After the Canadian Minister of Industry, Tony Clement, blocked the hostile takeover bid for Potash Corporation of Saskatchewan Inc. by Australia’s BHP Billiton, many in the legal community voiced concerns about the increasing regulatory uncertainty posed by the Investment Canada Act (“ICA”) review process. Following the controversial decision, Clement assured Canadians and the world’s business community that guidance regarding the “net benefit” analysis prescribed under the ICA would be provided in order to clarify the government’s position on foreign investment reviews. Before the government has been able to shed light on its decision-making process, the need for an ICA review has arisen once again with the recently proposed merger of TMX Group Inc. and the London Stock Exchange Plc (“LSE”).

Overview of the ICA

In brief, the ICA provides for Ministerial review and approval of, among other things, the acquisition of control of a Canadian business by a non-Canadian where the book value of the assets of the Canadian business exceeds prescribed dollar thresholds–the current threshold, subject to certain exceptions, is $312 million. Under the ICA, the Minister of Industry must determine whether the proposed acquisition is “likely to be of net benefit to Canada” having regard to the following factors, as set out in the ICA:
-the effect of the investment on the level and nature of economic activity in Canada;
-the degree and significance of participation by Canadians in the Canadian business and in any industry or industries in Canada of which the Canadian business forms a part;
-the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
-the effect of the investment on competition within any industry or industries in Canada;
-the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and
-the contribution of the investment to Canada’s ability to compete in world markets. While the Minister retains significant discretion in the determination of the “net-benefit” test, the power to reject foreign investments has been used sparingly. Since the ICA came into force in 1985, until the Potash Corp. decision last November, the government has only blocked one other potential bid on the basis of the “net benefit test”, namely the proposed acquisition of the information systems business of MacDonald Dettwiler and Associates Ltd. by Alliant Techsystems Inc. in 2008.

Proving net benefit

When submitting an application for review, foreign investors are encouraged to address the enumerated factors and to provide supporting documentation and financial data. The nature of and circumstances surrounding the investment will determine how the various factors are weighted.

If the Minister is not satisfied that the investment represents a “net benefit” to Canada, the Act provides an opportunity for foreign investors to make additional representations and undertakings which would demonstrate the “net benefit” of the investment. The undertakings typically involve commitments to maintaining levels of Canadian operation, production and employment, as well as research and development and capital expenditures.

The government’s has recently shown its willingness to enforce such undertakings and ensure that the promised benefits are being realized, in pursuing its action against  “U.S. Steel” for breaching certain undertakings provided to secure approval of its acquisition of Stelco Canada in 2007. In particular, U.S. Steel undertook to increase steel production in Canada by at least 10 per cent and maintain Canadian employment levels. Instead, U.S. Steel shut down most of its Canadian operations and laid off more than 1,500 employees in Canada. While the case remains before the courts, the government won a significant victory last year after the Federal Court rejected a challenge by U.S Steel to the constitutionality of the enforcement process under the ICA.

National security

In addition to the “net benefit” review, recent amendments to the ICA have added a “national security” component which equips the Canadian government with the power to block foreign investments that may be considered “injurious to national security.” The term “national security” was purposely left undefined in order to afford maximum discretion to the government. A transaction may be subject to a “national security” review even if it is not subject to a “net benefit” review under the ICA. 

While the power to block a foreign investment on this basis remains largely unexplored, the “national security” review process may have played a role in at least one transaction. The proposed acquisition of Forsys Metals Corp.by George Forrest International Afrique S.P.R.L GFI was halted shortly after Forsys issued a press released indicating that GFI had received a letter from Industry Canada stating that it was prohibited from implementing the investment pending further notice. The transaction fell well below the ICA “net benefit” review threshold. The reason for the government intervention was never made public.

However, there was speculation that GFI’s potential acquisition of Forsys’ uranium project abroad and concerns about GFI’s sources of financing for the acquisition may have triggered the review on the basis of “national security”.

Future of Canadian foreign investment

The lack of transparency in the “net benefit” and “national security” review processes under the ICA has generated a significant amount of uncertainty for foreign investors.  While the Canadian government maintains that it is open to foreign investment, some commentators suggest that the federal government’s increasing willingness to scrutinize, and occasionally block, such investments, combined with the lack of clear guidelines for the ICA’s review process, will have a chilling effect on Canada’s ability to attract such investments in the future. 

Investors are advised to carefully assess business plans. While the outcome of a review under the ICA is impossible to predict with certainty, investors are encouraged to consider cooperative and proactive approaches to adapt to the shifting landscape. It is crucial for investors to identify and manage sensitive issues early on.  In addition, both the Potash Corp. bid and the proposed TMX-LSE merger have illustrated the strengthening hand of provincial governments in the ICA review process.  When the proposed acquisition concerns established Canadian businesses in important economic sectors or involves what are deemed to be “strategic assets”, it becomes all the more important to be mindful not only of the federal but also the provincial reaction and to consult with key stakeholders at all levels of government.

The parties to the proposed TMX-LSE merger appear to have thoroughly considered and prepared for an Industry Canada review, though it remains to be seen whether such a proactive approach will yield the desired result.  While Clement’s decision on the proposed transaction will have a great impact on the shareholders of both companies as well as the future of the financial services industry in Canada, perhaps more importantly, the minister’s decision will send a clear message to the global business community about whether Canada really is “open for business”.

The content of this article is intended to provide general information for the reader and is not intended as advice or an opinion to be relied upon in relation to any particular circumstance. For specific applications of the law to a particular set of circumstances, the reader should seek professional advice.

*Talar Beylerian practices in the areas of commercial and insurance litigation with McLean & Kerr LLP, a law firm based in Toronto.