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Update on Foreign Investment Review in Canada

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This article highlights significant developments in foreign investment review in Canada over the past year.

Post Potash Anxiety Lifts in 2012?

In the immediate aftermath of the Canadian Government’s rejection of BHP Billiton’s bid for Potash Corporation of Saskatchewan, foreign investors questioned whether there would be a sea-change in Canada’s previous openness to foreign investment. While the failed bid by the LSE for the TMX removed the possibility of another potential rejection, foreign investors, including SOEs, have not been dissuaded from investing in Canada. Despite this, a run at Canadian icons such as Research In Motion could again thrust into the public arena questions of foreign ownership of “national champions” or in “strategic” sectors. As a result, potential acquirors of such targets will need to develop strategies at an early stage to address government and public relations in order to pre-empt, or at least mitigate, any public backlash.

Chinese SOE Investments Approved

The Canadian Government approved a number of state-owned investments in 2011, including Sinopec’s proposed acquisition of Daylight Energy, a Canadian oil and gas company, and CNOOC’s acquisition of oil sands company, OPTI Canada. CNOOC acquired OPTI’s 35 percent working interest in Long Lake and three other project areas located in the Athabasca region of northeastern Alberta. Both investments would have been subject to the Government’s guidelines on state-owned investors which consider the SOE’s corporate governance and commercial orientation in assessing whether the transaction would be of “net benefit” to Canada.

Enforcement of Investment Canada Undertakings

In 2010 the Canadian Government sued US Steel for alleged non-compliance with its employment and production undertakings. This represented the first time an investor has been taken to court over a failure to comply with undertakings. In December 2011 US Steel settled the dispute with the Canadian Government, committing to make additional capital investments in its Canadian facilities and to operate certain Canadian plants until 2015.

The US Steel case underscores both that the Canadian Government will enforce undertakings in appropriate circumstances (although variations are still possible) and that when formulating 3 or 5 year commitments in relation to an acquisition, foreign investors must carefully consider their ability to meet such undertakings in light of the vagaries of economic conditions. Investors should also proactively manage public and government relations when compliance with undertakings proves difficult.

Review of Investment Canada Act

After its rejection of BHP Billiton’s bid for Potash Corporation of Saskatchewan, the Canadian Government indicated its openness to review the Investment Canada Act. In the winter of 2011, the Parliamentary Standing Committee on Industry, Science and Technology invited foreign investment experts to speak about their views on the statute and the review process. However, there has been no public indication since the Government majority win in the May 2011 federal election that the Government intends to resume scrutiny of the foreign investment review process.

Review Threshold Increases

It is expected that the threshold for review for WTO investors will be $330 million for the year 2012. The official threshold will be published in the Canada Gazette in early 2012. However, what may be of greater interest to foreign investors is whether the Canadian Government finally implements regulations bringing into force amendments made to the Investment Canada Act three years ago. These amendments would raise the review threshold to $600 million in the target’s “enterprise value” for the two years following implementation, to $800 million in the subsequent two years and to $1 billion thereafter (indexed to inflation), thereby reducing the number of investments that are subject to review.