The Competitor : Canada Competition / Antitrust Blog by Stikeman Elliott Lawyers & Attorneys

Shawn C.D. Neylan and Michael Kilby -

In March 2009, significant amendments to Canada’s Competition Act and Investment Canada Act were passed, with important implications for the regulatory review of mergers and acquisitions. 

Merger Control – Competition Act

Following the amendments of March 2009, Canada now has a “two-stage” merger review process. The merits and demerits of this new regime were never thoroughly debated among competition law practitioners or in Parliament, because the amendments were included in a budget implementation bill drafted in response to the global economic crisis of 2008. The bill moved through the legislative process in a matter of weeks, with the clear focus of parliamentary debate being on economic stimulus measures, rather than amendments to the Competition Act and other statutes. In any event, the new merger review process shares many similarities with the US process under the Hart-Scott-Rodino Act1. More particularly, the submission of the required notification filings by the purchaser and the target company triggers a 30 calendar day waiting period during which the transaction may not proceed, unless the Commissioner of Competition (the Commissioner) issues a positive clearance for the transaction and/or terminates the waiting period. If the 30 calendar day waiting period expires without the issuance by the Commissioner of a supplementary information request (a SIR), then there is no legal impediment to the parties closing the transaction. However, if the Commissioner issues a SIR within the 30 calendar day waiting period, the transaction may not close until 30 days after the parties have complied with the SIR, unless the Commissioner issues a positive clearance for the transaction and/or terminates the waiting period.

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Lawson A.W. Hunter, Q.C. and Susan M. Hutton -

In February, 2011, a Canadian Parliamentary committee began reviewing the Investment Canada Act (ICA) with a view to recommending measures to increase the transparency and effectiveness of the statute. The review was terminated by the federal election called in late-March, but may well recommence in the next Parliament. This article examines recent events leading to the statutory review as well as the various decision-making models under consideration and asks: “Will reforms be of “net benefit” to Canada?”

The ICA applies to the acquisition of control of existing Canadian businesses and to the commencement of new Canadian businesses by non-Canadians. In the case of most such transactions, the foreign purchaser or investor is merely required to file a short notification within 30 days following completion of the transaction, and there is no discretion on the part of the Canadian Government to block the deal from closing or to re-visit it after the fact to impose conditions. Acquisitions of control of large Canadian businesses, however, by persons controlled in WTO-member states (and smaller acquisitions if the business has a “cultural” aspect or neither party is controlled in a WTO-member state) generally require the approval of the Minister of Industry on the grounds that he or she is satisfied that the transaction is likely to be of “net benefit” to Canada, according to a prescribed set of criteria. 

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Shawn Neylan

As we discussed late last year, the Canadian government recently rejected BHP Billiton's proposed acquisition of PotashCorp. The government's actions have put the Investment Canada Act (ICA), and the process for government approval of proposed transactions, back into the spotlight. On that note, we thought that we'd take this opportunity to answer some frequently asked questions about the legislation.

Q: Is Canada still open to foreign direct investment?

A: Absolutely. Although a recent high profile transaction received a heightened level of public and political attention, and there is also some uncertainty whether there may be a general policy and/or legislative change on the horizon, there is no doubt that the Canadian government is generally supportive of foreign direct investment. Since the ICA came into force a quarter of a century ago, over 99% of reviewable transactions have been approved. As discussed in more detail below, only two transactions were rejected and they each had unique circumstances.  

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Susan M. Hutton

On November 3, 2010, Canada's Minister of Industry announced his conclusion that the proposed acquisition by BHP Billiton plc of Potash Corporation of Saskatchewan Inc. was not likely to be of "net benefit to Canada". Although provided a further 30 days to try to convince him to change his mind, BHP Billiton announced on November 14, 2010 that it would withdraw its bid. The Minister's announcement marked only the second time Canada has rejected a foreign takeover under the Investment Canada Act, the first being its rejection of the proposed acquisition by Alliant Techsystems Inc. of the information systems division of MacDonald, Dettwiler and Associates Ltd. in 2008. 

The Minister said that he felt the takeover would not have a beneficial effect on three of the six criteria listed in the Act: Canada's ability to compete in world markets; productivity, efficiency and innovation in Canada; and the country's overall level of economic activity. The proposed takeover had also been vocally opposed by Saskatchewan Premier Brad Wall and generated an unprecedented degree of public commentary and controversy. Following his decision, the Minister said that he would support a review of the 25-year old statute to see how it could be improved in terms of transparency and enforceability. He also indicated that, in the meantime, he would clarify how he interprets the factors he is required to consider in coming to his conclusions on the "net benefit" test. Stikeman Elliott's Lawson Hunter, Susan Hutton and Michael Kilby represented PotashCorp with respect to the Competition Act and Investment Canada Act aspects of the transaction.

