Canadian COMPETITION LAW

October 19, 2010

The Sidney Morning Herald, CBC News, Globe and Mail and others reported earlier today that Saskatchewan “government sources” had disclosed that the Saskatchewan Government intended to oppose BHP Billiton’s hostile bid for Potash Corp.

The principal obstacle in BHP’s ongoing discussions with the Saskatchewan Government has been a forecasted loss in tax revenues of approximately $2 billion (based on a Conference Board of Canada report commissioned by the Saskatchewan Government).  On this basis, BHP now faces not only increased pressure to increase its bid, but also raises the question of what concessions it might seek with Saskatchewan in the next two weeks (e.g., commitments to remain in the Canpotex export cartel).

According to the Globe and Mail, the Saskatchewan Government’s decision, expected to be announced tomorrow, is the result of BHP refusing to a “one-time, special tax of more than $1 billion, as well as hundreds of millions of dollars worth of infrastructure funding”, which was sought to offset the Saskatchewan Government’s anticipated tax revenue losses.  Saskatchewan’s current Premier, Brad Wall, a member of the Saskatchewan Party (that has been described as a “center” party), is scheduled to make an announcement to the media tomorrow morning and to the Regina Chamber of Commerce on Thursday.

While a number of Saskatchewan government officials have been indicating growing dissatisfaction with the proposed transaction over recent weeks, today’s media announcements indicate the toughest stance yet by Saskatchewan that could either be its final position, or merely a strategic move to seek further commitments from BHP.  The Saskatchewan Government’s current position is not altogether surprising, however, given the renewed criticisms relating to the “hollowing out” of corporate Canada (and Canada’s resource sector in particular) and the unfortunate timing of BHP’s bid in relation to the Government’s litigation with U.S. Steel over U.S. Steel’s alleged breach of its undertakings following its acquisition of Stelco.

The timing of the Saskatchewan Government’s (expected) announcement is particularly interesting given that the 75 day review period under the Investment Canada Act for BHP’s proposed investment expires November 3^rd which, again, may indicate that the timing of the Saskatchewan Government’s expected announcement this week are intended to press BHP into making more significant commitments.

Having said that, time is not up for BHP given that the 75 day review period can be further extended on consent of the investor (i.e., BHP), as well as the fact that even if the Minister was to conclude that the proposed investment was not of net benefit to Canada, BHP could request a further round of negotiations (i.e., investors have a right to make further representations and undertakings before a final decision is issued).  Of course, further delay may have significant adverse market impacts.

The Saskatchewan Government also does not formally have any power to block or veto BHP’s proposed transaction, given that while the Minister is obligated under the Investment Canada Act to “take into consideration” the economic policy objectives of the provinces, the final decision rests with the Minister.  This important distinction, i.e., the requirement for the Minister to consider provincial views with no formal obligation to consult with the provinces, was one of the Federal Government’s political wins during the drafting of Canada’s former foreign investment legislation (the Foreign Investment Review Act).

Legal niceties aside, however, while the ultimate decision rests with the Minister, it is difficult to see how the Saskatchewan Government’s position on a transaction that will have such significant impacts on the Saskatchewan economy will not be a key factor in the analysis.  Having said that, the Investment Canada process is, by its nature, a largely political process and no single factor under section 20 of the Investment Canada Act is determinative, including the factor relating to regional economic policies, nor is there any meaningful authority as to which factors should be given particular weight.  The process is intended to be, well, a flexible political process.  This uncertainty and lack of transparency is amplified by the fact that the Federal Government has only refused one proposed investment since 1985 on non-cultural grounds (out of more than 1500 investments reviewed).

The reality at the end of the day, however, is that the key political players both in Saskatchewan and Ottawa (Brad Wall and Tony Clement) are center or right of center (Saskatchewan Party and Conservatives), time still remains for BHP in the process (with further review extensions possible) and of more than 1500 investments reviewed since 1985, only one proposed investment has been refused on non-cultural grounds.

Perhaps most importantly, both Canada’s competition laws and foreign investment laws were recently significantly amended to, among other things, liberalize foreign investment in Canada and align Canada’s merger and foreign investment regimes with that of its major trading partners, including the U.S.  This is more than mere policy trivia, given that these very recent changes (in March 2009) were intentionally and consciously the result of Conservative policy to make Canada more investor-friendly, and resulted in sweeping changes to Canada’s competition and foreign investment law regimes.  A refusal to approve BHP’s bid, assuming reasonable concessions are made by BHP, would be very difficult to reconcile with the Conservative Government’s recent policy initiatives to liberalize Canada’s foreign investment laws.

In sum, will the BHP transaction be approved?  We think it is more likely than not, but will likely require more from BHP (including, in our view, more significant up-front commitments than may have been required in the past to reduce the perception of another U.S. Steel/Stelco transaction).

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