Prime Minister says free market principles will be tempered by reality

Shawn Neylan -

Bloomberg News reported yesterday that in an interview given on September 21, Canada's Prime Minister Harper confirmed that capital from China and other countries is welcome provided that acquisitions of Canadian businesses are “economic in nature and don’t have other strategic or political objectives”.  Bloomberg quoted the Prime Minister as saying "[a]s much of an advocate as I am of free markets, I don’t think that governments realistically can just make the assumption that everybody else is operating on a market basis."

With respect to the BHP-Potash transaction that was rejected under the Investment Canada Act the Prime Minister stated: "If it had been in Australia, to put the shoe on the other foot, I don’t believe that takeover would have been approved. ... I think the objectives of BHP, in fairness, probably were beyond merely what we would consider good business in a market sense, but probably more an issue of strategic positioning, and that strategic positioning was obviously not in the interest of the Canadian economy.”

While it is reasonable to expect that most transactions will not involve strategic or political objectives that may raise issues under the Investment Canada Act, the Prime Minister's comments underline the importance of an early assessment of the potential for planned transactions to attract the heightened scrutiny of the Canadian government. This has been understood at least since the China Minmetals - Noranda transaction discussions in 2004 and was confirmed in the State Owned Enterprise Guidelines issued by Industry Canada in 2007. The SOE Guidelines make specific reference to the Canadian government's need to be satisfied that Canadian businesses that are acquired by non-Canadians will continue to operate on a commercial basis. The Prime Minister's comments in relation to BHP suggests that strategic actions by non-state owned enterprises may also attract government scrutiny, underlining the need for assessment and planning to satisfactorily resolve such issues and successfully complete acquisitions of significant Canadian businesses.

Canada's Merger Control and Foreign Investment Regimes - selected recent developments

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.

To those familiar with US antitrust law, the above-outlined structure of the new Canadian regime clearly bears a close resemblance to the structure of US merger control law under the Hart-Scott-Rodino Act. However, two key differences between the Canadian and US regimes are that: a) it is possible in Canada, and even common, for parties to seek and obtain clearance for substantively simple transactions via an “advance ruling certificate” process, removing the need to make formal notification filings in the first place; and b) the expiry of the 30 calendar day waiting period in Canada does not amount to substantive comfort that the Commissioner has concluded that a transaction does not raise competition issues.

Since the new law came into force in March 2009, the rate at which the Commissioner and the Competition Bureau (the Bureau) have obtained negotiated remedies has increased dramatically in 2009 and 2010, as compared to historical levels. Indeed, between July 2009 and September 2010, (a 14 month period), the Bureau obtained Canadian competition law remedies in approximately 10 transactions, including numerous international transactions. Whether this is due to an increased number of strategic transactions or the new law is open to debate. Although it is impossible to say whether the Bureau could have obtained divestitures in respect of this number of transactions under the previous merger control regime, it is clear that this rate is considerably higher than in recent years where there were typically two or three merger remedies per year.2

Looking more closely at the transactions for which divestitures have been required, they vary greatly in terms of their Canadian elements. Some (Suncor/Petrocan, Clean Harbours /Everready and IESI-BFC/Waste Services) exclusively, or almost exclusively, raised competition issues in Canada and not in any foreign jurisdictions. In these situations, the Bureau obtained divestitures entirely independently from any foreign competition law regulators. Others (Pfizer/Wyeth, Merck/Schering Plough, Novartis/Alcon) were very much international mergers with relatively small Canadian components, and where international cooperation would have been significant in arriving at conclusions. Others still were international majors, but with relatively large Canadian components (e.g.,Agrium / CF Industries) with international cooperation again likely being significant. However, even where international cooperation was an important component of the Bureau’s review, the divestitures obtained have frequently had Canada-specific elements, demonstrating that Canadian remedies are not merely an exact re-iteration of any foreign remedies.

Prior to the March 2009 amendments, merging parties had the ability to force the Commissioner to litigate to prevent closing on the expiry of the 42 day period after pre-notification filings were submitted. Although such litigation was, in practice, a rare occurrence because parties wanted to obtain positive clearance from the Commissioner, the bargaining dynamic that existed between the Commissioner and the parties was nevertheless generally more favourable to the parties than is the case today. More particularly, for transactions the review of which lasted longer than 42 days, which captures the significant majority of mergers that are substantively complicated from a competition law perspective, the Commissioner had an incentive to negotiate to avoid litigation. 

