Spotlight on investment in Canada by foreign states

By Raj Sahni and Karma Dolkar, Bennett Jones LLP

The year 2012 was another very strong year for foreign investment in the Canadian energy sector. On 7 December, Canada’s minister of industry announced the ministry’s approvals of two multibillion-dollar acquisitions by foreign state-owned enterprises (SOEs): the acquisition by China National Offshore Oil Corporation (CNOOC) of Nexen Inc for approximately C$15 billion (US$15 billion) and the acquisition by Malaysia’s Patroliam Nasional Berhad (PETRONAS) of Progress Energy Corp for approximately C$6 billion.

Guidelines revised

The Canadian government also unveiled important new guidelines applicable to foreign investments in Canada by foreign SOEs. Three key changes in the revised guidelines are designed to clarify and provide greater transparency to the review and approval process for large investments by foreign SOEs.

Raj Sahni Partner Bennett Jones
Raj Sahni
Bennett Jones

First, the definition of a foreign SOE has been expanded under the revised guidelines to include entities that are influenced, directly or indirectly, by a foreign government (in addition to those owned or controlled by a foreign government).

Second, the government reaffirmed that it will increase the investment review threshold to C$1 billion in “enterprise value”, however the current C$330 million in “asset value” will be retained for foreign SOE acquisitions.

Third, although not specifically addressed in the revised guidelines, the government indicated that investments by foreign SOEs to acquire control of a Canadian oil sands business will, in the future, be allowed on an exceptional basis.

Application restricted

With the clarification of Canada’s rules for the review of large foreign SOE investments, foreign investment, including investments involving SOEs, should continue to grow in Canada. It should be noted that the changes only apply to foreign SOE investment and only to reviewable SOE investment. The revised guidelines, like their predecessors, only apply to investments by a foreign SOE to acquire “control” – as the term is defined in the Investment Canada Act (ICA) – of a Canadian business. As such, the ICA review remains inapplicable to foreign SOE investments where: (a) target’s asset book value is less than C$330 million; or (b) there is no acquisition of control.

Karma Dolkar Associate Bennett Jones
Karma Dolkar
Bennett Jones

There is significant scope for foreign investment by SOEs which falls outside the purview of the ICA. Foreign SOEs are not required to obtain ministerial approval for their transaction under the ICA where, for example: (1) they are acquiring less than one-third of the voting shares of a Canadian business; (2) they are acquiring 50% or less of the voting interests of a partnership or a joint venture; (3) they are indirectly acquiring control of a Canadian business (provided it is not engaged in a cultural business). These investments are not reviewable no matter how large the investment.

These types of non-reviewable investments by foreign SOEs are not expected to be impacted by the revised guidelines. The prime minister of Canada has emphasized that “the government continues to strongly encourage inward investment in Canada” in virtually all sectors.

Nuclear sector

There remain a myriad of synergistic trade and investment opportunities between India and Canada in many sectors, in addition to Canadian oil sands. For example, in November prime ministers Manmohan Singh and Stephen Harper announced that India and Canada had finalized a long awaited nuclear deal that will enable Canadian companies to ship nuclear hardware and uranium to India.

The deal is a positive development for both India, which already employs Canadian CANDU nuclear reactors to help meet its rapidly growing energy needs, and Canada, which has an abundant supply of uranium. In addition, Indian engineering companies, with their own nuclear engineering expertise and experience with CANDU-based technology, could be of assistance to Canada in refurbishment and further construction of its nuclear facilities.

Other growth areas

Other areas poised for growth include agriculture and fertilizers. Potash is an essential component of industrial fertilizers, and Canada, as the world’s largest producer of potash, has the capacity to meet current global potash demand for centuries. In addition to potash, other fertilizer and agricultural technology opportunities are gaining momentum. In October, the Indian Farmers Fertiliser Co-operative announced a joint venture to build a C$1.2 billion nitrogen plant in Canada to capitalize on strong North American demand for fertilizers.

Clearly Indian businesses and SOEs are increasingly seeing the opportunities to combine Indian technology and capital with Canadian resources not only to meet India’s own growing needs but also to profit in world markets.

Raj Sahni is a partner and co-chair of the India Business Group at Bennett Jones, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Dubai, Abu Dhabi, Doha and a representative office in Beijing. Karma Dolkar is an associate at the firm.


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