The federal government's decision to block the takeover of Potash Corp. has thrown Canada's rules governing foreign takeovers into question, casting doubt on the prospect of future bids for many prominent Canadian companies.
Industry Minister Tony Clement said BHP $38.6-billion (U.S.) bid for Potash Corp. did not meet the "net benefit" test under the Investment Canada Act, but the Australian mining giant has 30 days to try to change the federal government's mind.
The federal government "must do the right thing when faced with difficult decisions," Mr. Clement said.
"I believe that my decision today is the right decision in the interests of Canada and in the interests of Canadians and that is my bottom line." BHP said it was "disappointed" with the ruling but stopped short of saying it will drop its bid.
Mr. Clement said that he made the decision on his own, adding that federal officials had reviewed BHP's offer but made no recommendations on whether it met the "net benefit" test. He declined to provide further information on the specifics of his review.
But the historic move suddenly throws into question whether or not the government would allow a foreign acquirer to buy other large companies whose assets may be of strategic interest to the country, such as Suncor Energy Inc., natural gas producer Encana Corp. or Research In Motion Ltd. Such a policy would mark a dramatic shift in Ottawa's attitude toward large deals since 2006-07, when it permitted foreign corporations to buy Inco Ltd., Falconbridge Ltd. and Alcan Inc.
Business leaders across the country had been eagerly awaiting Mr. Clement's decision as rhetoric over BHP's offer had soared. Several provincial premiers backed Saskatchewan Premier Brad Wall in calling for the government to block the deal, and some corporate executives worried about the impact of the takeover. A recent Globe and Mail poll of business executives found a nearly equal split between those who said they were concerned about it and those who weren't.
"I find myself very conflicted by this issue," said Ian Telfer, chairman of Goldcorp Inc. "As a long time proponent of free markets it pains me to see governments interfere in the movement of capital. However, as a proud Canadian.... I agree with the decision and I am very pleased that Canadians will continue to have the opportunity to invest in these unique Canadian assets for decades to come."
Mr. Clement's refusal has now raised questions about just what guides decisions about these takeovers, said Roger Gibbins, CEO of Canada West Foundation.
"In a sense the whole bid [by BHP Billiton Ltd.]has elevated the discussion beyond the merits of a specific proposal and into a kind of broader discussion about the nature of the country," Mr. Gibbins said. "The criteria that were used, the paper criteria, are not the ones brought into play. So that demands almost immediate effort to try to figure out what are the larger criteria that we are talking about?"
Under the current rules, Investment Canada reviews takeover bids above $299-million and assesses whether the deal is a "net benefit" to Canada. That assessment is done confidentially but it includes reviewing employment, technology development, productivity, competition and national policies.
Mr. Gibbins said Wednesday's decision went further and appears to bolster the role of provincial governments as well. "That's part of the strategic consequences that come out of this, that we've reached a point where Ottawa making these decision by itself doesn't make sense."
Already, there are calls to change the way foreign bids are reviewed. The federal New Democrats have introduced a motion in Parliament that calls for a tighter definition of "net benefit". The NDP motion calls for several key changes to the legislation, including mandatory public hearings and publication of all conditions attached to the approval of a takeover.
"I'm in grave danger of agreeing with the NDP,'" said Joseph d'Cruz of the University of Toronto's Rotman School of Management, who said he is not normally sympathetic to NDP policies. "But on this one, I think they're on the right track. I think having public hearings is pretty healthy,"
"I've always been a bit concerned that the commitments that the foreign companies make to Investment Canada are confidential and the public doesn't know what they are. On an important public policy issue, I think confidentiality is not healthy."
Prof. d'Cruz said the existing rules leave the bureaucrats virtually no room to determine that a deal is not to Canada's benefit, something he said needs to be changed.
Former Industry Minister John Manley, who now heads the Canadian Council for Chief Executives, has argued the rules do allow bids to be rejected if they are not in Canada's national interest. However, in the case of Potash, he expressed regret earlier this week that it had become so "overtly politicized."
The federal government has only once before used the Investment Canada Act to block a foreign takeover. In 2008, the Harper government turned down a proposed acquisition of aerospace company MacDonald Dettwiler and Associates Ltd. by U.S.-based Alliant Technology. It was followed in 2009 with new legislated amendments to the act that allow national security concerns to factor in to decisions on foreign takeovers.
The Harper government has been sending mixed signals about foreign investment in recent years. In 2008, the Tories appeared open to easing foreign ownership rules in telecommunications and airlines. "We are a party of free enterprise, free markets and free trade," Mr. Harper said at the time.
In 2009, the government took a different approach when bankrupt Nortel Networks Corp. sold a collection of patents for new wireless technology to Sweden's Ericsson for $1.1-billion. The Ontario government urged the Prime Minister to block the sale arguing that taxpayers had funded development of the patents. Mr. Clement refused, saying the deal was "very beneficial to Canada."
A few months later the feds took the extraordinary step of overruling a decision by the Canadian Radio-television and Telecommunications Commission. The CRTC had refused to grant a cellphone licence to Globalive Wireless Management Corp., ruling the company fell outside Canadian ownership rules because it was backed by an Egyptian company. The government reversed the decision, arguing the CRTC had interpreted the laws incorrectly.
If you have a marriage and you don't argue, then you are not normal. If Canada welcomes all foreign investment and never closes the door on any, then it would not be normal.
Richard Kohler, a former Canadian consul general in Sydney and director of the Canadian Australian Chamber of Commerce
It's not like a technology you can move away and produce somewhere else.
Frank Stronach, chairman of Magna International Inc.
Not only is the BHP bid sidelined by this decision, but any other potential foreign bid in the shadows, is sidelined ... Shareholders of PotashCorp are the main losers in this decision, at least in the short term.
Chris Damas, analyst with BCMI Research, Barrie, Ont.
Although Potash's share price may decline in the very short term due to selling pressure from hedge funds, we would expect the price to rapidly recover to current levels ... Potash could even trade 10- to 15-per-cent higher.
Stephane Mardel, CEO of United First Partners, London
It is a setback, but we will just have to wait and see whether the impasse can be breached in the next 30 days ... It is difficult to ascertain what BHP is prepared to offer and what the Canadian government is prepared to accept.
Tim Schroeders, portfolio manager, Pengana Capital, Melbourne