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 the Investment 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.