On April 27, 2012, the federal government announced two proposed amendments to the Investment Canada Act, the legislation that regulates foreign investment in Canada. One relates to the transparency of the review process. The other relates to the government's ability to enforce undertakings given by foreign investors. Neither are likely to be particularly earth-shattering.
Transparency: The Minister of Industry would be permitted to publicly disclose that he has sent a preliminary notice to the foreign investor advising that he is not satisfied that the investment is likely to be of net benefit to Canada, which is the test applied to proposed investments that exceed the applicable review threshold under the Act. The Minister would also have the right to publicly explain his reasons for sending the notice, provided that doing so would not cause harm to the target Canadian business or the foreign investor.
This amendment seems to address the fairly extensive criticism directed at the government over the past several years relating to a perceived lack of transparency in the review process, particularly in the context of its controversial rejection of BHP Billiton's proposed acquisition of Potash Corporation.
As a practical matter, very few transactions ever get to a stage where the Minister delivers a preliminary rejection to the foreign investor. Indeed, the 75 day (45 + 30) review period is largely spent working with the government staff to put together a package that would be acceptable to the Minister. Accordingly, we do not expect the new power to come into play in the vast majority of transactions.
Enforcement: The government would be permitted to require an investor to post security that could be applied to the payment by an investor of any penalties imposed by a court in response to the investor's failure to comply with the undertakings given by the investor in conjunction with securing a net benefit to Canada determination.
In late 2011, the government and U.S. Steel settled a longstanding dispute over compliance with the undertakings U.S. Steel had given in conjunction with its acquisition of Stelco in 2007. U.S. Steel took the position that the fundamental change in worldwide economic conditions that commenced shortly after it gave the undertakings justified its deviation from them. In the course the litigation, the Act was frequently criticized in the media as being light in the area of enforcement powers. Although the government has not explicitly presented it as such, this amendment is almost certainly intended to address those concerns.
It is worth noting that the Act already provides for a substantial penalty of up to $10,000 per day of non-compliance with undertakings, and a foreign investor who has given undertakings by definition must have at least some assets in Canada against which a penalty could be realized. However, the process for enforcing these penalties is complicated and time-consuming.
The government has not yet provided any guidance as to what amount of security it will require, or whether it will require security as a condition of approving all, or only some, reviewable transactions, or what factors it will consider in deciding the forgoing in the context of any particular transaction. The government has consistently stated that Canada is "open for business" in terms of foreign investment. There is obviously some degree of inconsistency between these two goals. In deciding how high to set the bar on security, the government will presumably attempt to not effectively undermine its competing goal of encouraging foreign investment.
The amendments have not yet been passed into law. However, because they are part of the budget implementation legislation that was tabled in Parliament on April 26, 2012, we anticipate that they will be passed into law fairly quickly.
The government's press release is available at: http://news.gc.ca/web/article-eng.do?mthd=tp&crtr.page=4&nid=671359&crtr.tp1D=1.
The text of the proposed amendments is available at: http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&DocId=5524772&File=950 (and then scroll down to Division 28).
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