Originally published in Blakes Bulletin on Blakes Bulletin on International Trade - February 2008.
On December 7, 2007, the Honourable Minister of Industry, Jim Prentice, gave a speech to the Calgary Chamber of Commerce in which he delivered further insights into the federal government's view of foreign investment by state-owned enterprises (SOEs).
In Minister Prentice's speech, he unveiled the new Guidelines for SOEs wishing to invest in Canada. The Minister sought to make it clear that he did not wish to create obstacles nor change the government's policy on foreign investment. However, those who have had a chance to review the Guidelines may wonder what impact the Guidelines will have on foreign investment in Canada.
The Guidelines have been expected since October 2007, when Minister Prentice said that he would clarify the rules regarding investments by SOEs and set up a mechanism to review transactions that may adversely affect national security. However, the Guidelines do not clarify exactly what the government expects from SOEs wishing to invest in Canada, nor is there any mention of a "national security" review mechanism pursuant to which the government could review and potentially block investment by an SOE due to national security concerns. Details of the national security mechanism are only expected to be released sometime in 2008, and no further elaborations were included in the Guidelines.
The Guidelines
The clarifications set out in the Guidelines pertaining to the Investment Canada Act (the Act) and how the government intends to review investments by non-Canadians were little more than a recitation of the current provisions of the Act. When a review is necessary under the Act, either because a proposed investment by an SOE meets the threshold for review or qualifies for review under the cultural provisions of the Act, the Minister will still consider the factors found in section 20 of the Act. These factors include:
- the impact on the level and nature of economic activity in Canada
- participation by Canadians in the newly acquired business and in the industry in which the business forms a part
- the impact on productivity, efficiency, technological development and innovation
- the impact on domestic competition
- compatibility with industrial, economic and cultural policies
- the impact on Canada's ability to compete globally.
On the other hand, some might suggest that the Guidelines do point to a shift in direction. Earlier in 2007 when Minister Prentice announced that he would be creating new guidelines to clarify the rules on foreign investment by SOEs, the general consensus seemed to be that the government was too focused on the nationality of the foreign investor. Now, rather than being concerned with the nationality of the foreign investor, Minister Prentice seems much more interested in the behaviour of the investor. Specifically, when reviewing a proposed investment under the Act, how a foreign investor intends to operate will be of much more significance. The government will be looking at:
- the nature and extent of control by a foreign government
- the corporate governance (including commitments to transparency and disclosure) and operating and reporting practices of the SOE
- whether the acquired Canadian business retains the ability to operate on a commercial basis.
Whether an acquired Canadian business retains the ability to operate on a commercial basis will include looking at matters such as:
- where to export
- where to process
- the participation of Canadians in its operations in Canada and elsewhere
- support for ongoing innovation, research and development
- the appropriate level of capital expenditures necessary to maintain the Canadian business in a globally competitive position.
Minister Prentice considers that these Guidelines offer more guidance on how the government will review foreign acquisitions by SOEs and clarify the government's expectations. Unfortunately, in our view, without a better defined structure or clear cut targets, it is impossible to know exactly what the government will take into account when reviewing an acquisition of a Canadian business by an SOE.
Canadian Chamber of Commerce Recommendations
The Canadian Chamber of Commerce (the Chamber) has been actively involved in this issue since Minister Prentice's announcement in October 2007 and had previously provided Minister Prentice with recommendations for how investments by SOEs should be reviewed. In its paper, entitled Ensuring Canada's Competitive Advantage: A Position Paper on a National Security Review Mechanism for Foreign Investment and Guidelines For Investment By State-Owned Enterprises, the Chamber recommended that the federal government send a clear message that Canada wants inbound foreign investment.
In particular, the Chamber recommended that the federal government:
- specify what is an acceptable investment and under what criteria this would be assessed
- introduce no new barriers to legitimate foreign investment in any sector
- should not regulate in a manner to discriminate against or impede foreign investment
- explore how the Act and existing measures can address concerns about foreign investment without introducing new and onerous screening measures
- ensure that the review process provide legal and procedural certainty to the investor.
The paper also suggested that the review process for a proposed investment by an SOE should focus on the transparency of operations and other commercial drivers of the foreign investor, rather than ownership structure or nationality.
The Chamber recommended that the new guidelines incorporate compliance with Organization for Economic Co-operation and Development (OECD) Guidelines on Corporate Governance for State-Owned Enterprises. Such compliance would have added the following to the Guidelines:
- provision for a definite and explicit initial screening period during which national security and "net benefit" are considered
- a benchmark for Canada's measures regarding screening and review of foreign investments against other G7 and OECD countries, to ensure that Canada has no greater restrictions than its trading partners.
Not all of the Chamber's recommendations were followed. In particular, the Guidelines provide no further clarity as to what is an acceptable investment and no legal or procedural certainty regarding the review process. Overall, the government has yet to address the two principal concerns with which stakeholders appear to be most interested, namely, procedural certainty for the foreign investor and that there be no obstructions to investment beyond those imposed by other OECD countries.
Conclusion
The lack of certainty in the Guidelines and the absence of a defined national security review mechanism suggests that the government has not yet finished its review of foreign investment under the Act. Further clarity is necessary to give a clearer picture of what SOEs should expect in a review by the Minister. At best, the Guidelines simply confirm that the current government clearly has concerns regarding proposed acquisitions by SOEs where the SOE is merely an extension of a foreign country's geopolitical power and not commercially driven.
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