With investors still digesting the news that Potash Corp. of Saskatchewan Ltd. \u2014 recently a takeover target by Australia-based BHP Billiton Ltd. \u2014 is staying put, this may be a good time to get acquainted with Canada\u2019s 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<\/b> 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: \u201cThe legislation, the litigation and the [vague] guidelines have introduced an element of uncertainty that hadn\u2019t been there before.\u201d
But while Walker says such anxieties may be greater than experiences related to the revised ICA can justify, it\u2019s 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 \u201cnet benefit\u201d 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\u2019s failure to release new regulations dealing with how those values, known as \u201centerprise value,\u201d 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 \u201cinjurious\u201d to Canada\u2019s \u201cnational security.\u201d@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 \u2014 no one is yet sure what \u201cinjurious to national security\u201d 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\u2019s 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\u2019s 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\u2019s possible that the new \u201cnational security\u201d test will be used to review transactions that are not reviewable under the \u201cnet benefit\u201d 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: \u201cThe 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 \u2018national security\u2019.\u201d
There are other \u201cfirsts\u201d in this area. In a groundbreaking 2009 lawsuit, Canada\u2019s 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.
\u201cForeign investors who make binding commitments to the Canadian government have to be aware that those undertakings are taken very seriously,\u201d Walker says. \u201cThe fact that the government actually sued U.S. Steel in court underlines that fact.\u201d
More predictable \u2014 at least, so far \u2014 is another emerging area of review dealing with acquisitions by \u201cstate-owned enterprises.\u201d 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.\u2019s purchase of Harvest Energy Trust.
Walker notes that more uncertainty for investors lies ahead: \u201cThere is a lot of discretion, as there is in a lot of countries. But we don\u2019t have [sufficiently clear] guidelines.\u201d \t IE<\/b>
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