Fortress Canada?

Canada’s image as a welcome destination for foreign investment was shaken last fall, when Industry Minister Tony Clement denied BHP Billiton Ltd.’s $38.6-billion bid for Potash Corp. of Saskatchewan Inc. Last November’s refusal followed overwhelming opposition to the bid from PotashCorp’s board of directors, which called the Australian mining company’s offer “grossly inadequate” based on the company’s strong long-term growth forecast. It was not surprising to see a board take such a stance, especially when it represents an organization that produces about a quarter of the world’s potash, a key fertilizer ingredient in a world struggling to produce more food on less available land than ever before. Yet the government’s intervention raised eyebrows here and abroad. It was just the second time the Canadian government had stopped a deal using provisions of the Investment Canada Act, which, since 1985, has allowed the government to block deals valued at $299 million or more.

Clement put a halt to the takeover after ruling it would not provide a “net benefit” to Canada, based on a six-part test laid out in s. 20 of the act. Briefly explaining his decision in a November press conference, he said the acquisition would not help Canada better compete in world markets; would not boost productivity, efficiency, and innovation; and would not elevate economic activity. He added that BHP lacked experience in the potash industry when compared to PotashCorp, which was established in 1975.

Despite offering this explanation, Clement technically did not reject the bid, as BHP withdrew its offer before receiving a final decision. That meant the minister wasn’t obligated to release his in-depth reasons for blocking the acquisition, and his refusal to do so has voluntarily created an information void for investors eager to bid on Canadian companies. “It’s really the uncertainty and the confusion that it is creating for foreign investors and companies looking at the Canadian market, or financial acquisitions in Canada,” says Ogilvy Renault LLP Montreal partner Denis Gascon, who points out the overwhelming majority of foreign acquisitions go ahead without any issues being raised. But, he adds, “People talk about the two that were denied. What we hear from foreign clients is, ‘Where will the minister go from here, and what does it mean for the future?’”

Many observers expected Clement to offer some clarifying words to fill the gap, but on Dec. 15, he announced his intention to hold off on that in order to consider legislative changes in 2011. In the meantime, the thwarted bid for PotashCorp has changed the world’s view of foreign investment in Canada, and lawyers here say companies must change their approach if they hope to acquire Canadian companies.

One of the most glaring lingering questions following BHP’s failed bid involves PotashCorp’s categorization as a “strategic resource” by the likes of Prime Minister Stephen Harper and Saskatchewan Premier Brad Wall. That term now seems to have entered the foreign investment lexicon, yet its meaning remains unclear. Some speculate the term simply refers to any desirable resource, while others suggest it denotes a resource with a specific role in the Canadian economy. “It has become the term that has been used to define how this transaction was alleged to be different from others,” says Gascon. He points out such resources could include minerals, energy sources, or food products. At this point, companies will have to decide for themselves just what it means. And with Canada’s natural resources in high demand across the globe, it’s a question that could weigh heavily on a multitude of transactions.

The PotashCorp decision was also viewed as an indication of the federal government’s willingness to protect companies that might be viewed as “national champions.” Certain high-profile Canadian-owned businesses — such as BlackBerry maker Research In Motion Ltd., transportation equipment manufacturer Bombardier Inc., or Suncor Energy Inc. — could be included in this group. Of course that’s just speculation, and any number of other Canadian-owned businesses could make the list as well.

The visibility of Saskatchewan’s premier, who took to the airwaves to vehemently oppose BHP’s takeover of one of his province’s largest employers, was seen as indicating a new source of political interference from the provincial level, which could also threaten foreign investment in Canada.

Wall argued BHP’s plans to sell its potash at market value, rather than through the jointly owned Canpotex Ltd. marketing and distribution company, would cost the provincial and federal governments billions in lost royalties and tax revenues. He also suggested jobs would be lost if the Australian company took control of PotashCorp. Perhaps most threatening to Clement as he surveyed the takeover bid, however, was the Saskatchewan premier’s insinuation that a court battle over provinces’ constitutionally enshrined control of resources could ensue if the transaction was backed.