Under the new regime, this dynamic is often not present, as the Commissioner’s review of substantively complicated transactions occurs largely, or even exclusively, during a period in which the parties are not able to close. Parties can only put themselves in a legal position to close by complying with a SIR (or the terms of a timing agreement), but the very act of complying with a SIR is a time-consuming, resource-intensive process, and results in the parties providing, under oath, the internal data and documents that the Commissioner would use to support a merger challenge. Parties can and do agree to pull and refile their merger filing such that the waiting period recommences and the Commissioner need not issue a SIR to prevent closing.

While information regarding the timing of parties’ compliance with SIRs (or timing agreements) for specific transactions is not publicly available, it is very likely that at least some of the recent divestitures contained in consent agreements obtained by the Commissioner were negotiated in situations where the parties were not in a legal position to close. This was never or virtually never the case under the old regime, where the parties would often be in a legal position to close during the negotiation of any remedy. One of the implications of the new regime for merging businesses where there is some competitive overlap is that if a relatively short interim period between signing and closing is contemplated, the parties will very likely arrive at their intended closing date in a situation where they require positive clearance from the Commissioner to close, meaning that their bargaining position in negotiating a consent agreement may be relatively weak.

Finally, it is notable that although the Commissioner has obtained merger remedies at an unprecedented rate since the implementation of the March 2009 amendments, the Commissioner has only brought a single formal merger challenge at the Competition Tribunal, continuing a trend that dates back a number of years.   Furthermore, the merger in question was “non-notifiable,” in the sense that it was not large enough to trigger a mandatory Competition Act filing. The new SIR process and the enhanced leverage of the Commissioner would therefore have been an irrelevant consideration in the review of this merger. 

It is unclear whether there will be much in the way of contested merger proceedings in the future. On the one hand, the enhanced information gathering powers of the Commissioner, which operate to extend the waiting period, suggest that the Commissioner may be in a better position than before to prepare for a contested merger challenge. On the other hand, parties to a transaction, recognizing the enhanced power of the Commissioner, may be more inclined to arrive at a negotiated settlement by way of consent agreement relating to the problematic portions of the transaction, in order to permit a relatively expeditious closing. It may take several years before the impact of the March 2009 amendments on merger investigation and litigation in Canada is fully understood. It would seem, however, that consent agreements will continue to occupy a significant position in the Canadian competition law landscape at least so long as the current strategic merger activity continues and that, consequently, case law under the Competition Act’s substantive merger review provisions will remain sparse.

Foreign Investment Review – Investment Canada Act

The ICA provides for the pre-closing review and Ministerial approval of certain investments in Canadian businesses, with such approval granted where the Minister determines that an investment is of “net benefit to Canada.” Prior to March 2009, the ICA did not contain any explicit “national security” review mechanism. We provide below a brief overview of Canada’s new “national security” review regime under the ICA. Certain other technical amendments to the ICAwere made in March 2009, but are not discussed in any detail herein. 

  • National Security - Overview

A national security review may be launched where the Government regards a foreign investment as potentially “injurious to national security”. If it concludes that there is a potential threat, the Government can prohibit or attach conditions to a foreign investment, whether an investment in an existing Canadian business or the establishment of a new Canadian business. If the investment is already completed, the Government’s powers include the ability to order the divestiture of a Canadian business. It is important to note that this mechanism for national security review is separate from the existing economic review process.

The national security amendments to the ICA raise a number of issues, including the following.

  • National Security is Undefined

The ICA does not define “national security”. The Government has not provided any meaningful guidance on the factors it will consider when determining whether there is a national security issue. The concern that national security could be interpreted expansively (beyond obvious defence-related concerns) is heightened by the large and varied group of governmental departments and agencies listed in the National Security Review of Investments Regulations (the National Security Regulations), including the Department of Canadian Heritage, the Department of Natural Resources, the Department of Transport, the Canada Revenue Agency, the Department of Public Works and Governmental Services and the Department of Finance, in addition to the more obvious agencies such as the Department of National Defence and the Canadian Security Intelligence Service.

  • Small Transactions and Other Investments are Subject to the New Law

Unlike the case in economic reviews under the ICA, the new national security review law applies to minority investments. Also, under the new law, the government may order a review if the business in question carries on any part of its operations in Canada and has any of: a place of operations in Canada; one or more individuals who are employed or self-employed in connection with the operations; or assets in Canada used in carrying on the operations. There is no minimum asset or transaction size threshold, with the result that a national security review is possible even with respect to small transactions.

  • No Process for Voluntary Pre-Clearance

The ICA does not provide a pre-clearance process for national security issues. However, in some cases the National Security Regulations provide for a statutory limitation on the Minister’s ability to act after a certain date. In some cases it may be possible to have the limitation period expire before closing. If this is not possible, there will be some (in most cases minimal) risk of a post-closing national security review.

