Proposed changes to the review and enforcement of foreign investments under the Investment Canada Act should provide greater transparency to Canadians and make for a more appealing environment for foreign investors.
Of most significance is an amendment to the regulations which will, over a four-year period, change the financial threshold for review under the ICA from $330 million in asset value to $1 billion in enterprise value. This is to ensure the review process focuses on the most significant transactions, says Subrata Bhattacharjee, a partner with Heenan Blaikie LLP in Toronto.
“This is a positive message for foreign investors,” says Bhattacharjee. “The previous standard of $330 million in asset value was probably seen to be too inclusive. It caught too many transactions in the net, which raised no serious net benefit let alone any national security issues. There is some legitimate questions to be raised on what exactly enterprise value will mean and when the draft regulations come out stakeholders will have a chance to see how it will work in practice.”
Once the regulations are in force, the investment review threshold will immediately rise from $330 million in asset value to $600 million in enterprise value for two years, then up to $800 million for two years, then to $1 billion (subsequently, the threshold will be indexed to reflect changes in Canada’s gross domestic product as is currently the case under the ICA).
The change was seen as critical to reducing the number of transactions subject to review on the perception that foreign investors in non-contentious acquisitions would find it as a barrier.
The current standard is based on the value of the assets according to the business’ financial statements, or book value.
A second change incudes the issuance of mediation guidelines that make formal mediation procedures available under the ICA as an alternative means of voluntarily resolving disputes when the minister believes a non-Canadian investor has failed to comply with an undertaking given in connection with an investment.
“Most foreign investors would not want to see a situation as happened in U.S. Steel, where several years after making the acquisition you’re engaged in litigation that goes all the way to the appellate courts about your Investment Canada undertakings,” says Bhattacharjee.
For many years, if a foreign investor agreed to maintain employment at a Canadian plant it intended to acquire, it was required to so for a period of time unless circumstances were out of its control. What began to happen, partially as a result of the recession, was as some foreign investors made significant acquisitions in Canada they began to try and rationalize operations. In the case of U.S. Steel Corp., the government litigated to try and hold the company to employment obligations it said it had made when it bought Canadian steelmaker Stelco.
“U.S. Steel was indicative of a new era in how we treated commitments foreign investors made when they came into Canada,” says Bhattacharjee. “Part of the criticism at the time was there was concern foreign investors were walking away from employment or financial commitments they had made.”
The amendments will also include publication of an annual report by Industry Canada on the administration of the ICA.
“One of the comments that has been made about the Investment Canada process is that it’s fairly black box. That works to the advantage of the foreign investor and the government but, having said that, we have had a stream of high-profile cases where Canadian companies have been acquired by foreign investors and two high-profile blocks with MacDonald Dettwiler and Associates and BHP Billiton Ltd. bid for Potash Corp.,” says Bhattacharjee.
In both MacDonald Dettwiler and Potash the government did not provide a comprehensive statement on the reasons for blocking those deals.
“Transparency is another perceived issue the government is trying to address with these changes. In general the government wants to try and liberalize aspects of our foreign investment regime and so the announcements are consistent with those goals,” says Bhattacharjee.
At the same time, he says the changes are seen as strengthening the act.
“I think there has certainly been criticism about the ability of the minister to ensure that foreign investors who make commitments or undertakings as a condition to getting a net benefit determination are actually upheld.”