New Rules for Foreign Investment by State-Owned Enterprises - Do They Strike the Right Balance?

Dec 9, 2012

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On December 7, 2012 the federal government announced its approval of both Malaysian-controlled PETRONAS’ proposed $6 billion acquisition of Progress Energy Resources Corp. (“Progress”) and China National Offshore Oil Corporation’s (“CNOOC”) proposed $15.1 billion acquisition of Nexen Inc. (“Nexen”).  These transactions had been in limbo for months pending clarification by the government of the application of the “net benefit” test of the Investment Canada Act (“ICA”) to acquisitions by SOEs in light of mounting public concerns that Canadian businesses, particularly those operating in Canada’s crucial resource sector, could be acquired to serve the economic and political interests of foreign governments without adequate regard to Canadian interests.

At the same time the government approved these two acquisitions of control by Asian-based SOEs, the Prime Minister announced important changes to Canada’s policy for reviewing investments in Canada by state-owned enterprises (“SOEs”) (“New SOE Guidelines”) which clearly indicate that the rules of the game for SOE investment have changed.

Prime Minister Harper emphasized that Canada will continue to welcome and strongly encourage foreign investment in Canada.  But he also signalled the government’s clear preference for private foreign investment over investment by SOEs, minority SOE investments over acquisitions of control by SOEs, and a lower tolerance for SOEs acquiring control of, or material influence over leaders in any sectors of Canada’s economy.  Further, the government indicated that Canada will more closely monitor all investments by SOEs.  This position is consistent with the Harper government’s philosophical approach to reducing ownership of the domestic economy by Canadian federal and provincial governments. 

As it was acquisitions of control of substantial energy enterprises that prompted the New SOE Guidelines, it is not surprising that the Canada's energy sector, and in particular, the oil sands, are particularly affected. In this regard, the federal government stated that in order for the oil sands to be developed for the benefit of all Canadians, the role of private sector companies must be enforced.  To that end, the Prime Minister stated that while each case will be examined on its own merits, “the Minister of Industry will find the acquisition of control of a Canadian oil-sands business by a foreign state-owned enterprise to be of net benefit, only in an exceptional circumstance.” “Exceptional” is undefined. This is an interesting position given prior statements by federal and provincial government officials regarding the need for extensive foreign investment in the oil sands to achieve their full potential and the linkages between development of the Canadian resource sector and Canada's future prosperity.

It is too early to say whether the New SOE Guidelines will have a chilling effect on SOE investment in the oil sands sector. At a minimum, SOE investors will have to reset their expectations for the degree of influence they will be permitted to acquire over Canadian enterprises. As was the case in the past, they will be able to acquire significant minority interests combined with reasonable governance and project rights.  In this regard, the government specifically emphasized that non-controlling investments in the oil sands by SOEs, of which there have been many in recent years, will continue to be welcome. Furthermore, controlling investments by SOEs in the significant, developing energy sectors of shale gas and liquefied natural gas (LNG) will still be permitted.

Interestingly, the New SOE Guidelines do not elaborate upon the nature of specific undertakings that SOEs will be required to give to the government in order to establish a net benefit. For example, the government did not make it mandatory for an SOE to publicly list its shares or those of the Canadian target company on a Canadian exchange. The Prime Minster did indicate that the CNOOC and PETRONAS decisions “will be closely studied”. This suggests both that the undertakings given by these SOEs to the federal government will be disclosed and that the undertakings will have precedential value for other SOEs contemplating reviewable investments.

It is important to underline that the government has not announced any restrictions on private investment in Canada, and in fact re-confirmed the government’s commitment to liberalize the regime governing such investment by raising the threshold for “net benefit” review under the ICA over a period of four years to $1 billion based on enterprise value rather than asset value.  However, the increased threshold will be applicable to private sector investments only.  SOEs will be subject to the existing net benefit review threshold of $330 million in asset value (not enterprise value), adjusted annually to reflect the change in nominal gross domestic product in the previous year.

