Ottawa's surprise rejection of the bid by Malaysia's state energy firm Petronas to buy Canada's Progress Energy Resources Corp. has everyone asking what it means for the deal that really matters: the proposed $15.1-billion takeover of Calgary's Nexen Inc. by state-controlled China National Offshore Oil Co. The government didn't explain its reasons for saying no to Petronas, and Canadians from many quarters have been calling on Ottawa to clarify the rules for assessing future takeovers to give buyers a better sense of their chances.
Prime Minister Stephen Harper has promised to do just that. He should reconsider.
Ottawa's tool for assessing foreign takeovers, the Investment Canada Act's "net benefit" test, may be maddeningly broad. But that's not such a bad thing. New Zealand and Australia, two countries like Canada that are resource-rich economies, also have vaguely-worded foreign takeover rules that give governments the discretion to judge deals on a case-by-case basis.
There is good reason for that. Enacting clear standards that apply consistently from deal to deal runs the risk of locking the government into positions that might not reflect changing realities. No legislator can be expected to foresee shifting diplomatic alliances, market upheavals or technological advances – such as the recent shale-gas revolution – that can dramatically alter the definition of what constitutes an important industry.
What if hard-and-fast rules forged from the CNOOC/Nexen deal some day prove to be out of date and force the rejection of a perfectly acceptable future takeover by a Chinese company at an inconvenient time for Canada-China relations – for example, as trade negotiations are heating up?
Assessing takeovers by foreign interests, particularly state-owned companies, is tricky business and requires a nimble approach. As the legal framework in Australia and New Zealand suggests, it's important to leave some manoeuvring room for governments in a world where economic growth opportunities for domestic companies can be subject to trade arrangements between nations.
The "net benefit" test should remain a delicately handled lever of diplomacy, not become a numbered yardstick. To be sure, the government needs to strike a balance: Canada requires a massive inflow of foreign dollars to develop its energy resources. But the risks of leaving the rules somewhat vague are less than many contend.
Many nations protect their national energy champions from takeovers. It is reasonable for investors to conclude that Canada will do the same for some companies, but not others. Where Ottawa draws that line should remain the prerogative of the government in power when the time comes, not left up to a playbook that could be out of date by then.