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On June 14, 2010, the Honourable Madam Justice Hansen of the Federal Court of Canada (“FCA”) dismissed U.S. Steel Corporation’s and U.S. Steel Canada Inc.’s (“U.S. Steel”) motion challenging the constitutional validity of section 40 of the Investment Canada Act (“ICA”).

This case relates to recent proceedings commenced by the Canadian government against U.S. steel for allegedly failing to comply with undertakings given in connection with U.S. Steel’s acquisition of Stelco Inc’s Hamilton-based Canadian business in 2007.  In connection with its investment, U.S. Steel provided 31 undertakings, including two undertakings in relation to employment and production levels.  On October 29, 2007, the Minister approved the acquisition.

In May, 2009, following approval, the Minister sent a demand to U.S. Steel under section 39 of the ICA taking the position that U.S. Steel had contravened its employment and production undertakings and requested that U.S. Steel cease the contraventions, remedy the default and show cause why there were no contraventions (or, alternatively, to justify the failure to comply).

Unsatisfied with U.S. Steel’s response, in July, 2009, the Attorney General of Canada filed an application under section 40 of the ICA seeking an order directing U.S. Steel to comply with the two undertakings and a penalty of Cdn. $10,000 per day, per breach of the undertakings from November, 2008 until compliance with the undertakings.

A section 40 proceeding under the ICA arises after a ministerial demand made pursuant to section 39 of the ICA, and is commenced by a superior court application.  If the court is satisfied at the conclusion of a hearing that the Minister was justified in sending the demand (and the non-Canadian investor has failed to comply with the demand), the court may make any order (or orders) that it considers are required by the circumstances including orders provided for under section 40(2).   In relation to the U.S. Steel motion, the court may order that a monetary penalty of up to Cdn. $10,000 per day for each day U.S. Steel is in contravention.  The court may also direct the disposition by U.S. Steel of any voting interests or assets acquired that are or were used in carrying on the Canadian business.

Following the Attorney General’s application, U.S. Steel filed a motion challenging section 40 on two grounds: (i) that section 40 contravened section 11(d) of the Canadian Charter of Rights and Freedoms (the right to be presumed innocent until proven guilty according to law in a fair and public hearing) and (ii) that section 40 contravened section 2(e) of the Canadian Bill of Rights (the right to a fair hearing in accordance with the principles of fundamental justice).

To succeed under section 11(d) of the Charter, U.S. Steel needed to establish that it was “a person charged with an offence” and, to do so, that it met either of the two branches of the test set out in R. v. Wigglesworth (a matter by its very nature is a criminal proceeding or it involves the imposition of true penal consequences).  The Federal Court found that U.S. Steel failed to meet either branch of the test – i.e., a section 40 proceeding under the ICA is not “by nature” a penal proceeding and the monetary penalty was not a true penal consequence.  U.S. Steel similarly failed to satisfy the court that it would be deprived of its right to a fair hearing under section 2(e) of the Bill of Rights and, in particular, its right to know the case to meet.

On this basis, the court concluded that section 40 of the ICA did not violate section 11(d) of the Charter or section 2(e) of the Bill of Rights and dismissed U.S. Steel’s motion.

This recent Federal Court decision potentially clears the way for a consideration of the Canadian government’s allegations against U.S. Steel that it failed to comply with its undertakings in connection of its acquisition of Stelco’s Hamilton-based business.

For the complete decision see: The Attorney General of Canada v. United States Steel Corporation and U.S. Steel Canada Inc.  For more information about the Investment Canada Act see: Investment Canada.

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