As part of its policy statement in releasing the New SOE Guidelines, the government announced that it would be introducing legislation to provide “the Minister with the flexibility to extend the timelines for national security reviews to give the Government the time it needs to conduct careful and thorough reviews of complex proposed investments that could be injurious to national security.”  This vague announcement of future changes to the national security regime raises questions as to whether the government will continue to exercise a judicious and restrained approach in its application of the national security regime of the ICA and, in particular, whether the national security regime will become a more important issue for SOEs going forward.

This Osler Update summarizes the changes to Canada’s foreign investment review regime announced by the Prime Minster and considers their effect on future SOE investment in Canada.

  1. Canada Continues to Encourage Foreign Private Investment

The Prime Minister’s December 7th announcement does not impose any further restrictions on private investment in Canada.  To the contrary, the Prime Minister specifically acknowledged the critical importance of foreign direct investment to “our Government’s focus on jobs and growth” and there was no indication that the government intends to depart from its long track record of exercising restraint in disapproving foreign investment on net benefit grounds.1  Furthermore the government re-confirmed its commitment to liberalize the regime governing foreign private investment by raising the thresholds for review to $1 billion based on enterprise value (not asset value) over four years.

The Government has drawn a line in the sand between foreign private investment and foreign SOE investment.  This excerpt from the Prime Minister’s statement captures the political rationale: “To be blunt, Canadians have not spent years reducing ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.”

  1. The Changes Apply Only to Foreign SOE Investment and Only to Reviewable SOE Investment

Like the previous SOE Guidelines, the New SOE Guidelines apply only to investments by a foreign SOE to acquire “control” of a Canadian business (as defined under the ICA), and only to SOE foreign investment that is reviewable under the general framework of the ICA. They do not prohibit any SOE investments but simply establish some unique rules that apply when an SOE is making such an investment. However, the New SOE Guidelines have potentially expanded the scope of entities that will be treated as SOEs and have made it more onerous for foreign SOEs to acquire control of Canadian businesses.

        (a)  The Question of Who Is An SOE is Unclear

The New SOE Guidelines have expanded the definition of SOE to include not only an enterprise that is owned or controlled directly or indirectly by a foreign government but also to include an entity that is influenced directly or indirectly by a foreign government.

Whether a foreign government owns or controls an enterprise, directly or indirectly, may be assessed by analogy using the general rules in the ICA that are applied to determine whether an entity is Canadian-controlled or WTO-investor controlled.

By contrast, it is not clear how the government will assess whether an SOE is influenced directly or indirectly by a foreign government or what the applicable threshold is for determining whether a foreign government’s influence is such that the enterprise should be considered to be an SOE. Notwithstanding a minority or even no equity interest position, if a foreign government can influence management and decision-making of the enterprise, it could be considered to influence a SOE. This expanded definition of SOE is likely to create significant uncertainty for investors who are nominally private because they are not controlled in law or fact by foreign governments, but which may have minority government investment, commercial relationships with foreign governments or significant relationships with officials within government.  As the onus is on the investor to establish it is not an SOE, investors (such as for example, foreign pension plans) may be required to seek guidance from, and to potentially submit to increased scrutiny of their internal governance and investment processes by the federal government.

        (b)  Applies Only to Direct Acquisitions of Control By SOEs Exceeding Current Review Thresholds

Under the ICA, Canada currently screens direct acquisitions of control by non-Canadians2 of Canadian businesses having a book value of assets which exceed the prescribed monetary thresholds (as discussed in further detail below, the government is in the process of implementing a revised threshold based on enterprise value; however this is not yet in place).

The ICA sets out a number of rules and presumptions relating to when control is or is not acquired,3 including:

  • the acquisition of less than one-third of the outstanding voting shares of a corporation (whether public or private) is deemed not to constitute an acquisition of control;
  • the acquisition of one-third to one-half of the voting shares of a corporation is presumed (subject to rebuttal) to constitute an acquisition of control.  For this purpose, the presumption may only be rebutted by showing that control in fact is not, or would not be, exercised as a result of such acquisition of voting shares;
  • in the case of the acquisition of voting interests of non-corporate business entities (partnerships, joint ventures and trusts), control is acquired when a majority of their voting interests are acquired, and that no control is acquired when the voting interests acquired represent less than a majority; or
  • through the acquisition of all or substantially all of the assets used in carrying on such business.

