On April 27, 2012, the federal government announced it would amend the Investment Canada Act to allow the Minister of Industry greater flexibility in explaining why a proposed foreign takeover of a Canadian business raises preliminary concerns. The amendments, contained in the government’s annual budget bill, will also empower the Minister to accept offers of security as a performance guarantee.
Canada’s foreign investment regime requires that any acquisition of control of a Canadian business by a non-Canadian, where the book value of the assets of the Canadian business exceeds a prescribed threshold (currently C$330 million), be reviewed and approved by the Minister of Industry before closing. The Minister must determine the transaction is likely to result in a “net benefit” to Canada, based on a number of factors contained in the Act. In the 26-year history of the Act, governments have used it only twice to block transactions: once in 2008 when Aliant Techsystems tried to buy MacDonald Dettwiler & Associates Ltd.’s aerospace business, and then in 2010 when BHP Billiton sought to acquire Potash Corporation.
The changes are in part designed to address concerns about the perceived lack of transparency in the review process, a complaint that came up in the BHP Billiton review process. However, the criticism was largely aimed at the vagueness of certain of the net benefit criteria, not what the Minister could or could not say in providing reasons for his preliminary decision that the proposed transaction was not likely to be of net benefit to Canada. Indeed, in making that announcement, the Minster spoke at some length before revealing his decision. The Act contains restrictions on what information the Minister and his staff can make public, designed to safeguard the commercially sensitive and confidential information provided during the course of a review. As such, it will be interesting to see in practice how the Minister will provide greater transparency while still respecting those confidentiality obligations.
The performance guarantee is intended to address the public perception that some foreign investors are not honouring the obligations they have under the Act. This issue was highlighted by the government’s case against U.S. Steel for alleged non-compliance with the Act, in particular that the company had failed to honour its commitments regarding the amount of steel it would produce in Canada. The case settled before there was a judicial determination that U.S. Steel had, in fact, violated its commitments. The prospects for conviction were uncertain, as U.S. Steel intended to rely on an administrative guideline issued by the Minister that excuses non-performance where such non-performance is for reasons outside of the investor’s control. The company had argued the global economic downturn led to a reduction in global demand for steel, thereby necessitating decreased production in Canada. Although the amendment is drafted to “permit” the Minister to accept an offer of security, rather than requiring an offer of security, it is likely prospective investors will feel compelled to make such an offer in high profile cases.