  • State-Owned Enterprises (SOEs)

It is generally thought that the genesis of the national security law was the proposed acquisition of Canadian nickel miner Noranda Inc. by China Minmetals in 2004. Although that transaction did not proceed, it did generate debate about the role of national security considerations under the ICA.

In December 2007, the government issued guidelines on how it would apply the “net benefit to Canada” test to investments by SOEs that were being reviewed under the economic review provisions of the ICA (as opposed to the new national security law, which was not then in force). In addition to the factors that the Minister of Industry typically considers in deciding whether to approve reviewable investments, the SOE Guidelines indicate that the governance and commercial orientation of SOEs will be considered.

With respect to governance, the SOE Guidelines state that the SOE’s adherence to Canadian standards of corporate governance will be assessed, including any commitments to transparency and disclosure, independent directors, audit committees and equitable treatment of shareholders, as well as compliance with Canadian laws and practices. The Minister will also consider how and to what extent the investor is controlled by a state.

With respect to the commercial orientation, the SOE Guidelines state that the following will be relevant: (i) destinations of exports from Canada; (ii) whether processing will occur in Canada or elsewhere; (iii) the extent of participation of Canadians in Canadian and foreign operations; (iv) the support of on-going innovation, research and development; and (v) planned capital expenditures in Canada.

Finally, the SOE Guidelines outline the types of binding commitments or undertakings an SOE may be required to provide to pass the “net benefit” test. While many of these include commitments required by any foreign purchaser, of particular interest is the potential for a requirement to list the shares of the acquiring company or the target Canadian business on a Canadian stock exchange.

Mitigating Considerations

Despite the uncertainty generated by the introduction of the national security review process in Canada, foreign investors should in most cases not be overly concerned for a number of reasons.

  • Experience with National Security Reviews to Date

As at the date of writing, there has apparently only been a single national security notice (not a full review) since the new law came into force a year ago. Moreover, as at the date of writing, even under the “net benefit to Canada” test that is applicable to economic reviews, there have only been two non-cultural investments rejected in the quarter century since the ICA came into force (the ATK - MDA aerospace transaction, and the BHP Billiton – PotashCorp transaction, both described below).

  • Canada has an Open Economy

Canada’s economy has historically been open to foreign investment. In 2009 (not a particularly active year for global foreign investment), 22 transactions were approved by the Minister of Industry under the economic review provisions of the ICA,including three significant investments by SOEs: (i) China National Petroleum Corporation’s acquisition of control of Athabasca Oil Sands Corp, (ii) Korea National Oil Corporation’s acquisition of Harvest Energy Trust and (iii) Abu Dubai’s International Petroleum Investment Co’s acquisition of NOVA Chemicals Corporation. Also, China Investment Corporation’s acquisition of a 17% interest in Teck Resources Limited was successfully completed in 2009, and, in 2010, Sinopec’s acquisition of an interest in Syncrude received approval under theICA. To date, no SOE transactions have been formally rejected.

Investment Canada Act Developments in Recent Months

The most significant ICA development in recent months was the rejection of BHP Billiton’s proposed acquisition of Potash Corporation of Saskatchewan (PotashCorp) in November 2010. This rejection, combined with other foreign investment controversies, has drawn considerable attention to the ICA and has generated widespread debate within the Canadian foreign investment bar, corporate Canada, policymakers and academia as to the appropriate role of government in screening, imposing conditions on and approving foreign investment in Canada. Most recently, parliamentary hearings regarding further potential changes to the foreign investment review regime have been commenced. The outcome of such hearings, in terms of further amendments to theICA, is uncertain. A brief summary of the PotashCorp situation follows.

BHP’s hostile takeover bid for Saskatchewan’s PotashCorp, an iconic world-class producer of a key Canadian natural resource, attracted massive political and media attention from the moment of its launch in mid-August 2010.3

The Premier of the Province of Saskatchewan vigorously argued that the federal government should refuse the proposed bid, concerned among other things, about potentially significant negative tax consequences for the Province of Saskatchewan and the loss of a public company Canadian head office.

On November 3, 2010, the Minister issued a preliminary decision rejecting BHP’s bid on the basis that it failed to satisfy the “net benefit to Canada” test. Although the law provided BHP with a 30-day period within which further submissions could be made to try to change the Minister’s view, BHP apparently chose not to proceed, officially withdrawing its application on November 14, 2010. BHP issued a detailed press release following the failure of the bid, outlining numerous specific commitments it had been prepared to make.  Undertakings would apparently have included a five-year commitment to remain in a Canadian potash export group, significant spending on infrastructure, increased investment in BHP’s already planned Jansen mine (also located in Saskatchewan), commitments to forgo certain tax benefits and to apply for a listing on the Toronto Stock Exchange. Other proposed undertakings apparently related to employment increases, spending on community and education programs and an unprecedented US$250 million performance bond to ensure that the company fulfilled its undertakings.