However, not all acquisitions of control are subject to pre-closing review and Ministerial approval under the ICA.  A distinction is made between a direct acquisition and an indirect acquisition of control of a Canadian business.  A “direct” acquisition involves the investor directly acquiring the shares of a Canadian corporation, or the voting interests of a non-corporate entity, that directly or indirectly carries on a Canadian business, or acquiring all or substantially all of the assets used in carrying on a Canadian business.  In comparison, an “indirect” acquisition involves the acquisition of control of a corporation outside Canada which controls the corporation or other entity which carries on the Canadian business.  Indirect acquisitions of control of Canadian businesses are not reviewable under the ICA, unless the Canadian business is engaged in a cultural business and the applicable thresholds are satisfied and, in such cases, the review occurs on a post-closing basis.

In the December 7, 2012 announcement, the government confirmed (again) that the threshold for “net benefit review” under the ICA will be increased over a period of four years to $1 billion, applicable to private sector investments only.  SOEs will be subject to the existing net benefit review threshold of $330 million in asset value (not enterprise value), adjusted annually to reflect the change in nominal gross domestic product in the previous year. When these changes are implemented (a precise timeline has not been announced and legislative amendments will be required), there will therefore be three thresholds for “net benefit” review:

  • $5 million in book value of assets of the Canadian business for non-WTO investors and investments by any investor in a Canadian cultural business;
  • $330 million (subject to annual adjustment) in book value of assets of the Canadian business for control investments by SOEs;
  • higher thresholds implemented over 4 years to $1 billion in “enterprise” value for private sector investments.
  • $600 million in enterprise value of the Canadian business for two years;
  • increase to $800 million in enterprise value for a further two years; and,
  • increase to a threshold of $1 billion in enterprise value.

We expect that the government will issue revised regulations soon to (finally) effect the commitment made back in 2009 to raise the thresholds for private sector investment.4

        (c)  Significant Foreign SOE Investment is Not Impacted

There is significant scope for foreign investment by SOEs which falls outside the purview of the ICA (except for the national security regime) or is subject merely to a post-closing notification obligation. The government’s changes have not limited the scope of such non-reviewable investment, and in fact the government indicated specifically that minority interest acquisitions by SOE, including joint ventures, “continue to be welcome in the development of Canada’s economy.”

Foreign SOEs are not required to obtain Ministerial approval for their transaction under the ICA where, for example:

  • they are acquiring less than 33⅓% of the voting shares in a Canadian business;
  • they are acquiring less than a majority of the voting interests of a partnership or joint venture;
  • they are indirectly acquiring control of a Canadian business (provided it is not engaged in a cultural business);
  • they are acquiring control of a Canadian business having a book value of assetsunder the prescribed monetary thresholds; or
  • they are acquiring control of a Canadian company which does not carry on a “Canadian business” as defined in the ICA.

Accordingly, there have been numerous significant investments by foreign SOEs that have not been subject to ICA review, including the following:

  • CNOOC’s $150 million acquisition of a 60% interest in Northern Cross (Yukon) Ltd. in 2011
  • Wuhan Iron & Steel (Group) Corporation’s $73.1 million acquisition of a 25% equity interest and China Minmetal Corporation’s acquisition of a 5% equity interest in Century Iron Ore Holdings in 2011
  • Yunnan Chihong Zinc & Germanium Co. Ltd.’s $100 million joint venture with Selwyn Resources Ltd. in 2010
  • CIC’s $1.74 billion acquisition of 17.2% of Teck Resources Ltd. in 2009
  • Korea Electric Power Corp. $75.4 million acquisition of a 19.9% stake in Denison Mines in 2009
  • Wuhan Iron and Steel (Group) Corporation $240 million acquisition of a 19.9% stake in Consolidated Thompson Iron Mines Ltd  in 2009
  • China National Gold Group Corporation’s $217.7 acquisition of  approximately 42% of Jinshan Gold Mines Inc. in 2008
  • SINOPEC’s $105 million acquisition of a 40% interest in Northern Lights Partnership oil sands project from Synenco Energy Inc. in 2005 and subsequent acquisition of a further 10% interest from Total S.A. in 2009  

In our view the changes announced by the government may be expected to foster this type of non-reviewable investment by foreign SOEs in the energy and resource sectors as well as other sectors of the Canadian economy.

