On 7 December 2012, the Canadian minister of industry announced decisions under the Investment Canada Act (ICA) to allow two foreign state-owned enterprises (SOEs) to acquire control of Canadian businesses. China National Offshore Oil Corporation (CNOOC) acquired Nexen Inc and Malaysia’s Petroliam Nasional Berhad (Petronas) acquired Progress Energy Resources Corp.
The ICA provides that an acquisition is reviewable if a non-Canadian investor proposes to acquire control of an existing Canadian business, where the book value of the assets of the target business exceeds C$344 million (US$342 million). (For a cultural business, the threshold is C$5 million.) This is in addition to a national security review process under the ICA that is applicable to any investment by a non-Canadian.
In broad terms, control of a Canadian business may be acquired through the acquisition of all or substantially all of the assets used in carrying on the business, the acquisition of a majority of the voting securities or interests of the joint venture or partnership that owns the business, or the acquisition of a majority of the voting securities of a corporation that owns the business.
The acquisition of one-third or more but less than a majority of the voting securities of a corporation will also constitute an acquisition of control, unless the investor can establish that it will not control the Canadian business through the ownership of those securities. An acquisition by an existing minority non-Canadian owner may be reviewable if by the incremental acquisition that owner acquires control of a Canadian business.
A non-Canadian investor is an entity that is ultimately controlled outside Canada, or an individual who is not either a Canadian citizen ordinarily residing in Canada or a permanent resident of Canada. Jurisdiction of incorporation is not relevant.
Special ICA guidelines pertaining to governance and commerciality apply when foreign SOEs want to make reviewable acquisitions of control of Canadian businesses. After the industry’s minister’s announcement, the prime minister of Canada announced changes to how the government of Canada will review acquisitions by foreign SOEs.
These changes are that: (a) the SOE definition will now include an investor that is influenced by a foreign government but not controlled through the ownership of voting shares by the foreign government; (b) the financial threshold for review of investments by foreign SOEs will continue to be based on book value (the threshold for which is GDP-indexed), rather than the enterprise value (which for other foreign investors will start at C$600 million and rise over four years to C$1 billion, after which it will be GDP-indexed); (c) the review will now look at the degree of control or influence that the SOE would likely exert on the target Canadian business and the relevant industry as well as the extent to which a foreign state is likely to exercise control or influence over the SOE; and (d) a foreign SOE investment to acquire control of an oil sands business will be approved only in exceptional circumstances.
The CNOOC and Petronas decisions were made under the ICA and government policy as they existed at the time the transactions were announced. The revised policy will apply to future acquisitions by non-Canadians.
Little guidance has been given with regard to the matters of influence and exceptional circumstances referred to above. The higher financial threshold for non-SOE transactions requires the enactment of implementing regulations.
Whether an investment is subject to review depends not only on the value of the Canadian business but also on the structure of the investment. For example, in many circumstances, the establishment or acquisition of a joint venture, where the foreign investor is acquiring 50% or less of the underlying assets, or the acquisition of 50% or less of the voting interests of a partnership will not be reviewable, no matter how large the investment.
There are already several examples of significant foreign investments, including by foreign SOEs, through joint venture and partnership structures, particularly in conventional gas exploration and development, which have not been subject to review under the ICA. The announced changes to the SOE review process and the SOE financial threshold would not affect those transactions.
These policy changes thus do not have a material impact on acquisitions of control by foreign SOEs except in relation to Canadian oil sands businesses. Even in the oil sands sector, business as usual continues to a large degree and many large investments by foreign entities will not be reviewable under the ICA.
Donald E Greenfield, QC, is a partner and co-leader of the energy practice group at Bennett Jones, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Dubai, Abu Dhabi, Doha, Washington and a representative office in Beijing.
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