Law Times

Law Times • September 16, 2013 Page 11 FOCUS Investment Canada Act Lawyers question new rules for state-owned firms BY MICHAEL McKIERNAN For Law Times C anada could miss out on foreign capital following the passage of federal legislation that muddies the water on reviewable investments by state-owned enterprises, competition lawyers are warning. Bill C-60, an enabling act stemming from the budget, significantly broadens the government's power to review or challenge takeovers of Canadian firms by foreign state-owned enterprises under the Investment Canada Act. Under the old rules, nonCanadian investors could avoid a net-benefit review by keeping their stake in a Canadian business below one-third of voting shares, the threshold for an acquisition of control. The Bill C-60 amendments replace that test with a vaguer one for "acquisition of control in fact" by a state-owned enterprise as determined by the minster of industry. The government can even invoke the test retroactively after a deal has gone through. Brian Facey, co-chairman of the competition, antitrust, and foreign investment group at Blake Cassels & Graydon LLP, says the aim was to close a perceived loophole that could allow a foreign state-owned firm to come in under the review threshold and leave the government powerless to act while effectively gaining control through other means such as supply arrangements and shareholder agreements. But he says the lack of guidance on when the minister may act will make state investors skittish about Canadian targets. "Our concern is that when you go from a bright-line test to a more opaque test, it becomes much more difficult to give good, predictable advice to clients," says Facey. "If you're an SOE and you want to deploy capital in Canada, you're now wondering if you're going to be caught up in a review even if it's a minority position. It increases uncertainty, which is going to chill investment." The amendments also single out state-owned enterprises for increased scrutiny by holding the asset value threshold for review at $344 million while the equivalent value for deals involving private-sector investors will escalate to $1 billion over four years. And while the tighter rules apply only to state-owned enterprises, the legislation's broad definition of what constitutes one also hands the minister the power to put that label on foreign or Canadian individuals or businesses if he believes they're "controlled or influenced, directly or indirectly," by a foreign government or agency. Facey says the issue could sow seeds of doubt in the minds of foreign investors with tangential ties to government about whether they'll count as state-owned enterprises and further chill inward investment at a time when it's "critically needed" in Canada. If other countries applied a similar standard reciprocally to Canada, he adds, it could cause problems for Canadian entities such as pension funds looking to invest abroad. Oliver Borgers of McCarthy Tétrault LLP's Toronto office says the amendments are consistent with the federal government's recent restrictive approach to investment from foreign state-owned enterprises as exemplified in its stance on the takeover of Calgary-based oil and gas company Nexen by Chinese state-owned CNOOC Ltd. Despite approving the $15-billion deal on review, the government warned any further deals like that in the oilsands would get the green light on an exceptional basis. "The SOE issue has been gaining traction for several years and with Nexen, they laid down some understanding of how seriously they take SOE investment in Canada. It sent an important warning to the community that at least one industry, the oilsands, was now off limits," says Borgers. Michael Woods, a former diplomat and current partner at Heenan Blaikie LLP, says freemarket western nations have traditionally shared skepticism about state-owned enterprises based on a belief that their government backing gives them the power to ignore commercial considerations and compete unfairly in the marketplace. More recently, he says, fears about the loss of control of natural resources to foreign powers have also driven a tougher line on this type of foreign investment. "Sometimes I think this may be the wrong perception, but they are often seen as an arm of government and there is a concern that when a Chinese SOE or one from some other nation invests in an economy that the decision is not based on economics but on geopolitics," says Woods, who practises in the firm's trade law group. Woods notes public opinion appears to be with the government when it comes to tightening the rules on investment by state-owned enterprises but suspects it's not an "opinion shaped in great depth." In his dealings with Chinese officials, he says they've often stressed the commercial viability of investments and expressed an interest in good corporate practices. In an industry like oil and gas where governments own many of the largest players around the world, Woods says Ottawa may be playing a risky game with its increasingly restrictive approach to foreign investment. "If the major ownership of oil and gas and resources are mostly state owned, then setting up investment rules that cut them out robs Canadians of a potential rich source of investment dollars 'The government will want to leave itself the flexibility to look into any deal that causes them concern,' says Oliver Borgers. and without investment, the Canadian economy won't prosper," he says. "Chinese companies are very interested in continuing to invest, but the major resource companies are not going to stop being SOEs. . . . If we deprive ourselves of being able to negotiate with these giants, then the investment goes elsewhere." According to Woods, it would help lawyers if the federal government clarified some of the language in the bill by better defining key terms such as control in fact and influence. But Borgers says lawyers could be waiting a long time for help since he believes the ambiguity of the bill suits Ottawa. "The government will want to leave itself the flexibility to look into any deal that causes them concern. What constitutes influence is going to depend on the circumstances. It might be that the government will exercise its discretion not to review something because it's in an industry that doesn't cause anyone concern whereas the same facts might lead to a review in a more sensitive area like the oilsands." The Canadian Bar Association's national competition law section also called for interpretation notes in a submission coauthored by Facey. The group originally wanted the amendments removed altogether from the omnibus budget bill in order to study them in more detail. Failing that, they recommended a time limit on ministerial intervention and a new mechanism for getting a ministerial opinion on the status of an investor ahead of any transaction based on the Competition Bureau's no-action letters on proposed mergers. "If you're going to move away from a bright-line test, why not adopt a process that will provide some comfort?" says Facey. However the review process pans out in practice, Borgers says a strong team of advisers is more important than ever for foreign investors, particularly those with potential connections to state-owned enterprises. "That's not only legal advisers but also government relations experts who can help assess how the law might be applied. The laws are not very technical but are politically important. If you're going to do a deal, you'd be welladvised to slow things down and think through a game plan from beginning to end." LT A OF CANADIAN LEGAL NEWS DAILY BLOG [ WWW.CANADIANLAWYERMAG.COM/LEGALFEEDS ] MAJOR COURT RULINGS EVENTS POWERED BY CANADIAN LAWYER & LAW TIMES Untitled-3 1 www.lawtimesnews.com 13-09-09 1:41 PM

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