        (d)  Door Closed on Direct Acquisitions of Control by SOEs in Canada’s Oil Sands

With respect to SOE investment in the Canadian oil sands specifically, the federal government has clearly indicated that in order for the oil sands to be developed to the benefit of all Canadians, private sources will provide the primary and preferred source of capital.  To that end, the Prime Minister stated that while each case will be examined on its own merits, “the Minister of Industry will find the acquisition of control of a Canadian oil-sands business by a foreign state-owned enterprise to be of net benefit, only in an exceptional circumstance.”

The rationale for singling out oil sands for exceptional scrutiny was not subject to extensive elaboration in the December 7 announcement.  In the question and answer period following the formal announcement, Prime Minister Harper cited the concentration of ownership and the magnitude of oil sands resources in the question and answer period following the formal announcement.  Canadian oil sands companies and projects have been one of the principal beneficiaries of SOE investment in Canada's energy sector and there have been numerous large transactions in the space.  However, over the last two years the nature of those investments has been evolving from minority investments to acquisitions of control.  Over the same period, the size of transactions and pace of SOE investment has been increasing.  For example, the aggregate value of the PETRONAS - Progress acquisition and the CNOOC - Nexen transaction exceeds some estimates of aggregate foreign SOE investment in the Canadian oil and gas sector to date.  We believe that these deals will be viewed in retrospect as representing the tipping point of SOE investment in the Canadian resource sector. There is no question that they have acted as a catalyst for public debate. The result of such discourse is a clear expression of concern by the Canadian domestic energy industry and Canadians generally about the degree of foreign ownership of Canadian resource assets, especially by SOEs.  In addition, there may be policy concerns about the competitive advantage of SOEs in terms of access to capital relative to private companies, although it was the ready access to capital by SOEs that resulted in them being solicited for investment by both oil sands enterprises and the Canadian government in the first instance. The concept of reciprocity, referenced in the release as an important government goal, may also be a concern as Canada is home to the largest privately held heavy oil assets whereas such assets in many other jurisdictions are not available for purchase. 

Although the oil sands have historically attracted the bulk of SOE investment in energy assets located in Canada, more recently, non-conventional gas projects (such as shale gas) and related infrastructure have also been the subject of significant SOE investment.  For example, foreign SOEs are participating in three of the five announced west coast LNG projects.  As such, some may wonder why that sector was not afforded similar protection. Although it is not possible to know the extent to which the non-conventional gas sector was considered in the government's deliberations, we believe that there exist good reasons as to why the government might not have wanted to limit this sector's access to capital at present.  The LNG industry is at a much earlier phase of its development than the oil sands and Canada is competing against other LNG producers, such as Australia, to build an Asian export market.  Further, while the supply of new oil sands properties is fairly limited, there is a view that there continues to be abundant opportunity for further exploration and development in the Canadian non-conventional gas sector.  As such, we expect that this sector will continue to attract significant SOE investment.

It is too early to say whether the New SOE Guidelines will have a chilling effect on SOE investment in the oil sands sector.  At a minimum, SOE investors will have to reset their expectations for the degree of influence they will be able to acquire over Canadian enterprises and, as was the case in the past, pursue transactions for significant minority interests combined with reasonable governance and project rights.  In this regard, the government specifically emphasized in the December 7 release that non-controlling investments in the oil sands by SOEs will continue to be welcome.  Further, acquisitions of oil sands entities with a book value of less than $330 million (which would be start-up sized entities) are still not subject to the ICA review process.  Moreover, no specific definition of “oil sands business” has been proposed.  With reference to the existing ICA policies on conventional oil and gas there may be some scope, albeit likely limited, for the acquisition of oil sands assets that do not constitute a business.

