With the Maple/TMX and Glencore/Viterra deals beginning to quiet down now, the next Competition Act / Investment Canada Act approval dance began earlier today with announcements that China National Offshore Oil Corporation (“CNOOC”) was proposing to acquire Nexen Inc. in a friendly $15.1 billion all cash transaction ($27.50 per Nexen share). Nexen has assets in Western Canada, the U.K. North Sea, Gulf of Mexico and offshore Nigeria, including oil and gas, oil sands and shale gas production.
Canada’s Industry Minister, the Honourable Christian Paradis, confirmed that the transaction would be subject to Investment Canada Act (“ICA”) review (see: Minister Paradis Confirms China National Offshore Oil Corporation and Nexen Inc. Transaction is Subject to Review under the Investment Canada Act) and made a number of rather pro forma statements, including confirming that the transaction exceeded the WTO review threshold and setting out the net benefit to Canada criteria under the ICA. The Minister also confirmed that the Competition Bureau would be reviewing the proposed transaction.
CNOOC, in reply, in this newest ICA approval dance, began to indicate the types of commitments it may be prepared to offer to secure ICA approval, including significant capital investment, listing CNOOC Limited’s common shares on the TSX, making Calgary its head office for North and Central American operations, vowing to maintain existing management and employees (as well as increasing jobs) and accelerating resource development. According to Nexen’s press release, CNOOC also intends to continue to support oil sands research at Alberta universities and participate in the Oil Sands Innovation Alliance (COSIA) (see: CNOOC Limited Enters Into Definitive Agreement to Acquire Nexen Inc.).
These are of course largely all intentions aligned with the net benefit to Canada criteria under the ICA, although it is too early to tell what political or stakeholder opposition the proposed bid may encounter, if any.
Media are also reporting that CNOOC is also saying it intends to operate on commercial principles, with one source having rather colorfully said that the acquirer “smells, tastes and feels like a commercial entity.”
Following the announcements, many of the usual queries are being raised as to whether Nexen will be argued by any stakeholders to be a “strategic asset” (a curious phrase, but one that is not included in the net benefit to Canada criteria under the ICA) and more as well of what now seem will be perennial comparisons to one of the rare occasions where ICA approval has not been secured – i.e., the BHP/Potash transaction.
Having said that, Chinese acquirers do have a bit more of an uphill battle to obtain ICA approval. This is because in evaluating whether a proposed investment by a state-owned-enterprise is of net benefit to Canada, the Minister may consider not only the regular net benefit to Canada factors set out in section 20 of the Investment Canada Act, but also factors relating to the corporate governance and commercial orientation of a state-owned enterprise.
With respect to corporate governance, relevant factors include whether a SOE adheres to Canadian standards of corporate governance (e.g., commitments to transparency and disclosure, independent board and audit committee members and equitable treatment of shareholders) and to Canadian laws and practices.
With respect to commercial orientation, the Minister will assess whether a Canadian target will continue to operate on a commercial basis including: (i) where to export, (ii) where to process, (iii) Canadian participation in operations and (iv) adequate capital investment to compete globally.
Investment Canada also provides illustrative examples of undertakings that may ensure that investments by SOEs meet the net benefit to Canada test under the ICA. These include: (i) the appointment of Canadians as independent directors, (ii) appointing Canadians to senior management positions, (iii) Canadian incorporation and (iv) Canadian listing of the acquirer or Canadian business.
Some media are also reporting that the transaction may be subject to a national security review. Amendments to the ICA in March, 2009 introduced a new “national security” review mechanism, under which the Minister and Federal Cabinet may review proposed or completed investments that may be “injurious to national security”. If national security threats related to new investments in Canada are identified – for example, by Canada’s security and intelligence agencies – they may be reported to the Industry Minister who may refer the investment to Cabinet for review.
Canada’s national security review regime, which is distinct and administered separately from the general “net benefit” to Canada review process under ICA arose as a result of recommendations made by the Competition Policy Review Panel in its 2008 final Report Compete to Win. The Panel was established in 2007 to review Canada’s competition and foreign investment laws and to make proposals to increase Canada’s competitiveness.
The relevant threshold for commencing a national security review is low and undefined. A national security review may be conducted where the Minister “has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security.”
“National security” is undefined giving the Government political discretion to review investments. In this regard, the Regulatory Impact Analysis Statement accompanying the National Security Review Regulations state that proposals to define “national security” were rejected “since national security threats are dynamic in nature and, therefore, constantly evolve” and because “future threats to national security cannot be predetermined [a definition could] limit the government’s flexibility to respond to future threats.”
In addition, a national security review can be commenced regardless of the value of a particular investment (i.e., whether or not the general monetary thresholds for a “net benefit” review under the ICA are triggered) and whether or not control of a Canadian business is acquired (section 28 of the ICA contains certain deeming provisions regarding the acquisition of control required to trigger the general application of the ICA).
For the Minister of Industry’s announcement and a few of the many media reports earlier today see: Minister Paradis Confirms China National Offshore Oil Corporation and Nexen Inc. Transaction is Subject to Review Under the Investment Canada Act, CNOOC’s Nexen Bid: A New Test for Harper, CNOOC’s Other Foreign Assets, China’s CNOOC to Buy Nexen for $15.1 Billion, Nexen Deal Helps TSX Avoid Bigger Loss and Nexen to be Acquired by China’s CNOOC for $15.1 Billion in Cash.
For Nexen’s and CNOOC’s news releases earlier today see: CNOOC Limited Enters Into Definitive Agreement to Acquire Nexen Inc. and Major Transaction in Relation to the Proposed Acquisition of Nexen.
For more about Canada’s Investment Canada, SOE and merger control rules see:
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