Ottawa to toughen rules for foreign investors

The federal government is poised to pass Investment Canada amendments that will broaden its definition of "state-owned enterprises" and could subject SOEs' acquisitions of minority stakes in Canadian companies to investment reviews to determine whether they represent a net benefit to Canada.

The measures are contained in a budget omnibus bill, tabled by Finance Minister Jim Flaherty last week, and expected to be passed into law before the Commons recesses for the summer next month.

In a written analysis, lawyers at Osler Hoskin & Harcourt LLP say the amendments will add considerable uncertainty to the foreign investment review process for companies that have close ties to foreign governments – even if they are not state-owned – and go beyond what Ottawa promised last December when it first announced heightened foreign-investment scrutiny for state-owned enterprises.

The budget bill "introduces a new level of uncertainty into the federal government's treatment of proposed investments by SOEs which was not anticipated in December 2012," the Osler lawyers write.

Osler partner Shuli Rodal said the proposed amendments remove "safe harbour" assurances that allow foreign companies to acquire less than one-third of voting shares, or a minority interest in a trust, partnership or joint venture, without triggering Investment Canada review.

Companies in the cultural sector already have to demonstrate that they are not gaining de facto control through the purchase of minority shares, and now state-owned enterprises will face that same hurdle, Ms. Rodal said in an interview.

At the same time, Ottawa is giving itself broad discretion to decide who is state controlled.

Prime Minister Stephen Harper announced late last year that Ottawa would not allow additional foreign-government investment in the oil sands, even as he allowed CNOOC Ltd.'s $15.3-billion acquisition of Calgary-based Nexen Inc. and a $6-billion takeover of natural gas-rich Progress Energy by Malaysia's Petronas. While insisting Ottawa welcomes investment by state-owned enterprises elsewhere in the Canadian economy, the prime minister signalled a clear preference for their acquisition of minority stakes and said Ottawa would assess whether an investment would leave the Canadian firm under the influence of a foreign government, even if it did not involve a majority interest.

Prior to the Nexen decision, the investment banking community expected a wave of new deals involving state-owned enterprises in Canada, but very few have materialized.

Many critics, including the opposition New Democrats, urged Ottawa to clarify Investment Canada rules so that potential foreign investors would know what hurdles they faced before they attempt to do business in Canada. But the December policy announcement and proposed Investment Canada amendments create more, not less, ministerial discretion and greater uncertainty.

"Until somebody tests it, we won't know for sure how it will be applied," said Paul Boothe, a University of Western Ontario business professor and former senior official at Industry Canada. "So someone who wants to to do their deal and thinks they're in good shape will test this, and if it works, then we'll have a little more evidence no how this is being applied. But right now, people are going to be unsure about it."

In determining whether an investment by a foreign company should be reviewed under SOE guidelines, the minister can look at whether it has a minority government investment, commercial relationships with foreign governments or significant relationships with officials within government. So for example, Brazil's Vale SA is a publicly traded company but the Brazilian government exercises considerable influence and holds a "golden share," so Vale could be considered a state-owned enterprise under the new Investment Canada rules.