These restrictions on access to capital will likely lower the market value of oil sands businesses and assets, including the price at which such businesses can raise much needed capital or sell their assets as competition for those assets will be reduced.

  1. Relationship Between the New SOE Guidelines and the Net Benefit Test

Where a foreign SOE is directly acquiring control of a Canadian business, the SOE must satisfy the government that such investment is of “net benefit to Canada”.  “Net benefit” is not defined in the statute and no meaningful new guidance was provided in the December 7 announcement.  Accordingly, its meaning will continue to be inferred from the purpose of the ICA itself, the statutory factors the Minister is required to consider when assessing whether the net benefit test has been met, interpretation and precedent.

        (a)  Purpose of the ICA

The stated purpose of the legislation is to “provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security.”

        (b)  Factors Considered by the Minister

The ICA requires the Minister to consider the following factors5 in assessing whether a reviewable investment is likely to be of “net benefit” to Canada:

  • the effect of the investment on the level and nature of economic activity in Canada;
  • the degree and significance of participation by Canadians in the Canadian business;
  • the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
  • the effect of the investment on competition within any industry or industries in Canada;
  • the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and
  • the contribution of the investment to Canada’s ability to compete in world markets.

The factors enumerated in the statute, together with the New SOE Guidelines allow the Minster to take into account the corporate governance and commercial orientation of an SOE and to require, as part of the package of written contractual undertakings6 provided by the SOE investor to the government, undertakings relating to such matters.

        (c)  Review of Prior SOE Transactions

Material investment by foreign SOEs in the Canadian economy is a relatively recent development and most foreign SOE investment into Canada has occurred while Prime Minister Stephen Harper’s Conservative party has been in power.  In 2006, the Harper government published Advantage Canada: Building a Strong Economy for Canadians which identified concerns that some foreign investment by SOEs with non-commercial objectives and unclear corporate governance structures and reporting may not be beneficial for Canadians.  The study called for a principled approach to deal with such situations.  In response, the federal government in December 2007 issued Guidelines - Investment by state-owned enterprises - Net benefit assessment (“2007 SOE Guidelines”).  The 2007 SOE Guidelines were focussed on:  

  • the need for transparency and commercial orientation of the SOE;
  • the nature and extent of control by the foreign government; and
  • the SOE’s corporate governance, operating and reporting practices, and whether the acquired Canadian business will retain the ability to operate on a commercial basis.7

In order satisfy the Minister that an investment by an SOE is likely to be of net benefit to Canada, the 2007 SOE Guidelines required an SOE to give undertakings addressing transparency and commercial orientation (in addition to the more traditional types of undertakings governing employment, capital expenditures, R&D and other matters).  In order to demonstrate transparency, SOEs have given undertakings relating to the appointment of independent Canadian directors, employment of Canadians in senior management, incorporation of the business in Canada, and/or a public listing of the shares of the SOE or the Canadian business on a Canadian stock exchange.  To demonstrate commercial orientation, SOEs have given undertakings relating to exports, processing, support of ongoing innovation and/or an appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.  While an investor’s undertakings generally remain in force for three years from implementation of the investment, the term is oftenlonger for SOE undertakings related to governance and commercial orientation.

It is important to note that the federal government approved numerous acquisitions of control by foreign SOEs, including ones controlled by the government of China and Korea following implementation of the 2007 SOE Guidelines.  Osler has been involved in a number of acquisitions of control by SOEs for which ICA approvals were successfully obtained.  The adoption of the 2007 SOE Guidelines did not adversely affect Canada’s reputation as a jurisdiction that is welcoming of foreign investment.  For example, between 2009-2011 the following foreign SOE direct acquisitions of control of a Canadian business were approved:

  • PetroChina’s acquisition of control of the entity which held a 20% interest in Shell Canada Energy’s Groundbirch project (2011)
  • Harvest Operations Corp.’s C$525 million acquisition of producing and undeveloped assets from Hunt Oil Company of Canada (2011)
  • Sinopec’s C$2.2 billion acquisition of Daylight Energy (2011)
  • CNOOC’s US$2.1 billion acquisition of OPTI Canada Inc. (2011)
  • Sinopec’s US$4.65 billion acquisition of ConocoPhillips’ stake in Syncrude (2010)
  • International Petroleum Investment Company’s US$2.3 billion acquisition of NOVA Chemicals Corp. (2009)
  • Korea National Oil Corporation’s C$4.1 billion acquisition of Harvest Energy Trust (2009)
  • PetroChina International Investment Company’s C$1.9 billion acquisition of a 60% interest in two oil sands projects from Athabasca Oil Sands Corp. (2009).

