Canadian Protectionism? Political and Legal Considerations for Foreign Investment in Canada

Canada's law governing foreign investment, the Investment Canada Act has come under increased scrutiny since the government's review of BHP Billiton's proposed acquisition of Potash Corporation of Saskatchewan in late 2010. For the second time in two years, the Canadian government blocked an acquisition by a foreign investor, using a law that had never before in its 25 year history been used for that purpose. The concern is that Canada has become protectionist and will review transactions through a political lens with a sharp domestic-preference focus, rather than an international business and investment focus. This paper outlines the legal framework for foreign investment review in Canada, describes recent political events in Canada as they relate to the Act, and concludes with lessons drawn both from recent transactions and recent political events.

Key points

A non-Canadian investor acquiring a Canadian business with assets of more than $312 million must satisfy the Minister of Industry that the proposed transaction is likely to be of net benefit to Canada. Investors provide undertakings to the Minister detailing how they will operate the business in order to demonstrate that net benefit. The net benefit criteria are a mix of objective and subjective criteria; the application of the subjective criteria has been criticised. The federal government consults with affected provincial counterparts; provinces are now seeking a greater role in the process. The breadth of the net benefit criteria, combined with the fact that the decision ultimately rests with an elected politician, means that potential investors must be mindful of both the legal and political considerations that will influence a clearance decision. Investors must remember that all politics are local and to target all levels of government with strategic messaging. Acquisitions of a regional or national champion will receive heightened media and political scrutiny. High profile transactions require a mix of legal, political and public relations strategy. The legal framework

Non-Canadian investors establishing or acquiring direct or indirect control of a "Canadian business" must consider their obligations under the Investment Canada Act. The ICA establishes standards which determine whether a transaction must be reviewed and approved by the responsible federal minister (a reviewable transaction) before it can close, or whether it merely must be notified to the minister (a notifiable transaction). In particular, the structure of the transaction and the value and nature of the assets of the Canadian business being acquired will determine its status.

If the transaction is merely a notifiable transaction, the investing party need only complete a two page standard form notification which is designed to provide some basic information about the party or parties and the transaction. That form must be sent to Industry Canada (or the Department of Canadian Heritage if applicable) no later than 30 days after closing. A reviewable transaction, on the other hand, requires the filing of a lengthy application for review prior to closing. The transaction may not be completed until the Minister of Industry (and/or the Minister of Canadian Heritage in certain circumstances) has determined that the transaction is "likely to be of net benefit" to Canada.

(a) Reviewable transactions

A non-Canadian can acquire control of a Canadian business either by buying substantially all of its assets, or by purchasing the voting interests (i.e., shares) of the business. Such an acquisition will be reviewable if the book value of the assets of the Canadian business is equal to or greater than a prescribed threshold, which is currently $312 million1. Asset values are generally determined by reference to the audited financial statements of the Canadian business for its most recently completed fiscal year.

When voting interests are acquired, an acquisition of control is deemed to occur when the non-Canadian directly acquires a greater than 50 percent voting interest in a Canadian company, and is presumed to occur where there is an acquisition of between 33 percent and 50 percent of the voting shares. The acquisition of control of other Canadian entities such as a partnership, trust or joint venture, with assets greater than $312 million will be reviewable if a non-Canadian acquires more than a 50 percent interest.

A lower threshold ($5 million) applies if the investor is from a country that is not a member of the World Trade Organization (WTO) or if the Canadian business is engaged in a cultural business (described further below). Any transaction that is not reviewable is a notifiable transaction.

The Investment Canada Act was amended in 2009 to progressively increase the review threshold for the acquisition of control of a Canadian business to $1 billion over a five-year period (starting with a threshold of $600 million for the fi rst year), which period has not yet commenced. Further, the measurement standard for the new threshold will be changed from book value of assets to the enterprise value of the acquired business. These changes have not yet taken effect because new regulations to define "enterprise value" must first be adopted.2

(b) Global acquisitions with Canadian elements

An indirect acquisition of control of a Canadian business occurs when there is an acquisition of a company incorporated outside Canada that controls an entity in Canada carrying on a Canadian business (e.g., the acquisition of a foreign company that has a Canadian subsidiary). Pursuant to Canada's international commitments, indirect acquisitions by or from WTO investors are not reviewable, unless the Canadian business carries on a cultural business. If it is a cultural business in Canada, there will be a post-closing review of the investment.

For non-WTO investors, the threshold is $5 million for a direct acquisition and $50 million for an indirect acquisition. The $5 million threshold will apply to an indirect acquisition if the asset value of the Canadian business being acquired exceeds 50 percent of the asset value of the global transaction.

(c) Acquisition of a Canadian-listed company with minimal Canadian operations

For the ICA to apply there must be an acquisition of control of a "Canadian business." The Act defines that term as a business carried on in Canada that has a place of business in Canada, an individual or individuals employed or self-employed in connection with the business, and assets in Canada used in carrying on the business. It is not uncommon for natural resource companies listed on a Canadian stock exchange to maintain a registered office in Canada, but not have any operational assets located in Canada (e.g., the mines or oil fields are elsewhere). Although this may appear to meet the broad definition of a "Canadian business," the Investment Review Division of Industry Canada also examines the extent of the connection of the business to Canada in deciding whether a business is a "Canadian business." To the extent that there are no operational assets in Canada and the directing minds of the business (i.e., senior management) are located outside Canada, it is possible that the Act will not apply.3 Pre-filing discussions with the staff of the Investment Review Division can confirm this.

(d) Acquisitions of cultural businesses If the Canadian business that is being acquired is a cultural business, a direct acquisition of that Canadian business will be reviewable if the entity carrying on the Canadian business has assets with a book value in excess of $5 million or, in the context of an indirect acquisition, the entity carrying on the Canadian business has assets with a book value of more than $50 million.

A "cultural business" includes those involved in the publication, distribution or sale of books, magazines, periodicals, newspapers or music in print or machine readable form. Also covered are those involved in the production, distribution, sale or exhibition of fi lm or video products or audio or video music recordings.4 Reviewable acquisitions of cultural businesses are the responsibility of the Minister of Canadian Heritage. Businesses that carry on both cultural and non-cultural activities that are subject to review are reviewed by both the Minister of Industry and the Minister of Canadian Heritage. Note that non-Canadians are precluded from acquiring control of certain types of cultural businesses due to foreign ownership policies, although exceptions have been made.

(e) The review process

If a transaction is reviewable, the investor must submit an application to the Minister of Industry and/or the Minister of Canadian Heritage. Within 45 days of a completed application being received, the Minister must either (i) indicate whether he or she approves the transaction (on the basis that it is likely to be of "net benefit" to Canada), or (ii) extend the review period for a further 30 days, following which the...