In December 2012, the Canadian government updated the policy framework under the Investment Canada Act (ICA) for assessing foreign state-owned enterprise
(SOE) investments, just as it green-lighted China National Offshore Oil Corp.’s (CNOOC) takeover of Nexen and Petronas’ takeover of Progress Energy
Resources Corp. The objective was to resolve the debate over desirability of SOE investments, while clarifying the government’s review approach under the
ICA. However, the Harper administration was only partly successful in achieving this goal. While the new framework strikes a reasonable balance between
unfettered SOE investment and a complete ban on SOE acquisition, it fails to demystify the ICA review process, which many critics believe lacks
The December 7 announcement that accompanied the new policy framework clearly reflects Ottawa’s discomfort with SOEs acquiring control of Canadian
industrial sectors. As Stephen Harper said, Canada has not undergone a period of domestic privatization only to see its economy come under an “inordinate
amount of foreign state influence.” The government announced that it will only permit foreign SOEs to acquire control of Canadian oil sands businesses “in
exceptional circumstances” and warned that other sectors could be subject to a cap on SOE investments if they reach the point where SOE acquisitions of
control “could undermine the private sector orientation” of that industry.
Yet, as the government recognizes the importance of foreign investment to the economy, it does not want to shut the door entirely. In its December
statement, it emphasized that it will continue to welcome SOE acquisitions of non-controlling minority interests in Canadian businesses, as well as
greenfield investments. The government will also continue to review proposed SOE acquisitions of control outside of the oil sands sector on a case-by-case
basis in order to determine if they are of “net benefit” to Canada and “consistent with the principles of free enterprise.”
Although the government’s objective may have been to end the debate over SOE investment in Canada, its revised policy framework unfortunately raises new
questions that could undermine this goal.
One important question is: What exactly does the government mean when it refers to “SOEs?” The new policy appears to cover not only entities that are
controlled by foreign governments, but also those that are under foreign government “influence.” This may create significant uncertainty as to when the
policy will apply. For example, if a foreign government only holds a minority stake in a company purporting to buy a Canadian business, is that enough to
constitute “foreign government influence” and subject the investor to the SOE policy framework?
Ottawa has also left other important aspects of its SOE policy undefined. Questions have already been raised about what “exceptional circumstances” may
justify future SOE acquisitions in the oil sands sector.
Furthermore, the government has chosen not to define the circumstances in which SOE investments in other sectors could be prohibited, other than to
establish the nebulous standard of “inordinate foreign state influence.” This means prospective SOE investors will have to consider the extent of other SOE
investments in their target business’ industry and guess whether their proposed investments will go beyond the “tipping point” of undue SOE “influence.”
For example, foreign SOEs have already invested in other natural resource sectors in Canada, such as mining. Are those sectors now approaching the level of
“inordinate foreign state influence” that could lead to a ban on SOE investment? And what if the SOE acquires a Canadian company with operating assets
outside of the country? Will that also count towards the industry’s “inordinate influence” threshold, or are only acquisitions of businesses with assets in
Canada relevant for this purpose?
At the end of the day, Canadian businesses – especially natural resources industries – are left with one clear take-away from the government’s new SOE
policy framework: while foreign SOE investment is still an option, any SOE investment involving the acquisition of majority control will be subjected to
heightened scrutiny. However, the manner in which that review will unfold, and the criteria that will be applied, are still unclear.
Mark Katz is a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP, practising in the firm’s Competition and Foreign Investment Review group. He provides domestic and international clients with advice regarding the application of the Investment Canada Act and all aspects of Canadian competition law. He can be reached at email@example.com.