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Shawn Neylan and Michael Kilby

In the second quarter of 2010, the Investment Review Division of Industry Canada (IRD) received approximately 142 notifications in respect of the acquisition or establishment of Canadian businesses pursuant to the Investment Canada Act (ICA).  In addition, three Ministerial decisions based on applications for review were made in the second quarter of 2010.  By way of contrast, in the full 2007 year, likely a high water mark for foreign investment in Canada, approximately 676 notifications and 62 Ministerial decisions based on applications for review were made.  Meanwhile, only seven Ministerial decisions based on applications for review have been made in the first half of 2010.

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Shawn Neylan and Michael Kilby

In the first quarter of 2010, the Investment Review Division of Industry Canada (IRD) received approximately 115 notifications in respect of the acquisition or establishment of Canadian businesses pursuant to the Investment Canada Act (ICA).  In addition, 4 Ministerial decisions based on applications for review were made.  By way of contrast, in the full 2007 year, likely a high water mark for foreign investment in Canada, approximately 676 notifications and 62 Ministerial decisions based on applications for review were made.

 The key distinction between an application for review and a notification is that an application for review requires that a foreign investor establish for the Minister of Industry  (or the Minister of Heritage in the case of cultural businesses) that a proposed investment is of "net benefit to Canada".  This is usually achieved by providing binding undertakings to the Minister in respect of the future conduct and management of the Canadian business.  A notification does not trigger any approval requirement but is largely an administrative formality.  Applications for review are usually triggered by large, direct acquisitions of Canadian businesses.

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On June 25, 2010, the Minister of Industry, Tony Clement, announced that he had approved Sinopec’s acquisition of a 9% interest in Syncrude under the Investment Canada Act.  The Minister stated that he had considered Sinopec’s plans, undertakings and other information and emphasized that the transaction would not change the level of Canadian ownership of Syncrude which will remain at 56%.

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The House of Commons Standing Committee on Canadian Heritage has released transcripts of its June 1, 2010 hearing during which representatives of Icahn Enterprises and Heritage Canada testified regarding Icahn’s proposed acquisition of control of Lions Gate Entertainment Corp. (“Lionsgate”). While declining to give evidence with respect to the Investment Canada Act review process, the Icahn representative explained the business rationale of the transaction.  Among other things, Committee members asked whether the Icahn representative was a Canadian and whether he could name a Quebec film.

The June 3, 2010 Heritage Committee hearing transcripts have also been released.  Representatives of Lionsgate testified at this hearing regarding their view that the transaction would not be of net benefit to Canada and should therefore not be approved by the Heritage Minister under the ICA. A Lionsgate representative stated that “I think we have been a very loyal partner to Canada, and Canada has been a very loyal partner to us, and together Canada and Lionsgate have built a major media giant.” Among other things, Committee members asked for the address on his business card.

As noted in an earlier post, the Minister of Heritage approved  the transaction on June 9, 2010 based on commitments given by Icahn in relation to Canadian cultural activities.

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On June 14, 2010, the Federal Court of Canada released its decision dismissing US Steel’s constitutional challenge of the Investment Canada Act provision providing for enforcement of undertakings that may be given by investors to obtain Ministerial approval of transactions that are subject to the ICA.  The challenge was brought as an application in proceeding commenced by the Attorney General of Canada (“AGC”) for an order enforcing certain employment and capital expenditure undertakings given by US Steel in respect of its 2007 acquisition of Stelco, and for the imposition of a penalty of $10,000 for each day of alleged non-compliance.

The court found that the potential monetary penalty was not penal in nature, but was rather intended by Parliament to promote and ensure the legislative objectives of the Investment Canada Act.  Therefore, section 11 of the Charter, which provides rights to persons who are charged with an offence, did not apply.

The court also found that the procedural rights that were available in the proceeding brought by the AGC were sufficient to conclude that US Steel’s right to a fair hearing in accordance with the principles of fundamental justice under s. 2(3) of the Bill of Rights was not violated.

