Significant changes to the Investment Canada Act were made in March 2009 that have important implications for the foreign investment review of acquisitions of Canadian businesses by India-based companies. After almost three years, it is worth looking back at recent developments.
Under the 2009 amendments, the monetary threshold for review of foreign direct acquisitions of Canadian businesses was to rise significantly and to use the “enterprise value” of the proposed investment, rather than the gross book value of assets of the Canadian business. This change was expected to result in fewer reviews and therefore more flexibility for foreign investors.
But after all this time, the regulations required to bring the new thresholds into force have not yet been adopted. It appears that the government may be reconsidering whether an increase in the thresholds and adoption of “enterprise value” truly align with its objectives.
The May 2011 Canadian elections resulted in a majority government for the Conservative Party, which some thought would result in more definitive action to implement the 2009 amendments. There has been no sign of this happening, however, and one reason may be that the New Democratic Party (NDP) – historically the most vocal critic of foreign investment – is now the official opposition.
In its election platform, the NDP called for the review thresholds to be lowered to C$100 million (US$98 million) from the current C$312 million.
National security review
The 2009 amendments also introduced a new “national security” review mechanism that could be invoked when the government regards a foreign investment as potentially “injurious to national security”. If the government concludes that there is a threat to national security, it can prohibit the investment, attach conditions to it, or if the investment has already been completed, order a divestiture of the Canadian business. This kind of review can take 130 days or more.
The addition of the national security review mechanism has increased uncertainty for foreign investors for several reasons, including:
(1) “National security” is not defined in the act and no useful guidance has yet been issued on the criteria that will be considered by the government in determining whether a national security issue exists;
(2) The national security review extends to minority investments and to investments that do not exceed the review thresholds – i.e. there is no minimum asset or transaction size threshold;
(3) Guidelines on investments by foreign state-owned enterprises (SOEs), issued in 2007, which explain that the governance and commercial orientation of SOEs will be considered in assessing the acquisition of a Canadian business, may add additional complexity to a national security review where the acquirer is an SOE;
(4) There is currently a dearth of precedent on national security-type transactions that investors and their counsel can rely on for guidance.
BHP and Potash Corp
In November 2010, the government issued a preliminary decision rejecting BHP Billiton’s bid to acquire Potash Corp on the basis that it failed to satisfy the “net benefit to Canada” test. BHP chose not to proceed with the transaction, and withdrew its application. Concerns were raised about the decision, including the absence of transparency in the decision-making process, and whether the bid had been refused because potash is a strategic resource for Canada (although “strategic resource” is not an explicit factor for consideration under the act).
Following debate in parliament, the Standing Committee on Industry, Science and Technology undertook to review the act. The May election cut this review short, however, and it is not clear whether it will continue.
Despite the uncertainty introduced by the new national security process, and lingering questions about how the historically economics-based “net benefit to Canada” test will be applied going forward, Indian investors should not be overly concerned.
First, no investments have been rejected under the national security provisions to date. Second, only two non-cultural investments have been rejected since the act came into force in 1985 – the BHP-Potash Corp deal and an aerospace deal between Alliant Techsystems and MacDonald Dettwiler, which predated the national security provisions but was believed to have been rejected due to national security-type concerns.
Canada has historically been open to foreign investment, including several recent investments by foreign SOEs. Thus, while obtaining input from Canadian foreign investment counsel in the early stages of any planned investment is important, Indian investors can be assured that Canada continues to be “open for business”.
Randy Hughes and Adam Kalbfleisch are partners at Bennett Jones. Bennett Jones is a leading Canadian law firm with over 400 lawyers in offices throughout Canada and in the UAE.
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