On May 25, 2012, the Federal Minister of Industry Christian Paradis announced that the Government had issued a Mediation Guideline to introduce formal mediation procedures under the Investment Canada Act (ICA). The Industry Minister also announced that the ICA Regulations would be amended to: (i) gradually increase the threshold for review of investments involving WTO investors to C $1 billion (increased from the current C $330 million) and (ii) introduce (or more accurately reintroduce) a new enterprise value test for the valuation of Canadian companies being acquired, both to implement amendments to the ICA passed on March 12, 2009 (see our earlier posts here and here).
Draft Regulations were first published for public comment in July, 2009 (see: Canada Gazette (July 11, 2009)).
Revised draft Regulations have now been published in the Canada Gazette for public comment (see: Regulations Amending the Investment Canada Regulations).
According to the Government, the proposed changes would “improve Canada’s foreign investment review framework, while maintaining the Government of Canada’s commitment to examine significant foreign investment transactions to determine whether they are likely to be of net benefit to Canada.” The shift to an enterprise test from the current book value of assets test is meant to better reflect the value of businesses as going concerns and importance of intangible assets in service and knowledge-based industries.
In general, the proposed new Regulations would: (i) gradually raise the review threshold for investments involving WTO entities to C $1 billion based on enterprise value over four years (to $600 million for two years, $800 million for the next two years, $1 billion after four years, and then indexed annually based on Canadian GDP), (ii) establish the methodology to calculate the enterprise value of a Canadian business, (iii) make conforming changes to remove references to transportation, financial services and uranium production sectors (lower thresholds for which sectors have been eliminated) and (iv) formalize the process for collecting information relevant to the net benefit and national security foreign investment review processes.
Enterprise Value Test
Under the new Regulations, the enterprise value of Canadian businesses would be calculated as follows:
Acquisitions of public companies. For acquisitions of public companies, the enterprise value of assets would be calculated based on the combination of a company’s market capitalization and liabilities less cash. Market capitalization would be calculated for listed securities by combining the average daily number of equity securities outstanding during the relevant trading period (the 20-day trading period used to calculate market capitalization depending on the notification or application for review date or implementation date of the investment) multiplied by the average daily closing price during that period. Liabilities, cash and cash equivalents would be determined based on the public company’s most recent quarterly financial statements (or annual financials in some cases).
Acquisitions of private companies and asset acquisitions. For acquisitions of private companies and asset acquisitions, enterprise value would be calculated based on the combination of total acquisition value of the Canadian business and liabilities less cash. For 100% voting share acquisitions (or substantial asset acquisitions), total acquisition value would be calculated based on the consideration for the transaction. For acquisitions of less than 100%, acquisition value would be calculated based on the consideration for the transaction and a good faith determination certified by the acquirer’s board of the fair market value of the portion of the company not acquired. The proposed rules also make allowances for adjustments to consideration, for example through earn-outs, to be determined based on a good faith fair market value determinations by acquirer boards.
For a copy of the proposed Regulations and public consultation information see:
Regulations Amending the Investment Canada Regulations
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