Written By Milos Barutciski
Canada's Industry Minister, The Hon. Jim Prentice, has provided new guidance with respect to the direction that the Government of Canada is taking in relation to foreign investment review more generally, and acquisitions by foreign state-owned enterprises in particular. In a speech to the Vancouver Board of Trade on October 9, 2007, Minister Prentice signalled that the government's response to the perceived wave of high-profile foreign acquisitions of Canadian companies will be limited, although some new restrictions are likely to be adopted with respect to acquisitions by state-owned enterprises and acquisitions that raise national security concerns. The government does not seem to be contemplating a wholesale overhaul of the Investment Canada Act (ICA) or even a significant tightening of investment policy.
A number of high-profile foreign acquisitions of Canadian businesses in the mining, retail, steel, hospitality and other sectors during the past two years led to calls for a more restrictive foreign investment policy, including an overhaul of the ICA. In November 2006, the government issued its Advantage Canada economic policy statement calling for a general review of the ICA. The statement raised a particular concern with acquisitions of Canadian businesses by foreign state-owned enterprises “with non-commercial objectives and unclear governance and reporting”, noting that such acquisitions may not be “beneficial to Canadians.” The government subsequently established a panel of distinguished Canadians in September 2007 with a mandate to examine the ICA and the Competition Act and report back in June 2008.
Acquisitions by State-Owned Enterprises
Minister Prentice's remarks to the Vancouver Board of Trade provide important insights into the Government's plans. While acknowledging that the panel's review is ongoing, the minister endorsed the ICA as “working well” and confirmed that the government will continue to apply the existing test under the ICA that an acquisition must be of “net benefit to Canada”. This express support strongly suggests that the government is unlikely to pursue a major overhaul of the ICA, or to implement a substantial tightening of the investment review process and greater restrictions on foreign investment generally. It also sends a strong signal to the panel not to pursue a major revision of the ICA, but rather to focus on more limited process issues.
The government will likely act more quickly – in the fall of 2007 – with respect to guidelines for investments by state-owned enterprises. In a subsequent statement on October 15, Minister Prentice indicated that he would like to see the new national security rules implemented by June 2008. The minister did not provide any further guidance with respect to the national security issue, other than to note that several other countries exercise a similar jurisdiction to block foreign acquisitions on national security grounds.
The government's concern is said not to be with the ownership of foreign capital being invested in Canada but with “how that capital behaves in the marketplace.” Minister Prentice emphasized the government's interest in ensuring that state-owned enterprises “are operating under the same standards as any other commercial enterprise operating in Canada, including those related to transparency, good governance practices and whether they operate according to free market principles.” The government will consider adopting guidelines for acquisitions by state-owned enterprises this fall.
While suggesting closer scrutiny of investments by state-owned enterprises, Minister Prentice specifically noted that “state-owned enterprises are welcome to invest in [Canada],” and that a number of state-owned enterprises are already operating successfully in Canada. The government does not appear to be inherently opposed to investments by state-owned enterprises. Nevertheless, it is considering changes to the review process to address perceived risks related to state-owned investors.
State-owned investors should expect much greater disclosure of their governance structure. Our firm's recent experience obtaining approval for the first Canadian acquisition by a state-owned enterprise following the government's expression of concern in the Advantage Canada statement, indicates that investors can expect to be required to make disclosures regarding:
- the management of day-to-day operations;
- the role of the board of directors;
- the presence and role of “independent” directors;
- the mechanisms available to the owning state to influence the business decisions of the enterprise; and
- any other matters that might be relevant to determining whether and to what extent the enterprise is likely to be run on a commercial basis.
Corporate codes of conduct and compliance procedures will also be relevant, as will any attestations by third parties such as regulators, rating agencies or investment banks with respect to the governance practices of the enterprise. The government is also likely to seek information with respect to the enterprise's record as a foreign investor in other jurisdictions.
State-owned enterprises, including sovereign wealth funds, that are not able or prepared to make these kinds of disclosures can expect a more strenuous review process and a greater risk that a proposed transaction will not be approved. Moreover, since investors are increasingly expected to make binding undertakings to the minister to take positive actions considered to be beneficial to Canada as a condition of obtaining ICA approval, the government's expectations with respect to the level of undertakings will likely be greater where a state-owned investor is unable or unwilling to make these kinds of disclosures, or where those disclosures suggest that the enterprise is not run on a commercial basis.
Timing of foreign investment review can also be expected to be impacted. The ICA currently calls for a mandatory 45-day waiting period before a reviewable transaction can be completed. The minister can extend the initial waiting period unilaterally by an additional 30 days. Further extensions can only be made with the consent of the investor. Reviews of large and high-profile transactions now routinely take longer than the initial 45-day period. The new approach regarding state-owned enterprises can be expected to put additional time pressure on transactions involving such entities. Business planners should factor in sufficient time to allow the government to review and verify information with respect to the governance of state-owned enterprises (not normally an issue in acquisitions by private parties) and also for the negotiation of any further undertakings that might be required for such investors.