On April 29, 2013, the Government of Canada tabled its budget implementation bill, the Economic Action Plan 2013 Act, which includes proposed amendments to the Investment Canada Act (ICA), particularly in relation to state-owned enterprises (SOEs). Given that the amendments are contained in the budget bill, it again appears that there will be little or no opportunity to debate substantively the merits of the amendments or to revise them before they become law. This is not the first time amendments to the Investment Canada Act have been made within the budget bill. In 2009, extensive amendments were made to both the Investment Canada Act and the Competition Act in that year's budget bill, and were passed without revision. The significance of both the Investment Canada Act and the Competition Act to the Canadian economy is such that the practice of amending these statutes without the opportunity for full consultation and reflection from all stakeholders increases the risk of unfortunate and unintended consequences.
The proposed amendments follow the Government's December 7, 2012 announcements in relation to SOEs in the context of its approval of CNOOC/Nexen and Petronas/Progress. As outlined in detail in our previous blog post on the subject, the December 7 announcements set out several new concepts, including:
- a special policy
specific to the oil sands, pursuant to which acquisitions of
control of oil sands businesses by SOEs will now only be found to
be of "net benefit to Canada" on an exceptional
basis;
- the widening of
the previous definition of an SOE to include entities that are
merely influenced directly or indirectly, by a foreign government.
The term "influenced" is not defined in the ICA, unlike
the term "controlled", which has a specific meaning under
the ICA;
- different review
thresholds for SOEs vs. non-SOEs, with SOEs being subject
to a lower threshold for review;
- a clarification of
the factors to be considered by the Government when reviewing an
SOE-investment, which include the degree of control or influence of
the foreign state over the SOE, the degree of control or influence
of the SOE over the Canadian business, and the degree of control or
influence of the SOE over the industry of the Canadian business
operates
The effect of these changes has become the subject of
considerable debate amongst foreign investment law specialists in
Canada, with a key area of focus being whether they are likely to
reduce or "chill" foreign investment by SOEs in Canada.
On the one hand, they set the bar higher for SOEs (particularly in
the oil sands, where it would appear future acquisitions of control
are prima facie prohibited, barring undefined
"exceptional circumstances"). On the other hand, the
Government was careful to note that "investments to acquire
minority interests proposed by foreign SOEs, including joint
ventures, continue to be welcome in the development of Canada's
economy."
This debate is an important one given the capital-intensive nature
of Canada's resource industries, and the oil sands in
particular. It is estimated that hundreds of billions of dollars
will be needed to develop the oil sands and as such it is certainly
arguable that a policy restricting foreign investment in the very
area where it is most necessary is fundamentally misguided,
particularly where there seems be no evidence at all that previous
SOE investments in the oil sands have been unsuccessful.
The key changes to theInvestment Canada Act contained in the budget bill are set out below. In summary, the overall thrust of the amendments is clear: the Government is seeking to maximize its discretion in dealing with SOEs. While this approach may be understandable from the Government's perspective, it is not clear whether the Government fully appreciates the potential "chilling effect" of significantly changing the rules for SOEs twice in a matter of months. Stikeman Elliott's firm view continues to be that Canada remains open for foreign investment, including large-scale foreign investment, and including large scale foreign investment with substantial SOE involvement, but the current draft bill risks undermining that message.
- SOE
Definition. An SOE will be defined very broadly to include
an entity that is controlled or influenced, directly or indirectly,
by a foreign government or government agency, and also individuals
who are acting under the direction or direct or indirect influence
of such a government or agency. This potentially captures companies
with tenuous connections to foreign governments, certainly falling
well short of control. Given calls for reciprocity, are Canadian
banks, for example, to be considered to be SOEs (albeit Canadian
SOEs) simply because the Minister of Finance calls asking them to
rein-in consumer lending? Is there not a risk that defining SOEs so
broadly will cause foreign governments to react by treating less
favourably various Canadian firms, including an array of Canadian
pension plans seeking to diversify their portfolios
internationally?
- SOE
Deeming – Canadian Status. An entity that satisfies
the Canadian status rules set out in the Investment Canada Act can
nonetheless be deemed by the Minister to be non-Canadian if the
Minister determines that it is controlled-in-fact by an SOE.
Indeed, the Minister can deem any entity to be controlled-in-fact
by an SOE if he so determines.