Following the decision, some commentators noted suggestions by Minister of Agriculture Gerry Ritz that BHP’s bid had been refused because potash is a “strategic resource” for Canada. This is not an explicit factor for consideration under the ICA. However, other countries have, in the context of foreign investment review, taken measures to protect their most valuable resources or companies.4

The ICA certainly provides the Minister with significant discretion and the PotashCorp decision has led to calls for clarification of Canada’s foreign investment rules from businesspeople, investors and politicians across the political spectrum. Critics have cited a lack of transparency and a lack of predictability as factors affecting the efficacy of foreign investment review. While the current approach gives the Minister significant flexibility to assess proposed investments on a case-by-case basis, it is also true that perceived unpredictability might complicate the risk assessments undertaken by foreign acquirers and, conceivably, deter investment in Canada. Nevertheless, the PotashCorp decision had numerous unique features, including the opposition to the transaction from the Premier of Saskatchewan, suggesting that it would be incorrect to draw any broader conclusions regarding Canada’s approach to foreign investment from this apparently unique transaction.

[1] There had been no groundswell of support in Canada for the adoption of a US-style merger review process. The recommendation was included in the final June 2008 report of the Competition Policy Review Panel, a panel formed in July 2007 with a mandate to review Canada's competition and foreign investment policies, and make recommendations to the federal government for making Canada more globally competitive. This recommendation was somewhat surprising given that none of more than 100 written submissions to the panel called for the adoption of US-style process, and indeed such a recommendation seemed beyond the terms of reference of the panel. Furthermore, the recommendation was also contained in the final report of Brian Gover, following his review of the exercise of the Commissioner’s powers under section 11 of the Competition Act

[2] The final months of 2010 and first few months of 2011 were a relatively quieter period for the Competition Bureau in terms of merger remedies. Although numerous remedy sale processes were completed, these related to remedies that had been previously announced. Notable transactions cleared during this timeframe included Shaw / Canwest, BCE / CTVglobemedia and XM Canada / Sirius Canada. The Bureau did, however, bring a merger challenge in January, 2011 in respect of a closed merger.

[3] Stikeman Elliott LLP acted as counsel to PotashCorp.

[4] In fact, Australia itself has been known to protect key industries and, at the same time that BHP was making a bid for PotashCorp, Australian authorities were engaged in a detailed review of the takeover bid for the Australian Stock Exchange by Singapore Exchange Ltd. Indeed, the very existence of BHP and the other Australian mining supermajor, Rio Tinto, as Australian companies, is due, in no small part, to the existence of stringent Australian foreign investment rules that played a major role in previous transactions involving BHP and Rio Tinto. 

Reprinted with permission from The Canadian Legal Lexpert® Directory 2011
© Thomson Reuters Canada Limited






Industry Minister Clement Approves PetroChina-Athabasca Oil Sands Corporation Transaction

Today, the Honourable Tony Clement, Minister of Industry, made a statement regarding his approval of an Investment Canada Act application for review made by PetroChina International Investment Company Limited (PetroChina) concerning a proposed purchase of an interest in properties owned by Athabasca Oil Sands Corporation (AOSC). The Minister stated that the transaction is likely to be of net benefit to Canada and described undertakings given by PetroChina regarding expenditures, employment and other matters.

Competition Policy Review Panel urges Competition Act, Investment Canada Act reforms

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.

The Competition Act

The Panel concluded that "a number of provisions of the Competition Act are either ineffective or obsolete" and noted that "[t]hese deficiencies are particularly evident in respect of the conspiracy and pricing provisions." While satisfied that the Competition Act's substantive merger provisions are "modern" and that there is "no compelling need" to change the existing efficiencies defence, the Panel concluded that the Competition Bureau should not limit its assessment of efficiencies to mergers that it determines likely to prevent or lessen competition, but should consider efficiencies from the outset of its assessment of a merger. The Panel also recommended that the Bureau provide more guidance on the criteria the Commissioner of Competition applies in issuing advance ruling certificates in respect of mergers.  Notably, the Panel also concluded that the Competition Bureau should focus on its core mandate of enforcing and promoting compliance with the Competition Act and limit its "advocacy" efforts to interventions before federal and provincial boards and tribunals. General competition advocacy (e.g., market studies) should be left to the Panel's proposed (independent) "Canadian Competitiveness Council," whose general mandate would be "to examine and report on, advocate for measures to improve, and ensure sustained progress on, Canadian competitiveness."