Further, in recent months, the federal government has been particularly active in courting such SOE investment.  Government officials, such as Prime Minister Harper and federal Minister of Natural Resources, Joe Oliver, as well as Alberta Premier, Alison Redford, have made numerous public statements in support of foreign investment in the resource sector, including Premier Redford’s statement in Beijing that “foreign investment has assisted us in growing our economy so we are encouraging that.”  Federal and provincial officials have participated in numerous trade missions in the last few months, many of which have focused on Asia.  These efforts culminated in the signing of the Canada-China Foreign Investment Promotion and Protection Agreement in September of this year. Such initiatives are intended to assist the resource sector in accessing the capital it requires to fully realize the potential of Canada’s resources as well as expanding Canadian export markets for resource products. The federal government has stated publicly that further development of the Canadian resource sector can be the “catalyst for a new era of jobs, growth and prosperity for Canadians.”8

  1. The New SOE Guidelines Relating to Acquisitions of Control By SOE - What Has Changed and What Are the Implications

The key changes resulting from the New SOE Guidelines are as follows:

  • SOE investors are expected to address in their business plans and undertakings that they are susceptible to state influence, and will need to demonstrate their strong commitment to transparent and commercial operations.
  • The New SOE Guidelines re-affirm that, under the ICA, the burden of proof is on foreign investors to demonstrate to the satisfaction of the Minister that proposed investments are likely to be of net benefit to Canada.
  • In addition to considering the SOE’s adherence to principles of Canadian standards of corporate governance, laws and practices, and the extent to which the SOE is owned, controlled or influenced by a state, the New SOE Guidelines state that the Minister will also consider the SOE’s adherence to free market principles and the effect of the investment on the level and nature of economic activity in Canada, including the effect on employment, production and capital levels in Canada.
  • In the Minister’s assessment of whether the SOE will likely operate on a commercial basis, the Minister will specifically consider the impact of the investment on productivity and industrial efficiency in Canada.  The considerations identified in the 2007 SOE Guidelines remain in place (i.e., where to export; where to process; the participation of Canadians in its operations in Canada and elsewhere; support of on-going innovation, research and development in Canada; and the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position).

Under the New SOE Guidelines, investors will be required to demonstrate to the Minister a commitment to commercial orientation, freedom from political influence, adherence to practices that promote sound corporate governance and transparency, and positive contributions to the productivity and industrial efficiency of the Canadian business.  The changes reflected in the New SOE Guidelines demonstrate the federal government’s intention to more closely scrutinize both the degree of control or influence that an SOE (and the foreign state) will exert on both the Canadian business being acquired and the industry in which the Canadian business operates.

Simultaneously, the Prime Minister emphasized in his announcement that non-control investments by SOEs will continue to be welcomed, albeit subject to further monitoring.

Importantly the government explicitly indicated that where an industry has a high concentration of ownership by SOEs such that it could undermine the private sector orientation of an industry, and consequently subject an industrial sector to an inordinate amount of foreign state influence, “the government will act to safeguard Canadian interests.”  This suggests that the government will consider an SOE investment not in isolation but also in the context of other SOE investments that may have previously occurred in the sector.  The December 7 announcement did not explain what degree of concentration of ownership would be a concern.  This leaves the door open to SOE investment where the sector is unconcentrated and still in private ownership.

The government also announced that SOEs will remain subject to the existing net benefit review threshold of $330 million in asset value (not enterprise value), adjusted annually to reflect the change in nominal gross domestic product in the previous year.