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On June 9, 2010,  the Honourable James Moore, Minister of Canadian Heritage and Official Languages, announced the approval of the Icahn Group’s acquisition of Lions Gate Entertainment Corp.  The Minister stated that his decision “will result in Lions Gate maintaining or increasing Canadian film and television production and protect and preserve Canadian jobs.”  The Minister referred to undertakings being given with respect to employment and film production in Canada, film production in Quebec, distribution rights for Lions Gate films, “providing financial support to organizations that help less fortunate Canadians experience Canadian culture”, and support for cultural events.

The Minister’s decision was announced after the House of Commons Standing Committee on Canadian Heritage had commenced a study on the transaction.

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On August 18, 2009, the Minister of Industry issued a notice to George Forrest International Afrique S.P.R.L. (GFI), pursuant to section 25.2(1) of the Investment Canada Act (ICA), that its proposed acquisition of Forsys Metals Corporation (Forsys) could be injurious to national security, and that an order for a national security review could be made under section 25.3(1) of the ICA. Forsys is engaged primarily in the development of a uranium deposit in Namibia and has no productive assets in Canada.

The effect of this notice was to prohibit the completion of GFI's acquisition of Forsys, unless and until the Minister issued a further notice that would have the effect of removing the prohibition on closing. The notice letter was only recently made public in the context of litigation between the parties to the transaction. This is believed to be the first national security notice issued under the Investment Canada Act since the national security provisions were enacted in March, 2009.

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Michael Kilby

The Investment Canada Act threshold for review of direct acquisitions of control by WTO investors in non-cultural industries has now been officially lowered to C$299 million for transactions closing in 2010. Draft amendments to the Investment Canada Act regulations that would change the C$299 million (book value of assets) threshold to C$600 million (enterprise value) have yet to be issued in final form, as the government continues to consider comments on the draft.

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Susan M. Hutton

Unless changed by regulation, the "size of target" threshold for advance notification under the Competition Act of transactions involving Canadian businesses will likely be reduced to C$67 million, in accordance with the GDP indexing provisions which were introduced in amendments to the Act last March. The amount will be official once published by the Minister in the Canada Gazette, and until then the previous C$70 million threshold continues to apply.

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Susan M. Hutton and Kevin Rushton

On March 12, 2009, the Canadian government enacted the most significant amendments in over 20 years to Canada's competition and foreign investment regimes, as part of Bill C-10, the Budget Implementation Act, 2009. The amendments to the Competition Act result in fundamental changes to the way that business operates in Canada, and provide the Competition Bureau with unprecedented enforcement tools and/or penalties in all areas. Fewer foreign investments in Canada will meet the increased thresholds for Ministerial review and approval under the changed Investment Canada Act, but all such investments will face potential scrutiny under a new "national security" test. The most significant amendments to both these laws are discussed below.

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Jeffrey Brown and Kevin Rushton

On March 12, 2009, the most significant amendments to Canada's competition and foreign investment regimes in more than 20 years were enacted when Bill C-10, the Budget Implementation Act, 2009, received Royal Assent. The amendments were described in detail in the February 20, 2009 edition of The Competitor.
 

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Susan M. Hutton

The Canadian Competition Bureau will be pleased today, as significant and far-reaching amendments to the Competition Act and the Investment Canada Act were included in the Budget Implementation, 2009 bill (C-10), which was tabled today in the House of Commons by the Canadian government (see Parts XII and XIII).

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Susan M. Hutton

Canada's 40th Parliament opened on Wednesday, November 19, 2008 with the traditional Speech from the Throne, outlining the government's legislative priorities. In keeping with the turbulent economic times and with calls for greater supervision of business, the throne speech promised to "proceed with legislation to modernize our competition and investment laws, implementing many of the recommendations of the Competition Policy Review Panel."

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On June 26, the blue-ribbon Competition Policy Review Panel issued its report to the federal Industry Minister on how to raise Canada's standard of living through greater competition and productivity, calling for urgent action to improve Canada's competitive position.

The report, "Compete to Win," is wide-ranging and thought-provoking, canvassing issues ranging from education, immigration, taxation, and securities regulation to specific proposals to amend Canada's competition and foreign investment review laws.  Implementation of all, or even many, of the Panel's sixty-five recommendations would result in fundamental changes to the way business operates in Canada.

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On December 7, Canada's Industry Minister announced that the Government would apply special guidelines (the Guidelines) to the review of Canadian investments by state-owned enterprises (SOEs) under the Investment Canada Act (the ICA), Canada's foreign investment review legislation.  In brief, the Guidelines:

• Focus on the governance and commercial orientation of SOEs;
• Outline factors that the Government will use to assess adherence to Canadian standards of corporate governance;
• Identify considerations for determining whether the SOE will operate the Canadian business according to commercial principles;
• Offer examples of the types of binding commitments that SOEs may be required to provide.

