With investors still digesting the news that Potash Corp. of Saskatchewan Ltd. — recently a takeover target by Australia-based BHP Billiton Ltd. — is staying put, this may be a good time to get acquainted with Canada’s new rules dealing with takeovers by foreign entities.

When announcing that the multi-billion-dollar deal for the Saskatoon-based fertilizer behemoth would be blocked, the federal government said that it will be reviewing the Investment Canada Act, even though that legislation was revised extensively in March 2009. And while the 2009 revisions have received little attention thus far, a combination of heated domestic politics, swelling international competitiveness and national security concerns could lead to more intervention by the Canadian government in takeover activity by foreign entities in the future.

It is still unclear exactly how the ICA will be altered as a result of the Potash/Billiton deal. However, the feds have indicated that future changes will be designed to increase transparency when it comes to application of the ICA.

Indeed, such changes are likely to be welcome in any case. Sandra Walker, foreign investment review legal specialist with Fraser Milner Casgrain LLP in Toronto, says that the level of discretion permitted by the ICA is high. Speaking generally about changes in the ICA and not in the context of the Potash deal, she notes: “The legislation, the litigation and the [vague] guidelines have introduced an element of uncertainty that hadn’t been there before.”

But while Walker says such anxieties may be greater than experiences related to the revised ICA can justify, it’s also becoming more apparent that political forces, in Canada and abroad, are shaping the way that foreign-takeover legislation is being applied. Globally, the appetite for key companies in strategic sectors such as energy, technology and mining is escalating. At the same time, other countries, such as the U.S. and Britain are acting more often to block some takeovers.

The section of the ICA that was recently used by the feds to block the Potash takeover attempt by Australian mining giant BHP, is known as the “net benefit” test. Under that section, which has existed for decades but is seldom evoked, the federal minister of industry is required to review and approve takeovers of Canadian-based companies by foreign entities; the review must include an assessment of whether or not the deal is of net benefit to Canada. Unfortunately for investors, however, there are currently only very general guidelines as to how that test will be applied.

The amendments to the section in 2009 deal with the size of the companies that will be subject to review in the future. The new thresholds for review have been raised to a book value of $600 million from a book value of $299 million. The threshold will rise gradually until 2014, when it will be $1 billion. However, implementation of that section is on hold due to the government’s failure to release new regulations dealing with how those values, known as “enterprise value,” will be defined. (In any case, of course, the Potash/Billiton deal would have been reviewed due to its size.)

Other 2009 changes include a new test for review. In what is a response to heightened security concerns around the world, the minister of industry has new powers to block a takeover of a Canadian company by a foreign entity if the takeover is found to be “injurious” to Canada’s “national security.”@page_break@Again, precise definitions are lacking. As a result, the minister of industry has broad discretion to review and potentially reject foreign investments using this test. In addition, this test applies to any size of company or transaction. Walker notes that this area remains murky, given the wide latitude given to the government under the new powers — no one is yet sure what “injurious to national security” means.

But at least one deal was abandoned in 2009 several days after Industry Canada advised the parties not to close their deal until further notice. The Canadian target company was Forsys Metals Corp., which owns a uranium mine in Namibia. The buyer was a Belgium-based mining firm. It’s still unknown if the issue was national security, but there is speculation in legal circles that it was. In addition to the uranium mine, it’s believed there were concerns about how the deal was to be financed.

With so little information, Wal-ker says, it may be wise to keep in mind that more deals of this nature may be derailed in the future under this new power of review.

And, like other areas of the foreign investment review policy, such decisions could well be influenced by politics in the future. For instance, it’s possible that the new “national security” test will be used to review transactions that are not reviewable under the “net benefit” test due to their size but which are politically unpopular.

That said, a number of transactions have been approved in the past few years that theoretically could have been caught by this new provision, including the sale to foreign buyers of Canadian technology icon Nortel Inc., as well as several energy companies.

Which party is in power will also be a factor. Says Walker: “The Conservative government has one view of national security. In the future, you might have a more interventionist government that takes a broader view of what constitutes ‘national security’.”

There are other “firsts” in this area. In a groundbreaking 2009 lawsuit, Canada’s federal government sued U.S. Steel Corp., which was permitted to acquire Hamilton-based Stelco Inc. in 2007 only after making a slew of promises dealing with matters such as maintaining Canadian employment and production levels.

“Foreign investors who make binding commitments to the Canadian government have to be aware that those undertakings are taken very seriously,” Walker says. “The fact that the government actually sued U.S. Steel in court underlines that fact.”

More predictable — at least, so far — is another emerging area of review dealing with acquisitions by “state-owned enterprises.” These guidelines allow the Canadian government to review proposed acquisitions by foreign companies that are state-controlled. The two major areas of review deal with: whether the company is run according to Canadian standards of corporate governance; and whether its commercial orientation adheres to free-market principles.

Recently, Walker notes, a number of acquisitions have gone through without being caught by the SOE guidelines, which should reassure investors in companies that may be targets of such takeovers. These deals include the purchase of Nova Chemicals Corp. by a company owned by the government of Abu Dhabi, and Korea National Oil Corp.’s purchase of Harvest Energy Trust.

Walker notes that more uncertainty for investors lies ahead: “There is a lot of discretion, as there is in a lot of countries. But we don’t have [sufficiently clear] guidelines.” IE