Another high profile decision by the Federal Industry Minister has raised important questions on what criteria Industry Canada will use to evaluate foreign take-overs. On October 19, 2012, Industry Minister Christian Paradis advised Malaysian state-owned oil company PETRONAS that it had failed to demonstrate that its proposed $5.5 billion acquisition of Calgary-based natural gas producer Progress Energy Resources Corp. would likely be of “net benefit” to Canada as required under the Investment Canada Act (the “ICA”). While acquisitions are rarely blocked under the ICA, this is the third rejection in the last four years and the first time the Minister of Industry (the “Minister”) has blocked an investment by a state-owned enterprise (“SOE”) in the oil and gas industry.1 The timing and consequences of this decision are also noteworthy due to the pending $15 billion bid by CNOOC Ltd., a Chinese controlled publicly traded company,2 for Calgary-based Nexen Inc., an upstream oil and gas company and a major player in Canada’s oil sands industry.
At this time, the Minister’s reasons for blocking the proposed transaction are unknown and PETRONAS has 30 days to make additional presentations and to submit formal undertakings to convince the Minister that its proposed acquisition of Progress is likely to be of “net benefit to Canada”.
The Minister’s decision to block the PETRONAS-Progress transaction highlights the looming questions that foreign investors and their advisors must face when dealing with reviewable transactions, which is: how do foreign investors, let alone foreign SOEs, meet the ICA’s “net benefit to Canada” standard in order to receive the Minister’s blessing and moreover, at what cost?
As described below, the ICA does provide foreign investors with some clues as to what the Minister will consider in his assessment of whether a transaction is of “net benefit to Canada”; however, there are no helpful metrics or bright-line rules involved in this process and no records as to why the Minister blesses some transactions and blocks others.
In determining whether a proposed transaction will likely be of “net benefit to Canada”, the Minister, as directed by the ICA, will take into account the following factors, among others, where relevant:
- the effect of the transaction on the level and nature of economic activity in Canada, including, among other factors, the effect on employment, on resource processing and on the utilization of parts and components produced in Canada;
- the degree and significance of participation by Canadians post-transaction in the Canadian business;
- the compatibility of the transaction with industrial, economic and cultural policies;
- the effect of the transaction on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; and
- the impact of the transaction to Canada’s ability to compete in world markets.
In addition to these broad factors, the Minister released guidelines in respect to acquisitions of Canadian businesses by SOEs (the “Guidelines”) which are meant to underscore the Government’s policy to ensure that the governance and commercial orientation of SOEs are considered in determining whether reviewable transactions by a SOE are of “net benefit to Canada”.
The Guidelines state that as part of the assessment of the factors enumerated further above, the Minister will also review the corporate governance and reporting structure of the SOE investor. This review will examine whether the SOE investor adheres to Canadian standards of corporate governance (e.g., commitments to transparency and disclosure, independent members of the board of directors and independent audit committees, among other standards), and to Canadian laws and practices.
Furthermore, as per the Guidelines, the Minister will also assess whether, post-transaction, the Canadian business will continue to have the ability to operate on a commercial basis regarding where to export; where to process; and the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position, among other factors.
While the Minister is directed to consider all of these relatively general factors, the Minister possesses a broad discretion in determining whether or not a transaction meets the “net benefit to Canada” threshold. In addition to these ill-defined concepts, which are open to subjective interpretation, the review process itself has often been characterized as opaque and in much need of greater transparency in order to provide foreign investors with enough guidance as to how to demonstrate a “net benefit to Canada” and to avoid any potential chilling effect on foreign investment in Canada. For example, there are no public hearings in respect to the ICA’s review process and furthermore, there are no published reasons following net benefit determinations unless the Minister, following an investor’s right to make further representations and undertakings, provides a final negative ruling.3
It is noteworthy, however, that shortly after the collapse of the BHP-Potash transaction, then Minister of Industry, Tony Clement, following much criticism of the ICA’s review process, alluded to a potential examination of the ICA in order to determine whether improvements could be made. While this examination never occurred and the ICA’s review process remains as murky as before, Canadian Prime Minister Stephen Harper, following the PETRONAS-Progress decision, has indicated that foreign investment guidelines would be published in the near future which will provide some clarity to foreign investors as to how the government reviews reviewable transactions. While there is much speculation as to what these further guidelines could contain, it is certain that any additional clarity relating to the ICA’s “net benefit to Canada” threshold would likely be welcome.
Unfortunately, without such further guidance into the “net benefit to Canada” threshold and greater transparency in respect to the review process in general, uncertainty will continue to reign and foreign investors and their advisors will continue to be surprised by Canada’s foreign investment policies.
1. The other two rejected transactions include Alliant Techsystems’ attempt to acquire the space division of MacDonald, Dettwiler & Associates in May 2008 and BHP Billiton Limited’s bid to acquire Potash Corporation of Saskatchewan Inc. in November 2010.
2. Shares of CNOOC are listed on both the Hong Kong and New York Stock Exchanges.
3. To this day, the Minister’s reasons for blocking the BHP-Potash transaction remain unknown as BHP elected not to make additional representations or submit further undertakings and ultimately withdrew its bid. As a consequence, the Minister did not have to reveal his reasons for blocking the transaction.