  1. CNOOC and PETRONAS – Disclosure Forthcoming?

Following lengthy reviews, Minister of Industry Paradis approved the $15.1 billion acquisition of Nexen by CNOOC and the $6 billion acquisition of Progress by PETRONAS.  Nexen has conventional and unconventional oil and gas and coalbed methane operations in Alberta and Saskatchewan, though a significant portion of Nexen’s assets and operations are located outside of Canada, in the North Sea, West Africa and the Gulf of Mexico. To date, Progress’ activities have focused primarily on the exploration and development of shale gas assets in the Montney formation in the Foothills region of northeast British Columbia9.

In announcing these approvals the Minister did not provide any specifics regarding the undertakings the foreign SOEs provided to the federal government to satisfy the net benefit test, including the terms of the SOE policy.  The Minister did indicate that both CNOOC and PETRONAS had made significant commitments to Canada in the areas of governance, including commitments on transparency and disclosure; commercial orientation, including an adherence to Canadian laws and practices as well as free market principles; as well as employment and capital investments, which demonstrate a long-term commitment to the development of the Canadian economy. 

At the time CNOOC announced its proposed acquisition it outlined a number of proposed commitments to demonstrate the transaction’s benefits to Canada, including making Calgary one of its international headquarters which will manage Nexen’s global operations and CNOOC’s existing operations for North and Central America (comprising approximately US$8 billion of CNOOC’s existing assets); retention of Nexen’s current management team and employees; maintaining and enhancing capital expenditures on Nexen’s assets; intending to list CNOOC Limited shares on the Toronto Stock Exchange; and supporting oil sands research at Alberta universities.   

PETRONAS did not announce many details regarding its proposed commitments, though on December 4, 2012 PETRONAS and Progress announced they had completed a detailed feasibility study for their previously announced LNG Export Project that they expected would provide significant revenue and royalties to the provincial governments, opportunities for economic benefits to local First Nations and communities, up to 3,500 direct jobs during the construction phase and 200 to 300 jobs in long-term operations of the facility and that, if the acquisition of Progress was approved, they expected throughput at the facility to increase by approximately 60%. 

Given that the Prime Minister opened his statement on the government’s New SOE Policy with the comment that “[t]hese decisions will be closely studied” we expect that the government and the companies will release details of their commitments in the near future and that the commitments will have precedential value for other SOEs contemplating reviewable investments.

  1. Vague Announcement About Future Changes to the National Security Regime

As part of the announcement the government telegraphed that the Minister of Industry will be introducing legislation to amend the process for the national review regime of the ICA in order “to provide greater flexibility, when it is considered necessary, to extend the time available to conduct national security reviews of proposed foreign investments.” The statement proceeds to state that these extensions will only be used in exceptional circumstances.

It is not clear what timelines the Minster will be seeking to extend. Currently the ICA sets out (i) the time within which the Minister may provide notice of and order a national security review; (ii) if a national security review is ordered, the time within which the Minster is to conduct a national security review and may refer an investment to the Governor in Council if he believes or is unable to determine whether the investment would be injurious to national security; and (iii) the time within which the Governor in Council may take any measures advisable to protect national security.

In light of the fact that these changes formed part of the broader announcement by the government about changes to the ICA framework governing SOE investment it is important to note that, to date and to our knowledge, the federal government has not ordered a national security review in connection with an SOE investment, whether such investment was reviewable or non-reviewable under the general ICA provisions.  In fact, the federal government has shown considerable restraint in exercising its relatively new power to review and impose conditions or prohibit foreign investment of any size on the basis that the investment  “could be injurious to national security”.  Since the national security regime was introduced in March 2009,10 it appears that the Canadian government may have only used this power once.  In August 2009, George Forrest International Afrique SPRL, after announcing the proposed acquisition of uranium mining company Forsys Metals Group, a TSX-listed company with uranium assets in Namibia, received an unsolicited letter from the Canadian government advising that it was prohibited from completing the proposed transaction until further notice (the transaction was terminated shortly thereafter). 

The timing of the vague announcement of these future changes to the national security regime raises questions as to whether the government will continue to demonstrate a judicious and restrained approach in its application of the national security regime of the ICA and, in particular, whether the national security regime will become a more important issue for SOEs going forward.


