Ottawa raises foreign takeover review level to $1-billion

Ottawa is lifting the minimum threshold for reviewing foreign takeovers to $1-billion, but it remains mum on a promise to clarify how it decides if investments are good for the country.

Under new rules unveiled Friday by Industry Minister Christian Paradis, the minimum value that will trigger a review will be raised to $1-billion over the next four years, up from the current floor of $330-million.

The government also said it's moving to a system of valuing investments based on "enterprise" value, rather than book value – an apparent attempt to deal with the fallout from the controversial $4.5-billion sale of bankrupt Nortel Network's patents.

Book value can often low-ball the real worth of an asset, or a company, pointed out Oliver Borgers, a partner at McCarthy Tétrault in Toronto.

The higher threshold and new valuation methodology have been in the works since early 2009, when the Conservatives passed legislation to update the Investment Canada Act.

The lengthy delay to draft regulations is partly due to the difficulty in defining enterprise value, which can be "a moving target," according to Mr. Borgers.

"Enterprise value is hard to pin down and it's often not known until closing," he said, noting that an earlier attempt by Industry Canada to define it "lacked transparency and certainty."

In a statement, Mr. Paradis said the changes are aimed at ensuring that its foreign investment regime "continues to encourage investment and spur economic growth."

But experts say Ottawa is missing the point by not rethinking the so-called "net benefit test," now used to determine if an investment is good for the Canadian economy. The test can include a deal's impact on jobs, investment and competition.

A cloud of uncertainty has hung over Canada's foreign takeover regime since 2010, when the Conservative government blocked Anglo-Australian mining giant BHP Billiton's hostile bid for Potash Corp. of Saskatchewan Inc.

"The net benefit test remains highly subjective and unpredictable," argued Philippe Bergevin, a senior policy analyst the C.D. Howe Institute in Toronto.

The Potash Corp. decision marked just the second time Ottawa has rejected a deal outright since the Investment Canada Act was passed in 1985. Critics have suggested that the Conservatives, then clinging to a minority in Parliament, blocked the deal for political reasons – namely, to hang on to seats in the company's home province Saskatchewan, where the public opposed the takeover.

Mr. Bergevin pointed out that Ottawa has already made the judgment that foreign investment is good for the country. So the onus should be on Ottawa to prove that a deal isn't in the national interest.

"We're not asking the right questions to start with," he said. "The net benefit test is the wrong test."

There are legitimate policy reasons why foreign ownership might be against the national interest, but the government should spell them out, according to Mr. Bergevin. The opposition in Ottawa was also quick to jump on the announcement, complaining that the government continues to ignore the confusion surrounding the "net benefit" test.

"What Canadians and investors really want is to know what constitutes a net benefit to Canada," said MP Geoff Regan, the Liberal Industry critic.

In another change, the government said it would begin offering foreign investors voluntary mediation in the event Ottawa decides they aren't living up to commitments.

That's a response to Ottawa's lengthy legal battle with United States Steel Corp. over the 2007 purchase of Stelco. Ottawa took U.S. Steel to court in 2009 for breaking its commitments on jobs and investments. The two sides settled out of court last year, with U.S. Stelco pledging new investments in Hamilton.