The Panel's principal recommendations for amendments to the Competition Act include:

Criminal Matters

  • replacing the current conspiracy (cartel) provisions with a per se criminal offence for hard core cartels and civil review by the Competition Tribunal for all other agreements that are demonstrated to have or be likely to have significant anti-competitive effects;
  • repealing the price discrimination, promotional allowance, and predatory pricing provisions;

Reviewable Practices (other than Mergers)

  • repealing the existing criminal price maintenance provision and replacing it with civil review by the Competition Tribunal of price maintenance that is demonstrated to have or be likely to have significant anti-competitive effects, at the behest of  either the Competition Bureau or private parties (private access);
  • empowering the Competition Tribunal to impose an administrative monetary penalty of up to $5 million for abuse of a dominant position;


  • harmonizing merger review procedures with the United States' Hart-Scott-Rodino (HSR) procedures, with an initial review period of thirty days and a discretion, on the part of the Commissioner of Competition, to initiate a "second stage" review period that would end thirty days after compliance with a "second request" for information by the Commissioner;
  • reducing the period within which the Commissioner can challenge a completed merger from three years to one year; and
  • reviewing (with a view to increasing) the financial thresholds for merger notification requirements.

The Panel also recommended that the Bureau strive to improve the timeliness of its decisions, advice and rulings, including the issuance of informal "advance rulings," to ensure that compliance with the Act can be achieved in a timely manner.


The Panel's recommended introduction of an HSR-like merger review process could - depending on how similar it is to the U.S. process - substantially increase the information demands on merging parties and the time period during which a transaction raising significant competition law issues could not close. It would also diminish the importance of the Federal Court as a gatekeeper in respect of Bureau information demands by replacing the current, judicially-supervised section 11 process with, if it follows the U.S. approach, an onerous second request by the Bureau.  Some Canadian stakeholders have expressed surprise at the Panel's advocacy of a U.S.-style system in these regards.

The Panel's recommendations for reform in the areas of conspiracy, pricing and abuse of dominance are consistent with the recommendations of the Commissioner (and, in respect of the repeal of the criminal pricing provisions, the private bar) in years past.  Of note, the Panel's recommendations with respect to the pricing provisions and abuse of dominance are at least directionally in line with proposed amendments to the Act contained in Bill C-454, currently before Parliament and discussed in the May 2008 issue of The Competitor.

The Investment Canada Act

While the Panel rejected the OECD's assessment that Canada has the most restrictive barriers to foreign direct investment among industrialized countries (suggesting instead that Canada's foreign investment review process is simply more explicit and visible than in most countries), the Panel proposed significant amendments to the Investment Canada Act (the ICA) on the basis that there has been no policy review of the ICA in more than twenty years and to rectify the perception that Canada does not fully welcome foreign investment.  Chief among the recommended amendments to the ICA are the following:

  • raising the threshold for review of direct foreign acquisitions of Canadian businesses from $295 million in book value of assets of the Canadian target to $1 billion in the "enterprise value" of the business, and extending the higher threshold to investors from all countries (not just those that are members of the World Trade Organization);
  • eliminating the very low threshold ($5 million in book value of assets) currently applicable to targets with activities in the so-called "sensitive sectors" of uranium production, financial services and transportation services (but not cultural activities, which would continue to be subject to possible review by Heritage Canada);
  • shifting the onus from investors to the Minister by permitting the Minister to reject a transaction on the grounds that it would be "contrary to Canada's national interest" (currently, investors must show that the transaction is likely to be of "net benefit" to Canada);
  • eliminating the requirement to notify Industry Canada of transactions that fall below the review threshold;
  • requiring the responsible Ministers (Industry and Heritage Canada) to produce an annual report that would give reasons for the disallowance of any investment, disclose new policies or guidelines, and describe undertakings offered by investors (while respecting confidentiality concerns); and
  • increasing the use of guidelines and other advisory communications to clarify the review process and interpretations of the ICA.

Application of ICA to Cultural Activities

With respect to acquisitions of Canadian businesses with "cultural" activities, the Panel was critical of numerous aspects of the current review process undertaken by Heritage Canada: the overreach of the current review process to activities and transactions of minimal (if any) cultural significance; a lack of clarity as to the meaning of "cultural" products; and adverse incentives and impacts on the ability to raise capital and enhance competition in cultural sectors.  The Panel doubted that a review should be required where the cultural activities are only an ancillary part of the target's business, and recommended a de minimis exemption based on revenues from the cultural activities of the target business. It stated that Heritage Canada should distinguish between cultural products that involve creation and distribution and those activities that are incidental to commercial activities. Concluding that it did not have sufficient evidence before it to recommend a new review threshold, the Panel recommended that the Minister of Heritage conduct a review of its cultural policies, including foreign investment restrictions, every five years, with the first such review in 2008.