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Kevin Rushton, Susan M. Hutton

On October 9, 2007, Canada's Minister of Industry, Jim Prentice, announced that, this fall, the Canadian government "will examine the need for guidelines on takeovers by state-owned enterprises" and will "carefully consider the creation of an explicit national security test" in the context of foreign investment review under the Investment Canada Act.¹

Speaking before the Vancouver Board of Trade in a widely-anticipated address, Minister Prentice emphasized that "Canada is open for business", but said that safeguards must be put in place to protect Canadian interests.  With respect to investments by entities owned or controlled by foreign governments, Minister Prentice explained that the "government's concern is not with the ownership of the foreign capital being invested", but rather with "ensuring that state-owned enterprises in Canada are operating under the same standards as any other commercial enterprise operating in Canada, including those related to transparency, good governance practices and whether they operate according to free market principles."  With respect to national security considerations, Minister Prentice noted that several countries have the means to review and block foreign investment on national security grounds, and commented that the lack of a national security test in Canada for foreign investment is "an oversight that should be addressed."

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The Investment Canada Act (the Act) has returned to the national spotlight. As part of the long-term economic plan released in late November called Advantage Canada: Building a Strong Economy for Canadians,ⁱCanada's Minister of Finance announced, among other things, his intention to review the Act "with the aim of maximizing the benefits of foreign investment for Canadians, while retaining our ability to protect national interests." While identifying screening procedures under the Act as a factor that restricts foreign investment in the Canadian economy (and stating unequivocally that "both inward and outward foreign direct investment bring substantial benefits to Canada"), the report also noted concerns arising from the "rare" occasions when take-overs of Canadian businesses might damage Canada's long-term interests.

The only example cited was that of investment in Canada by a foreign state-owned enterprise (SOE) with "non-commercial objectives and unclear corporate governance and reporting." As has recently been the subject of some discussion in Canada (see below), the acquisition by a foreign SOE of a significant stake in Canada's natural resources might trigger a concern that such resources would simply be funnelled back to the investor's home country and not sold on the open market. One could also imagine, however, that investment in a defence-related industry by a hostile government might not be in Canada's "long-term interests." Moreover, in the highly charged post-9/11 world of international politics, other grounds may also be raised in opposition to certain investments.

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While foreign investment review thresholds have been increased, the scope and application of Canada's foreign investment legislation remains unchanged.

The Canadian government has increased the foreign investment review threshold in respect of all transactions closing in 2006 that involve acquisitions of control of Canadian businesses. Specifically, the monetary threshold for review of investments by WTO investors based in WTO-member countries has been increased from $250 million1 to $265 million, unless one of the exceptional circumstances discussed below applies.

The increased threshold is thanks to the inflationary indexing formula prescribed under the Investment Canada Act (the ICA), rather than a liberalization of Canada's foreign investment policy per se. In fact, the "rules" of foreign investment review have not changed. All acquisitions of control of a Canadian business (i.e., a business carried on in Canada that has a place of business in Canada, an individual or individuals in Canada who are employed or self-employed in connection with the business and assets in Canada used in carrying on the business) by a "non-Canadian" are subject to the provisions of the ICA - even where the Canadian business is already foreign-controlled (e.g., a Canadian subsidiary of a U.S. corporation). One common misconception is that the use of a Canadian-incorporated acquisition vehicle takes the transaction outside the scope of the ICA. This is not the case; the nationality of the persons ultimately controlling the acquisition vehicle is determinative for ICA purposes.

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The Honourable David L. Emerson, Minister of Industry, announced on June 20, 2005 that the Government of Canada is introducing legislation "to update Canada's foreign investment legislation." Although Minister Emerson has indicated that the proposed amendments reflect ".an update of our security system, not a change in our investment policy," they could, if enacted, present a significant hurdle to foreign investors.

Bill C-59, An Act to Amend the Investment Canada Act, would enable the Governor in Council (upon the recommendation of the Minister of Industry) to review any foreign investment that, in the opinion of the Governor in Council, "could be injurious to national security," regardless of the value of the assets of the target Canadian business. In contrast, generally speaking, foreign investments in Canadian businesses are currently reviewable only if the asset value of the Canadian business exceeds an established financial threshold.1

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