- SOE
Deeming – Acquisition of Control. An investment by
an SOE that falls underneath the acquisition of control threshold
can nonetheless be deemed by the Minister to amount to an
acquisition of control-in-fact by the SOE if the Minister so
determines. This amendment may turn out to be highly significant
because it deprives investors of the certainty of the long-standing
"acquisition of control" rules that currently govern the
Investment Canada Act (which, for example, clearly
establish that an acquisition of less than one-third of the voting
shares of a corporation is not an acquisition of control) and
imports an uncertain control-in-fact test for some types of
investors. This proposed amendment (unintentionally, we hope) calls
into question the Government's previous assertion that minority
interests and joint ventures will in fact be welcome, as they may
instead be subject to review. Although similar control-in-fact
tests exist in various contexts, including the Telecommunications
Act and the Canada Transportation
Act, they are certainly not without controversy
(see, for example,
the Wind/Globalive saga described elsewhere on
this blog, in which various branches of the federal government
issued fundamentally contradictory "control in fact"
decisions) and can lead to highly uncertain results. While we note
that the Government concluded that it would not review the Encana /
Petrochina Duvernay joint venture (50.1% / 49.9%) announced in
mid-December 2012, following the approval of the CNOOC / Nexen and
Petronas/ Progress transactions, and also that the Government has
in fact yet to block an SOE transaction, inclusion of this
"control in fact" test for SOE acquisitions may
potentially chill foreign direct investment by SOEs in Canada, even
by way of minority positions in joint ventures.
-
Thresholds. The bill re-iterates proposed changes
previously announced in March 2009 to the manner in which the
threshold for review is calculated for WTO investors. The threshold
will be altered from a "book value" test (currently set
at C$344 million for transactions closing in 2013, indexed to
inflation) to an "enterprise value" test (starting at
C$600 million and then moving to C$1 billion over 4 years, and
indexed to inflation thereafter). These changes cannot take effect,
however, until regulations containing the specific details of the
calculations are implemented. Although several draft regulations
have previously been issued, they were flawed in that they would
have introduced considerable ambiguities and complexities into the
calculation of the threshold value (which is currently a very
simple matter). The most recent draft was issued almost a year ago,
and it is unclear whether it will be passed in its current form or
amended to address these concerns. Moreover, the proposal announced
in late 2012 to make the new threshold inapplicable to SOEs
necessitated legislative amendments to define SOEs and make them
subject to different thresholds – previous rules regarding
SOEs had not been legislated but merely adopted as a policy matter.
In terms of the impact of the different threshold on SOEs, the
existing "book value" threshold will be reserved for
SOEs, with the result that the determination of whether an entity
is indirectly influenced by a foreign state could mean the
difference between a review being required or not. Moreover, the
difference between "book value" and "enterprise
value" is such that it is not at all clear that C$344 million
in "book value" is necessarily less than C$600 million in
"enterprise value", with the result that in some cases an
SOE might in fact benefit from a more favourable threshold
depending on the financial health of the target.
- National
Security. The national security provisions of the ICA
(themselves introduced without debate in the 2009 budget bill) set
out various timeframes within which certain processes are to be
completed where a transaction raises potential national security
concerns (e.g., the time period for ordering a review, the time
period for referring a review to the Governor-in-Counsel, the time
period for the Governor-in-Council to make a decision). The 2013
budget bill would extend several 5 day periods to 30 day periods
and also provide that certain periods can be extended on agreement
between the Minister and the foreign investor. Given that only one
transaction, to our knowledge, has ever been subject to a national
security notice (and it collapsed within a few days of a national
security notice being issued), the practical implications of these
extensions are likely not great. The overwhelming majority of
foreign investments will not be impacted, and the national security
review process is already highly discretionary. For those rare
cases where a national security notice is issued, however, the
latest amendments make it clear that the process will likely be
protracted, and essentially indefinite.
-
Ministerial Opinions. The ICA currently requires
the Minister to provide an opinion regarding whether an entity is
Canadian under the ICA, if requested by that entity, and if
complete information is provided. The bill would limit this
requirement to transactions involving cultural business, only. In
all other contexts, the Minister may choose to give the opinion,
but is not required to do so. In practice, the route of seeking a
Ministerial opinion was little-used but it did afford an entity the
opportunity to attain a degree of certainty as to whether the ICA
would apply to it. This route is apparently not necessarily going
to be available to non-cultural SOE minority investments, even as
the proposed amendments make them subject to considerable ambiguity
and uncertainty in the absence of such advice.
In summary, the overall thrust of the changes is unquestionably that the Government is reserving for itself a great deal of discretion in how it will handle future investments by SOEs. The manner in which the Government will exercise that discretion is not yet known. While we continue to believe the doors to foreign investment in Canada – even by SOEs - are open, Bill C-60 risks sending the message that they are in fact closed – or closing – for significant new sources of global capital investment.
View Stikeman Elliott's Investment Canada Act FAQ summary.
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