December 7, 2012
Earlier today, the Federal Government announced that it was granting Investment Canada Act approval for China National Offshore Oil Company’s (CNOOC) acquisition of Nexen Inc. and PETRONAS’ acquisition of Progress Energy (see: here and here).
With respect to CNOOC/Nexen, the Minister of Industry emphasized CNOOC commitments relating to governance, commercial orientation and free market principles as factors for approving the transaction:
“To demonstrate that the transaction is likely to be of net benefit, CNOOC has made significant commitments to Canada in the areas of: governance, including commitments on transparency and disclosure; commercial orientation, including an adherence to Canadian laws and practices as well as free market principles; and employment and capital investments, which demonstrate a long-term commitment to the development of the Canadian economy. A compliance report related to the undertakings will be provided to Industry Canada annually.”
As anticipated, at the same time the Government also released a new Policy Statement and revised State-Owned-Enterprise Guidelines (Investment by state-owned enterprises – Net benefit assessment) for net benefit to Canada reviews of investments by SOEs that amend Guidelines first issued in 2007.
Some of the key changes (and shifts in policy) that struck me on my review of the new SOE Guidelines and Policy Statement include:
1. The Federal Government sending a clear signal that acquisitions of control by SOEs in Canada’s oil sands will be found to be of net benefit to Canada only on an “exceptional basis”. When questioned in an interview following the announcements, the Prime Minister did not amplify on what circumstances may satisfy this test.
2. More formal monitoring of SOE transactions (which is consistent with an increased desire by the Government generally to ensure that Investment Canada Act undertakings are fulfilled).
3. Increasing the scrutiny on the level of control by a foreign state (to include the control or influence of the SOE over the business and relevant industry, as well as the control/influence of the foreign state over the SOE). In this regard, the definition of SOE in the Guidelines has been expanded to include “influence” in addition to ownership and control (the Investment Canada Act does not define SOE).
4. Distinguishing between reviews for acquisitions of control from minority investments including joint ventures (the latter “continuing to be welcome”, while the former will be cleared only on an “exceptional basis”).
5. Expanding the requirement to comply with Canadian laws and practices to include adherence to free market principles.
6. Allowing the Government to extend national security reviews (the Prime Minister said that CNOOC/Nexen was subject to review, did not raise concerns but did not elaborate any further).
7. Confirming, as anticipated, the phased-in increase over four years to the Investment Canada Act review threshold for WTO investors to $1 billion (based on enterprise value) while maintaining the existing $330 million threshold for SOE investments (adjusted annually to reflect GDP).
8. No changes were made to the net benefit to Canada criteria generally (or the Investment Canada regime for non-SOE investors), other than confirming the planned increase to the review threshold.
9. Underscoring that in seeking Investment Canada Act clearance, the burden remains for investors to establish to the satisfaction of the Minister that an investment is of net benefit to Canada. In this regard, there had been calls leading up to the issuance of the new SOE Guidelines for the burden to be shifted (i.e., for the Government to show why proposed investments were not of net benefit to Canada).
While some of these guidelines are entirely new, others are expansions of current policy (for example, the expanded definition of state control).
Unfortunately, no changes or clarification were made to the net benefit to Canada criteria under the Investment Canada Act generally and key terms are undefined (or without any guidance) including “unfluence” in the context of state control and “exceptional circumstances” in terms of when control transactions by SOEs may still receive clearance.
Given the already complex and politically opaque Investment Canada regime, the Government’s new policy adds to the uncertainty in a number of key ways (not least of which relating to the analysis of control). On the other hand, policy wise it is clearly a compromise to allow some but not all SOE investment and politically may be enough to satisfy Canadians the majority of which opposed the transactions.
For a copy of the new SOE Guidelines see: State-Owned-Enterprise Guidelines.
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