"Hollowing-Out of Corporate Canada"

The Panel acknowledged the debate over the "hollowing out" of corporate Canada and expressed its own concern over foreign takeovers of notable Canadian companies.  The Panel concluded that overall the "data indicate that the share of assets in Canada's non-financial industries under foreign control has not changed noticeably in recent years."  Moreover, while recognizing the loss of a number of leading companies, the Panel also noted a number of "growing Canadian champions" and rejected interfering with "the natural rhythm of creative destruction and renewal."   That said, the Panel was critical of securities regulations, which it says have ham-strung Canadian directors' ability to defend against hostile takeover bids as compared to their U.S. counterparts, and called on the Ontario Securities Commission to lead reform.

National Security and State-Owned Enterprises

Although the Panel's revised mandate did not include consideration of a national security test for foreign investment review, the Panel indicated its support for the Minister of Industry's intention to consider the establishment of a new review requirement for transactions that raise national security concerns and suggested a process similar to that used by the U.S. government, wherein such transactions must be approved by the Committee on Foreign Investment in the United States (CFIUS).  Similarly, the Panel also welcomed the Government's recently issued guidelines on the application of the ICA to state-owned enterprises (see the December 2007 issue of The Competitor for details).

Proposals on sectoral investment restrictions

The Panel reviewed current restrictions on foreign investment in air transport, uranium mining, telecommunications, broadcasting and financial services in order to assess their impact on, among other things, competition.   In general, the Panel was supportive of liberalizing foreign investment in these sectors, in some cases with the proviso that market access should be conditional on reciprocal liberalization.  The Panel's principal recommendations in this area were:

  • conducting periodic Ministerial reviews (every five years) of the regulatory regime in these sectors with a view to minimizing impediments to competition;
  • increasing the limit on foreign ownership of airlines to 49% of voting equity on a reciprocal basis through bilateral negotiations, and completing open-skies negotiations with the European Union "as quickly as possible";
  • liberalizing the non-resident ownership policy for uranium mining, subject to any new national security legislation and certain reciprocal benefits from other countries;
  • amending the Telecommunications Act to allow foreign companies to establish a new telecommunications business in Canada or to acquire an existing business having up to a 10% share of the Canadian market-and subsequently liberalizing foreign investment restrictions in the telecommunications and broadcasting industries in a competitively-neutral manner; and
  • removing the de facto prohibition on bank, insurance, and cross-pillar mergers of large financial institutions, subject to regulatory safeguards.

Whether and when the Panel's legislative recommendations will materialize remains to be seen.  Some of its key recommendations, including narrowing the focus of foreign investment review and liberalizing foreign investment in telecoms and airline transportation, will no doubt require further public debate before a consensus can be reached. Nevertheless, the Panel recommends a number of policy changes (such as greater transparency in the foreign investment review process) that could be implemented quickly. In addition, support from opposition parties can be expected with respect to many of the recommended amendments to the Competition Act such that these amendments could proceed, on their own or as amendments to Bill C-454 (an opposition private member's bill, which has passed second reading and is currently before a Parliamentary Committee) notwithstanding the minority status of the current Government.  Whatever the Government's ultimate response to the Panel's report, it will offer a fertile source of recommendations for Canada's economic agenda over the coming months.

State-owned investors face greater scrutiny in Canada

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.

Canadian treatment of SOEs

In July 2007, following foreign takeovers of Canadian icons such as Alcan and Inco, as well as a few highly controversial acquisitions involving foreign state-owned enterprises (including a 2004 bid for Noranda by China Minmetals Corp., which was abandoned in the face of controversy in the media and Parliament), the Government appointed the Competition Policy Review Panel to review the Competition Act and the ICA, including the treatment of state-owned enterprises and the possibility of a "national security" review clause.  However, on October 9, 2007, the Panel's mandate on the latter two issues was pre-empted by the announcement of imminent guidelines on the scrutiny of SOEs under the ICA (just released) and a proposed national security test (still to come).

New guidelines

The ICA requires that acquisitions of control of Canadian businesses exceeding certain monetary thresholds be reviewed and approved by the Minister of Industry (and/or the Minister of Canadian Heritage, for "cultural" businesses) prior to closing or, in some cases, post-closing. The test for review is whether the transaction will yield, on balance, a "net benefit to Canada." The ICA sets out the factors the Minister will consider in determining whether a reviewable investment will be approved. The new Guidelines focus on factors unique to investments by SOEs.

