As reported in our year-end review (Competition and Foreign Investment Review in Canada: Taking Stock of 2011 and Looking Ahead to 2012, available here), the Commissioner of Competition challenged the completed merger of two landfill companies in northern British Columbia, CCS Corporation and Complete Environmental – the first contested merger case since 2005. On May 29, the Competition Bureau announced its challenge was successful – a significant case because not only was it a non-notifiable transaction but the Bureau had to argue that the merger would lead to a substantial prevention of competition as the target, Complete Environmental, had not yet commenced its operations.
The Competition Tribunal ordered divestiture of Complete Environmental's Babkirk hazardous waste landfill site. Vendors in M&A transactions may be relieved to learn that the Tribunal did not follow the Commissioner's preferred alternative – to dissolve the merger, a result that can be punitive to vendors.
Unfinished Business: Industry Minister Heralds Higher Review Threshold for Foreign Investments
The Canadian Government is again addressing "unfinished business" relating to the Investment Canada Act (the ICA) following closely on the heels of its announcement last month of amendments permitting the disclosure of notices of, and reasons for, provisional rejections of foreign investments as well as security for payment of penalties for failure to comply with undertakings (see Focus on Foreign Investment dated May 1, 2012; click here to view). On Friday, May 25, Industry Canada Minister Paradis issued a press release heralding an increase in the review threshold under the ICA and a guideline permitting a foreign investor and the Government to resolve disputes over undertakings through mediation.
Increase in Foreign Investment Review Threshold
The Government will be increasing the review threshold under the ICA for foreign acquisitions of Canadian businesses -- from $330 million in the book value of the target assets to $1 billion in the target's "enterprise value" over 4 years (with the threshold to be $600 million for the first two years following issuance of regulations and $800 million for the following two years).
The ICA was amended three years ago to raise the threshold in response to the recommendation of the Competition Policy Review Panel in its report Compete to Win (2008). The Panel noted that: "[A] higher threshold is consistent with the scope for intervention being narrower, and thus more exceptional, than under the current ICA. Second, a higher threshold would be aligned with Canada's underlying premise that foreign investment is, except in unique circumstances, beneficial to Canada."
The 2009 amendment to the ICA was never implemented: draft regulations issued in July 2009 were subject to significant criticisms relating to the definition of "enterprise value" in relation to publicly listed companies. It is anticipated that the change from book value to enterprise value will result in greater recognition of the importance of targets in service and knowledge-based industries (which tend to have lower asset values than traditional industries such as manufacturing).
While Minister Paradis' announcement is in many ways "old news", it adds momentum to the Government's recent efforts to begin addressing the "chill" on the climate for foreign investment following its rejection of BHP's proposed acquisition of Potash Corporation of Saskatchewan in late 2010.
Draft regulations will be published in the Canada Gazette for public comment.
Mediation Guideline
Minister Paradis also announced a new process to facilitate the resolution of disputes between the Government and a foreign investor relating to whether undertakings given by the investor in the context of the acquisition of a Canadian business have been fulfilled. The goal of mediation would be to avoid lengthy and costly legal proceedings.
Currently, an investor has the options of engaging in discussions with Industry Canada officials, offering new undertakings or responding to a demand letter from the Minister justifying its compliance or explaining why it has not complied. In the event there is no resolution, the Minister may initiate court proceedings against the foreign investor, as occurred in the Government's lawsuit against US Steel for not complying with its undertakings in respect of the acquisition of Stelco in 2007 (which was settled late last year).
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