Highlights:

The Canadian Federal government has introduced proposed (and unanticipated) changes to the Investment Canada Act  (“ICA”) to further scrutinize a wider range of state owned enterprise (“SOE”) investments in Canada.  It is proposed that the black letter ICA review threshold rules be replaced by a control in fact examinations in determining if ICA should apply in investments in Canada involving SOEs.

Unexpectedly, Bill C-60 goes further than anticipated by expanding the definition of SOE in the Investment Canada Act (ICA), and empowering the Minister of Industry to determine that:

• an otherwise Canadian-controlled entity is controlled in fact by one or more SOEs;
• an entity is or is not controlled in fact by a SOE; or
• there has or has not been an acquisition of control in fact of an entity by a SOE.

As a result, for certain investments, the proposed amendments could result in an investor being considered a SOE, and would effectively eliminate the current statutory “safe harbour” that an acquisition of less than one third of the voting shares of a corporation, or less than a majority of the voting interests of a partnership or joint venture, does not result in an acquisition of control. The amendments would give the Minister a new ability to scrutinize all investments in which SOEs are involved including minority investments by SOEs to determine whether they confer control in fact on a SOE, and therefore require a net benefit review under the ICA.

Accordingly, Bill C-60 introduces a new level of uncertainty into the Federal Government’s treatment of proposed investments by SOEs which was not anticipated in December 2012.

Main Article:

On April 29, 2013, the Federal Government introduced its 2013 budget implementation bill, Bill C-60,[1] which would also implement announcements made by the Federal Government on December 7, 2012 concerning investments by non-Canadian state-owned enterprises (SOEs).

Unexpectedly, Bill C-60 goes further than anticipated by expanding the definition of SOE in the Investment Canada Act (ICA), and empowering the Minister of Industry to determine that:

• an otherwise Canadian-controlled entity is controlled in fact by one or more SOEs;
• an entity is or is not controlled in fact by a SOE; or
• there has or has not been an acquisition of control in fact of an entity by a SOE.

As a result, for certain investments, the proposed amendments could result in an investor being considered a SOE, and would effectively eliminate the current statutory “safe harbour” that an acquisition of less than one third of the voting shares of a corporation, or less than a majority of the voting interests of a partnership or joint venture, does not result in an acquisition of control. The amendments would give the Minister a new ability to scrutinize all investments in which SOEs are involved including minority investments by SOEs to determine whether they confer control in fact on a SOE, and therefore require a net benefit review under the ICA.

Accordingly, Bill C-60 introduces a new level of uncertainty into the Federal Government’s treatment of proposed investments by SOEs which was not anticipated in December 2012.

OVERVIEW

As expected, Bill C-60 includes amendments to the ICA to implement previously

announced reforms to:

• define a SOE, including a foreign government or an entity that is controlled or influenced, directly or indirectly, by a foreign government;
• implement new thresholds for review of acquisitions of control by non-Canadians, other than SOEs, starting at $600 million and eventually increasing to $1 billion based on “enterprise value”;
• establish a separate indexed threshold for review of SOE acquisitions of control; and
• permit potentially significant extensions of the periods for national security review.

In addition to implementing previously announced reforms, Bill C-60 also includes amendments to the ICA which extend the Federal Government’s oversight over SOE investments further by:

• expanding the definition of SOE to include an individual who is acting under the direction or influence of a foreign government;
• allowing for Ministerial determinations that an otherwise Canadian-controlled entity is controlled in fact by a SOE; and
• allowing for Ministerial determinations as to whether an entity is controlled by a SOE or whether there has been an acquisition of control by a SOE.

BACKGROUND

In December 2012, following the extended reviews and, ultimately, approvals of acquisitions by the Chinese SOE CNOOC of Nexen Inc. and the Malaysian SOE PETRONAS of Progress Energy Resources Corp., the Federal Government increased its scrutiny of future investments by SOEs with the release of new State-Owned Investor Guidelines along with several policy statements and promises for reform of its process for reviewing SOE investments. (see Osler Update – New Rules for Foreign Investment by State-Owned Enterprises – Do They Strike the Right Balance?). The new State-Owned Investor Guidelines indicated that:

• the Federal Government will closely monitor SOE investments in all sectors;
• future acquisitions of control of a Canadian oil sands business by a SOE will be found to be of net benefit to Canada only in exceptional circumstances;
• following increase of the general review threshold for investments by non-Canadians, control acquisitions of Canadian businesses by SOEs will continue to be subject to the current, lower threshold;
• the burden of proof is on foreign investors to demonstrate to the satisfaction of the Minister that proposed investments subject to ICA review are likely to be of net benefit to Canada;
• SOE investors will be expected to address in their business plans and undertakings that they are susceptible to state influence and to demonstrate their strong commitment to transparent and commercial operations; and
• in assessing whether a proposed control acquisition is of net benefit to Canada, the Minister will also consider the SOE’s adherence to free market principles and the effect of the investment on the level and nature of economic activity in Canada, including the effect on employment, production and capital levels in Canada.