Observers say Wall’s aggressive campaign against the acquisition likely had a significant impact on the failed takeover. Polls indicated the premier’s electorate was firmly behind him, and their voices were magnified in the context of a minority government in Ottawa holding 13 of the province’s 14 electoral districts. Meanwhile, many in the business community were surprised to learn that, while it was up to Clement to issue a final decision on the bid, provincial sentiments could play a big role in his final determination. The investment act specifically opens the door for such a role; s. 20(e) asserts that in determining whether a foreign takeover will be of net benefit to Canada, the minister must consider the compatibility of the investment with national industrial, economic, and cultural policies, but also take into consideration counterpart policy objectives set by the government or legislature of “any province likely to be significantly affected by the investment.”
Several provinces aligned against BHP’s bid for PotashCorp, but this aspect of the test could prove difficult if several provinces, or the federal government, take opposing positions to a future foreign takeover. “You end up dealing with two different governments with slightly different agendas, and you have to make both of them happy,” says Douglas New of Fasken Martineau DuMoulin LLP’s Toronto office. He adds this is nothing new for those familiar with foreign takeovers, but the BHP deal magnifies its relevance to future foreign takeover bids.

Of course, BHP isn’t the only foreign company to face a rejected acquisition offer in Canada. In 2008, Jim Prentice, who was then industry minister, denied a proposed $1.3-billion acquisition of the information systems segment of Richmond, B.C.’s MacDonald Dettwiler and Associates Ltd. by Alliant Techsystems Inc. of Minneapolis, Minn. While the reasons for that decision were also not made public, it is believed the rejection was based on national security concerns. The deal would have seen the U.S. company take hold of satellite imaging and space technology viewed as key to Canada’s national interest. Regardless, Prentice’s decision in the MDA bid was interpreted as an indication the Canadian government was stiffening against foreign ownership of certain enterprises. That view grew when Clement used s. 40 of the ICA in July 2009 to sue United States Steel Corp. for allegedly failing to live up to agreements it made during the acquisition of Stelco Inc. The Pittsburgh, Pa., integrated steel producer had made 31 undertakings when it took over the Hamilton, Ont., company in 2007. Included in those were guarantees to maintain employment and production levels, which the company was unable to justify failing to live up to, Clement ruled. He went on to issue a $10,000 fine for every day the company failed to adhere to the undertakings. In June 2010, the Federal Court of Canada rejected U.S. Steel’s contention that s. 40 of the ICA is unconstitutional.

The U.S. Steel sanctions were likely on BHP’s mind when it issued its own undertakings in the PotashCorp bid. The Australian company offered the Canadian government commitments it described as “unparalleled in substance, scope, and duration.” Those undertakings included an additional $450 million in exploration and development over the next five years; foregoing entitled tax benefits; remaining a member of Canpotex for five years; bringing 200 new jobs to Saskatchewan and Vancouver; increasing overall employment at its potash facilities by 15 per cent over five years; placing Canadians in senior management positions; listing BHP on the Toronto Stock Exchange; and providing the government with a $250-million performance bond. “Those undertakings were certainly beyond anything I’d ever seen. In spite of that, it was turned down,” says Paul Mingay, national leader of Borden Ladner Gervais LLP’s public mergers and acquisitions group. The bottom line is that investors want to know whether the BHP rejection truly signals a shift in approach by the federal government, he adds.

Most would like to see a review that answers that question and makes way for more transparency in the investment act review process. “We know there are a number of factors that need to be considered, but there’s nothing in the act to say how the factors are weighed, or how you actually get yourself over the line in terms of satisfying those tests,” says Mingay. Yet that review did not seem forthcoming by late 2010. A spokeswoman for Industry Canada would not confirm that Clement intends to issue further clarification on his reasons for rejecting the PotashCorp takeover, despite an earlier commitment to do so. The federal New Democratic Party managed to pass a motion in Parliament in November calling for a review of the act, but it remains unclear what that process would look like if it comes to fruition, and how it would differ from the extensive 2008 foreign investment review led by former BCE Inc. president and CEO Lynton Wilson. In the meantime, lawyers have been forced to do some guesswork on what foreign companies must do to receive the government’s approval for a takeover bid.

