Since the BHP-Billiton proposal to acquire Potash Corporation was turned down by the Canadian Government in 2010, there has been an air of uncertainty regarding Canadian foreign takeover policy. On the one hand, the government of Canada has continued to indicate that foreign investment is welcomed, but on the other hand, no explanation was provided for the Potash Corporation decision and so buyers have been left guessing about unwritten takeover restrictions.
In 2012, China’s state-owned oil company CNOOC proposed to acquire Nexen, a Canadian oil sands company. Canada has been actively encouraging development of Canada-China trade relations and needs more investment in the oil sands, so this proposal put the unwritten foreign takeover rules to the test – another resource takeover, like Potash Corp., and this time by a state-owned company. The Government of Canada had to clarify foreign takeover policy lest it appear arbitrary or biased, thereby discouraging inbound investment or inviting reprisals at a time when Canadian companies are acquiring all over the world.
In December 2012 the Canadian Minister of Industry announced that the Government of Canada would not block the CNOOC-Nexen deal nor would it block the pending Petronas-Progress Energy acquisition (Petronas being a Malaysian state-owned enterprise). Notwithstanding the trade agenda with China, it could not approve one and not the other.
However, not to leave the impression that Canadian resources were now for sale to any interested foreign government, Prime Minister Harper announced on the same day several changes/clarifications to foreign takeover policy. He said “Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.”
The key policy changes make it easier for non-state owned companies and harder for state-owned companies (SOEs) to acquire in Canada in the future:
- The SOE definition will now include an investor that is influenced by a foreign government, whether or not it is also owned by the foreign government
- The financial threshold for review for non-SOEs will rise from C$600 million to C$1billion; for investments by foreign SOEs the threshold will remain C$330 million GDP-indexed book value
- In particular, further acquisitions of oil sands businesses by SOEs would only be approved in exceptional circumstances (CNOOC and Petronas last through the gate)
- The acid test for all reviewed foreign takeovers remains that there is a “net benefit to Canada”; the burden of proof lies with the investor; (the considerations for assessing the “net benefit” are outlined in the Industry Canada Act)
- In the case of SOEs, the degree of influence on the SOE by its government and/or by the SOE on its industry will be negative factors.
Notwithstanding the clarifications, these policies and, in particular, the “net benefit” test remain somewhat ambiguous. But don’t wait for more definitive decision rules. Foreign takeover rules can be an important element of foreign policy and governments generally retain some “wiggle room” for consideration of other factors (as was clearly the case in the CNOOC-Nexen approval). While some argue that the ambiguity will discourage investment, the evidence is to the contrary – Canada’s resources and quality corporate assets are attracting and will continue to attract investors from around the world.
Note that the above should not be taken as a comprehensive summary of Canadian foreign investment policy. For example, Canadian cultural industries remain protected, and acquisitions in these industries over C$5 million are reviewed. Those interested in acquiring in Canada should consider the following sources for more information:
- The Investment Canada Act is available on the Government of Canada web-site: http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/home
- For legal advice, most of the major Canadian commercial law firms have investment review expertise. For example, Bennett-Jones provides a summary of the policy and policy revisions at: http://www.bennettjones.com/Publications/Updates/Canadian_Government_Adj...
- For Canadian acquisition strategy, some of the major strategy firms have active Canadian practices; also search the membership of the Canadian Management Consultant Association for M&A expertise: http://www.cmc-canada.ca (the author of this article included)
- For deal development support, the major Canadian investment banks are more familiar with the players than are their US counterparts
Ken Smith is an independent strategy consultant and an author and advisor on M&A business and public policy.