NEW THRESHOLDS

Bill C-60 confirms the Federal Government’s intention to implement an increase in the general review threshold for acquisitions of control by non-Canadians, other than SOEs, to $600 million based on “enterprise value”, eventually increasing to $1 billion over four years. Once in force, this would replace the current threshold for acquisitions of control by non-Canadians based on book value, which is presently set at $344 million for 2013 and indexed annually to nominal GDP growth. Bill C-60 confirms the increases to the threshold but now carves out acquisitions of control by SOEs, implementing the Federal Government’s December 2012 promise to retain the existing lower review threshold for SOE investments.

The amendments to the review thresholds will not come into force until ordered by the Governor in Council. A key matter still not yet resolved is the definition of “enterprise value”. The most recent draft proposal defined “enterprise value” based on a calculation of market capitalization (plus liabilities minus cash) for publicly listed companies and on purchase price for private companies and asset acquisitions. The draft proposals introduced uncertainty in determining whether the threshold would be exceeded, particularly in multiple bidder scenarios, and potentially captured more transactions than under the current book value threshold (see Osler Update – Proposed Changes to the Investment Canada Act and Foreign Investment Review Process – Benefit or Increased Burden for Foreign Investors?). As a result, the impact of the proposed increased threshold on the reviewability of transactions will depend upon the

prescribed definition of “enterprise value”.

DEFINITION OF SOE

The Federal Government’s December 2012 announcement that the definition of a SOE would be revised to include entities that are “influenced directly or indirectly” by a foreign government will be implemented by Bill C-60. However, Bill C-60 expands the SOE definition to include an individual who is acting under the direction or influence, directly or indirectly, of a foreign government.

It is unclear how the Federal Government will assess direct or indirect influence of an entity, or whether an individual is acting under the direction or influence, directly or indirectly, of a foreign government, though this would likely be a lower threshold than the standard that has been applied under “control in fact” tests. The expanded definition of SOE is likely to create significant uncertainty for investors who are nominally private because they are not controlled in law or fact by foreign governments, but which may have minority government investment, commercial relationships with foreign governments or significant relationships with officials within government. The inclusion of individuals introduces additional uncertainty regarding whether appointments of board members by minority investors or board members’ individual relationships with foreign governments result in an individual acting under the direction or influence of a SOE.

MINISTERIAL DETERMINATIONS OF SOE STATUS AND CONTROL BY SOE

The Federal Government’s December 2012 announcements indicated it would carefully monitor SOE transactions throughout the Canadian economy and closely examine the degree of control or influence a SOE would likely exert on a Canadian business being acquired and the industry in which the Canadian business operates, and the extent to which a foreign state is likely to exercise control or influence over the SOE acquiring the Canadian business.

Bill C-60 includes amendments to the ICA which would provide the Minister with new powers to determine that:

• an otherwise Canadian-controlled entity is controlled in fact by one or more SOEs;
• an entity is or is not controlled in fact by a SOE; or
• there has or has not been an acquisition of control in fact of an entity by a SOE.

The Minister could request from an entity information he considers necessary to make his determination and, if the entity refuses or neglects to provide the requested information within a reasonable time, the Minister could declare that the entity is not Canadian controlled, that the entity is or is not controlled in fact by a SOE, or that there has or has not been an acquisition of control in fact by a SOE.

The proposed control in fact amendments introduce a new level of uncertainty into the Federal Government’s treatment of proposed investments by SOEs. For certain investments, the proposed amendments would effectively eliminate the current statutory “safe harbour” that an acquisition of less than one third of the voting shares of a corporation, or less than a majority of the voting interests of a partnership or joint venture, does not result in an acquisition of control. The amendments would give the Minister a new ability to scrutinize all investments in which SOEs are involved including minority investments by SOEs to determine whether they confer control in fact on a SOE, and therefore require a net benefit review under the ICA.

Similar control in fact provisions exist in relation to cultural businesses. Our experience in this sector suggests that it is possible to successfully implement transactions where control in fact may be an issue, but in some cases additional time and complexity may be involved in order to comply with such provisions.

EXTENSIONS OF NATIONAL SECURITY REVIEW TIMELINES

The Federal Government’s December 2012 announcement referred to amendments to the ICA to provide the Minister with flexibility to extend the time available to conduct national security reviews of proposed foreign investments in exceptional circumstances. At the time of the Federal Government’s December 2012 announcement, it was unclear which timelines the Minister would be seeking to extend.

The ICA sets a number of timelines in relation to national security reviews, including: (i) the time within which the Minister may provide notice of and order a national security review; (ii) if a national security review is ordered, the time within which the Minster is to conduct a national security review and may refer an investment to the Governor in Council if he believes or is unable to determine whether the investment would be injurious to national security; and (iii) the time within which the Governor in Council may take any measures advisable to protect national security.

Bill C-60 proposes amendments to extend a number of relatively short five day periods to 30 days, and enable various timelines to be extended on agreement between the Minister and the non-Canadian investor.

While the proposed extensions to the national security review timelines and the ability to negotiate extensions introduce more flexibility into the process, these proposals may result in a protracted review where an investor may feel obliged to consent to the Minister’s request for an extension, in order to avoid rejection of the transaction.

Overall, Bill C-60 would give the Federal Government greater flexibility to investigate SOE investments from every angle, and to take a thorough, lengthy look at a transaction on national security grounds.

For this article in Chinese please click here.