The Guidelines define an SOE as an "enterprise that is owned or controlled directly or indirectly by a foreign government." Relevant to the review of a proposed SOE investment is the SOE's "governance and commercial orientation."

The Guidelines state that adherence to Canadian standards of corporate governance will be examined, with particular regard to commitments to transparency and disclosure, independent directors, audit committees and equitable treatment of shareholders, as well as to compliance with Canadian laws and practices.  In addition, the Government will consider how and the extent to which the investor is owned or controlled by the state in question.

The SOE's commercial orientation will also be evaluated in relation to the operation of the Canadian business, in particular respecting:

  • where to export;
  • where to process;
  • the participation of Canadians in its operations in Canada and elsewhere;
  • the support of ongoing innovation, research and development; and
  • the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.

Finally, the Guidelines outline the types of binding commitments or undertakings that may be required to ensure that SOE investments result in a net benefit to Canada. These include:

  • commitments to appoint Canadians as independent directors;
  • the employment of Canadians in senior management;
  • the incorporation of the target business in Canada; and
  • the listing of shares of the acquiring company or the target Canadian business on a Canadian stock exchange.

Assessment of the SOE Guidelines

While the Guidelines offer insight into the Government's concerns about SOEs, some questions do remain. For instance, how does the Government define a "state"? Is de facto state control sufficient and if so, what criteria would be examined? What if a state holds a "golden share" in the SOE, permitting it to veto certain actions?

Non-commercial objectives

The Guidelines indirectly address possible non-commercial objectives of an SOE by considering such factors as the destination of exports and the location for processing. The first factor highlights a potential concern (voiced in the debate over Noranda) that the SOE may simply wish to funnel Canadian natural resources to its home state, rather than supplying market-based customers. With respect to processing, the Government is likely worried that processing will be moved offshore to increase employment and economic activity in the home state of the SOE.

Lack of transparency

Many commentators have expressed concerns that the lack of transparency and unclear governance of SOEs can lead to volatility in financial or other markets. For example, because of the lack of public disclosure surrounding certain SOEs' investment policies or risk-management strategies, minor comments or rumours could result in instability in the markets.

The Guidelines use Canadian standards for governance as the litmus test for appropriate governance of the SOE.  For example, the requirement for independent directors may be an attempt to ensure that the Canadian business is governed by an entity with directors at arm's length from the SOE's home country.  It is not clear whether this factor is to apply to the SOE itself or merely to the entity directly holding the target business. If the Government is concerned about the former, and the SOE is a vehicle with a large portfolio of investments, a requirement for an independent director would signal a significant departure from existing requirements and could result in a decision by some SOEs not to invest in Canada.

The "equitable treatment of shareholders" factor appears to indicate that the Government will want assurances that private investors in SOEs will be treated equally, relative to the state shareholder. The Guidelines do not provide guidance as to what exactly is being asked of SOEs, although equal disclosure of information about the SOE to all shareholders may be one concern.

Sample undertakings

While the Guidelines' sample undertakings are similar to those applicable to private investors, of particular interest in the SOE context is the undertaking that the target business be listed on a Canadian exchange.  Does this indicate that the Government might require a minority Canadian shareholding in certain instances?  Such a step would again be a material departure from past practice but would ensure that the SOE meets the disclosure requirements of Canadian securities laws, while at the same time giving Canadians the opportunity to remain or become part-owners of the target Canadian business.

Unanswered questions

In summary, while the Guidelines are a start, they leave a number of questions unanswered. Whether the Government will exercise its power to curtail foreign state investment in Canada or merely use it as a lever to extract concessions is a question which only time and experience with the SOE Guidelines can answer.

Canada considers changes to foreign investment review

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."


Calls to allow for "national security" reviews of foreign investment in Canada, and to scrutinize foreign state-owned investments in particular, are not new.  Indeed, the Minister's announcement is consistent with the formation in July of this year of the Competition Policy Review Panel, with a mandate to examine, among other things, those very issues.2 In fact, in June of 2005, Canada's former Liberal government introduced draft legislation to amend the Investment Canada Act to empower the Governor-in-Council (effectively, the federal cabinet) to review and disallow foreign investments in Canadian businesses on "national security" grounds.3Similar legislation was again introduced in November, 2006 to prohibit foreign investments thought to be contrary to the "national interest".4 Both bills ultimately died on the order paper before they could be enacted.