“You need to, early on, be thinking about government-relations strategy, public-relations strategy,” says Fraser Milner Casgrain LLP Toronto partner Sandy Walker, who is a leading expert on the ICA. “You have to be thinking about what’s the message you want to get out to your shareholders and to the public, and you also have to be thinking about making contact with government, and selling them your message on why the deal would actually be good for Canada.”

Much of in-house counsel’s work on this type of matter, explains New, involves plenty of in-depth research. He says the best way for counsel to put their company’s best foot forward is by developing a thorough understanding and analysis of the proposed takeover. At the same time, it now appears that counsel representing foreign investors looking to acquire a Canadian company will have to be more vigorous in their advocacy. “When you’re sitting down in your initial strategy sessions and your planning sessions, you have to focus on the strengths and weaknesses of your bid or your offer, in the context of the net-benefit test under the Investment Canada Act,” says New.

That means more focus must be placed on the ability to demonstrate a clear correlation between the transaction and a marked economic benefit to Canada, adds New. “You’ve got to say, ‘Where are we going to in this particular industry, what are the sensitivities, what are the weaknesses of our bid, what are the strengths of our bid, and how are we going to sell this?’” He also urges companies to get their story into the press and to government decision-makers as soon as possible. Waiting too long may give opponents the bid time to create a narrative for the transaction that, accurate or not, could become a significant roadblock.

The MacDonald Dettwiler bid demonstrated Ottawa’s continuing concern over transactions involving foreign companies with potential national security implications. Those issues should be canvassed early on, and a determination must be made as to whether the bid has a good chance of proceeding, says New. If that research turns up significant concerns, the bid should be put aside.

Just as the international investment community is wondering what’s changed with Canada’s foreign-investment regime after the BHP rejection, Canadian companies are wondering what it could mean for their own plans to grow abroad. Many fear other countries will take a firmer stance against Canadian investors seeking foreign acquisitions in retaliation for the Canadian government’s recent interventionism. But a closer look reveals this country’s stance toward foreign takeovers is, perhaps, far less threatening than that taken by other countries.

The American approach to foreign investment took a hit in 2006 when the state-owned Dubai Ports World attempted to acquire a company holding management contracts to six major U.S. ports. DPW eventually sold the properties to a subsidiary of American International Group Inc. after U.S. politicians moved to block the deal through legislation. “That’s the type of case that seems to go well beyond national security concerns,” says FMC’s Walker. “It was managing ports, it wasn’t relating to the production of some piece of weaponry for the U.S. army.”

While the U.S. political process can serve as a hurdle, the Committee on Foreign Investment in the United States, a multi-agency panel chaired by the treasury secretary, purports to deal only with foreign acquisitions that threaten national security. However, this national security provision can be applied quite broadly. Everything from energy to critical infrastructure and technology could be swept into its net.

The U.S. is just one of several key free-market economies that have faced criticism for blocking foreign acquisitions. Australia’s Foreign Investment Review Board, for example, was slammed in 2001 for blocking Royal Dutch Shell Group’s takeover of the petroleum company Woodside Petroleum Ltd. based on national interest concerns. Japan too has come under attack for creating informal barriers to international players seeking access to its domestic economy, largely due to the overwhelming influence of the country’s keiretsu system of corporate affiliations. The European Union has been accused of informally blocking foreign investment, especially in the telecommunications sector, through a complex series of regulations. France has faced accusations of economic nationalism for moves such as listing multinational food production company Groupe Danone S.A. as a “strategic industry” in an effort to block a 2005 takeover by PepsiCo Inc. “In one way or another, there are foreign investment restrictions in a lot of countries,” Walker says. Unfortunately for Canada, however, the BHP rejection is the latest blocked deal to gain international prominence, putting this country’s approach in the spotlight for the time being.

Most commentators have certainly been surprised to see the investment act, once considered an afterthought by the legal community, get its own 15 minutes of fame. Foreign investors have rarely given much thought to its provisions. “Four or five years ago, if you said foreign investment act to anyone, they would yawn,” remarks New. They’re not dozing off anymore. Not after it caused BHP to throw away about $100 million in legal and advisory fees in its blocked bid for PotashCorp.

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