1  Between 1985 and 2012, the Minister reviewed and approved more than 1650 investments and only two major transactions were disallowed: Alliant Techsystems Inc.’s proposed acquisition of Macdonald Dettwiler and Associates Ltd. in May 2008; and BHP Billiton plc’s proposed hostile takeover of Potash Corporation of Saskatchewan in November 2010.  (Refer to Osler Update: Canadian Government Rejects BHP’s Proposed Acquisition of Potash Corporation Under the Investment Canada Act – Is Canada Still Open for Business?)  In each case there were a number of specific and somewhat unique factors that likely contributed to the outcome.

2  Indirect acquisitions may be reviewed where the Canadian business is engaged in a “cultural business” as the term is defined in the ICA. In general, a non-Canadian is an individual that is neither a Canadian citizen nor a permanent resident, or an entity that is not Canadian-controlled.  The ICA contains provisions for determining whether an entity is Canadian-controlled.

3  The ICA contains exemptions for a number of specific types of investments. 

4  In 2009, the government passed amendments to the ICA to increase the general thresholds to $1 billion based on enterprise value, over four years.  The delay in the implementation of these amendments is principally due to debate over the enterprise value calculation.  Regulations defining enterprise value were first released in 2009 and then revised regulations were released in May, 2012. The proposed regulations define the “enterprise value” of a publicly listed entity based on its market capitalization (assets plus liabilities minus cash)  over a specific period of time rather than based on purchase price (as had been recommended). Enterprise value for private companies and asset acquisitions is based on purchase price (plus liabilities minus cash).  While the proposed regulations address some of the concerns raised about uncertainty in calculating the market capitalization of listed companies, the calculation process is complex and potentially results in different outcomes for different bidders for the same target business, depending on the timing of their bids. (Refer to Osler Update: Proposed Changes to the Investment Canada Act and Foreign Investment Review Process – Benefit or Increased Burden for Foreign Investors?)

5  These factors may be given different weight in different circumstances according to the nature of the proposal, the industry sector affected by the investment, the region in which it is to be made and other factors and circumstances applicable to the case.  It is important to recognize that in order to make the net benefit determination, the IRD consults with affected federal departments and independent agencies, such as the Competition Bureau, as well as the provincial governments of those provinces which will or may be impacted by the implementation of the investment.  While affected provinces do not have a veto power, in some circumstances they are able to significantly influence the process.  For example, the government of Saskatchewan was instrumental in the federal government’s preliminary decision to reject BHP Billiton's proposed US$38.6-billion acquisition of Potash Corp. (Refer to Osler Update: Canadian Government Rejects BHP’s Proposed Acquisition of Potash Corporation Under the Investment Canada Act – Is Canada Still Open for Business?)

6  Undertakings typically relate to such matters as new capital investment, employment, research and development expenditures, reinvestment of earnings, the employment of Canadians and their involvement in management and equity ownership of the business, maintenance of a Canadian head office and decision making in Canada, production, exports and charitable contributions.  It is not sufficient for an investor to establish that it plans to maintain status quo.  The undertakings are generally required to be for a term of three years, although depending on the circumstances and the identity of the investor some or all of the undertakings may be in force for a longer term. 

7  Refer to Osler Update: New State-Owned Investor Guidelines Released.

8  Refer to Osler 2010 Capital Markets Review – Foreign Investment in the Natural Resource Sector in the Wake of Potash; Osler 2011 Capital Markets Review – Foreign Investment in Canada – One Year After Potash Corporation; and December 5, 2012, International Financial Law Review - Asian SOEs’ future in Canada’s non-conventional O&G sector.

9  Refer to Osler Update: Government Rejects Petronas-Progress Transaction: Is Rejection the New Reality for Foreign Investors?

10  Refer to Osler Update: Proposed Changes to the Investment Canada Act and Foreign Investment Review Process – Benefit or Increased Burden for Foreign Investors?; and to Osler Update: Significant Changes to Canada’s Competition Law and Foreign Investment Regime