The introduction of a "national security" test for foreign investment potentially raises serious issues with respect to the transparency, predictability and political neutrality of foreign investment review in Canada.  Indeed, a principal criticism of the proposed 2005 and 2006 legislation was its failure to define "national security" and to list specific factors to be considered in evaluating whether a proposed investment is contrary to national security.Minister Prentice's speech did not address these concerns, and it remains to be seen whether a "national security" review would include objective criteria for its application. That said, Minister Prentice did state that "[t]he The Investment Canada Act should not - and will not - become a shield to protect Canadian industry from the full rigours of global competition."

Given the recognized importance of trade and foreign investment to Canadian prosperity, it is crucial that Canada continue to be perceived, in Minster Prentice's words, as "open for business". The takeovers of several Canadian icons in the past year or so, however, appear to have ignited an outpouring of concern, which the Minister's announcement appears designed to address. Many in the business community, however, are also worried that the introduction of any explicit new tests in the Investment Canada Act will have a chilling effect on foreign investment in Canada.

1See The Honourable Jim Prentice, Minister of Industry, Speaking Points to the Vancouver Board of Trade, 9 October 2007, available here

2See The Competitor, "Canada appoints Competition Policy Review Panel" (July 27, 2007: Susan M. Hutton)

3Bill C-59, An Act to amend the Investment Canada Act, 38th Parl., 1st Sess

4 Bill C-386, An Act to amend the Investment Canada Act (foreign investments), 39th Parl., 1st Sess.

5See, for example, The Competitor, "Canada considers Investment Canada Act amendments: Potential focus on foreign state-owned investors" (December 11, 2006)

Canada considers Investment Canada Act amendments: Potential focus on foreign state-owned investors

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.

Wariness of foreign state-owned investors is neither novel, nor unique to Canada. South of the border, national energy security was invoked by members of the United States Congress who objected to China National Offshore Oil Corporation's (CNOOC) proposed acquisition of Unocal, a U.S.-based oil producerâ#"objections that may have influenced Unocal's decision to reject CNOOC's offer in favour of a lower bid by Chevron. Earlier this year, a United Arab Emirates state-owned company, Dubai Ports World, announced that it would sell the US port management business it had recently acquiredâ#"after a chorus of Congressional opposition to the deal. It was also reported in 2005 that the Chair of the US House of Representatives' Armed Services Committee had urged the Bush administration to pressure Canada to review proposed Chinese investments in Canada's oil sands projects.ii

In Canada, unease with acquisitions by foreign SOEs was demonstrated in 2004, when a number of Canadian Parliamentarians expressed concerns about the proposed acquisition of Noranda, a large Canadian mining company, by China Minmetals Corp., a Chinese SOE. Minmetals was not the successful bidder, so the issue of foreign government control over Canadian "strategic assets" was never fully addressed. Since then, however, China Petrochemical Corp. and CNOOC have purchased minority interests in Canadian oil sands projects without objection by the federal government. Nevertheless, the previous Government responded to the controversy in 2005 by introducing a bill into Parliament (Bill C-59) that would have added "national security" as a ground under the Investment Canada Act for reviewing and prohibiting a foreign take-over of a Canadian business. While the then-Industry Minister (responsible for the Act), stated at the time of the Minmetals bid that foreign investment review is "a qualitatively different matter when enterprises are state-owned,"iii

foreign state-owned enterprises were not specifically targeted by Bill C-59.iv

The scope of the current Government's concerns, as briefly alluded to in the report (foreign state investments), may be narrower than "national security." That said, like Bill C-59, any legislation the Government brings forward would likely face similar challenges to articulate the criteria on which to reject an investment, while not appearing to discourage foreign investment in Canada. Indeed, criticism of Bill C-59 targeted the potentially very broad reach and uncertain scope of the term "national security." While the Minister of Industry at the time stated that "national security" in the context of foreign investment review referred principally to acquisitions involving sensitive technology (e.g., satellite or encryption technology) or military hardware, the possibility of an expansive interpretation remained. It is worth noting that the federal Treasury Board guidelines for procurement define "national security" as encompassing threats to economic, environmental and human security.

It remains to be seen whether the new Government's proposed amendments will zero in on foreign SOEs, or will seek broader discretion to reject foreign investment in Canada on "national security" grounds, and exactly how it will attempt to change the perception that the Act discourages foreign direct investment in Canada. It will also be interesting to see how foreign governments will respond. Canada will need to tread carefully, walking a fine line between offending foreign state investors, on the one hand, and promoting foreign investment in Canada, on the other.

 i]On-line at

ii]U.S. officials sound alarm on China; Unocal bid painted as reserve grab, Globe and Mail, Report on Business, p.1, July 14, 2005.

iii] PM lauds Chinese takeover of Noranda, The Globe and Mail, p. A1, October 22, 2004.

iv] Bill C-59 died on the Order Paper as a general federal election was called before its enactment.

v] See The Competitor July 2005