Law Times

Law Times • sepTember 27, 2010 FOCUS PAGE 11 Does U.S. Steel case signal a shift in enforcement? Federal action means foreign companies will take commitments 'more seriously' BY JULIUS MELNITZER For Law Times hostile bid for the Potash Corp. of Saskatchewan Inc. So far, it's not clear whether the bid will succeed or if other viable suit- ors will emerge to outdo BHP. One thing is obvious, how- T ever. Th e Canadian govern- ment will almost certainly de- mand commitments aimed at ensuring that the transaction is of net benefi t to Canada from any successful bidder. As it turns out, the Fed- eral Court decision in June in Canada (Attorney General) v. United States Steel Corp. goes a long way to consolidating the government's power to enforce such undertakings. Th e suit against U.S. Steel marked the fi rst time the Ca- nadian government had taken a company to court under the Investment Canada Act en- acted in 1984. It alleged the steelmaker had contravened promises to maintain employ- ment and productivity levels at its Ontario plants. Th e com- pany responded by arguing the enforcement proceedings were unconstitutional as they violat- ed its rights under the Charter of Rights and Freedoms. But the Federal Court re- jected those assertions, which cleared the way for the case to proceed to trial on the merits if the decision stands on appeal. "Th e ruling is a reminder not only that the government considers Canada's foreign in- vestment review regime to be important but that it is both willing and able to enforce un- dertakings in cases involving material non-compliance de- spite the fact that it has never resorted to court proceedings in the past," says Omar Wakil, a partner at Torys LLP. he big business news of the day lately has been BHP Billiton Ltd.'s Th e act prohibits, with limited exceptions, a foreign company from acquiring con- trol of a Canadian business of a designated size unless it has fi led an application for review and convinced the industry minister that the investment is likely to be of net benefi t to Canada. In making a decision, the minister can take into ac- count any promises off ered by the investor to enhance the benefi t to Canada. Such promises are bind- ing commitments. But the government's administrative guidelines state that it won't hold investors accountable in cases in which the inabil- ity to fulfi l a commitment "is clearly the result of fac- tors beyond the control of the investor." When a company doesn't "Tony Clement, the indus- try minister, went after U.S. Steel because he perceived that the company's Canadian cutbacks were disproportion- ate to its cutbacks elsewhere," says Neil Campbell, a partner at McMillan LLP. U.S. Steel defended the Despite the litigation, 'it's too early' to conclude the U.S. Steel matter is the start of a trend, says Omar Wakil. live up to its commitments, the act authorizes the minister to demand that it comply with the undertaking, show cause that it hasn't contravened its promises or justify any non-compliance. If the investor doesn't satisfy the demand, the minister can either agree to a new undertaking or ap- ply to the court under s. 40 of the act for a variety of remedies, in- cluding divestiture, a compliance order or an administrative mon- etary penalty of up to $10,000 per day per breach. It was against this statutory background that U.S. Steel an- nounced in August 2007 that it had reached an agreement with Stelco Inc., the last of Canada's major steelmakers still under domestic ownership, to acquire all of the Hamilton, Ont.-based company's shares. Because the transaction was subject to the act, it couldn't close until the minister decided it was likely to be of net benefi t to Canada. U.S. Steel supported its ap- plication with 31 undertakings that promised, among other things, to maintain certain Inside you will find: • an up-to-date alphabetical listing of more than 57,000 barristers, solicitors and Quebec notaries, corporate counsel, law firms and judges in Canada; • contact information for the Supreme Court of Canada, the Federal Court of Canada, Federal Cabinet Ministers, departments, boards, commissions and Crown corporations; • legal and government contact information related to each province for the Courts of Appeal, Supreme Courts, County and District Courts, Provincial Courts, law societies, law schools, Legal Aid, and other law-related offices of importance. More than a phone book Hardbound • Published February each year • On subscription $141 • P/C 0600140999 One-time purchase $157 • P/C 0600010999 • ISSN 0084-8573 CD-ROM • On subscription $214 • P/C 0600260999 One-time purchase $229 • P/C 0600210000 To advertise in an upcoming issue, contact our sales team: Karen Lorimer 905-713-4339 klorimer@clbmedia.ca Kimberlee Pascoe 905-713-4342 kpascoe@clbmedia.ca www.lawtimesnews.com CLL ad - 1/4 _ 3X.indd 1 Narrow 1/8 - 2X.indd 1 3/4/09 2:27:32 PM For a 30-day, no risk evaluation call 1.800.565.6967 Canada Law Book, a Thomson Reuters business. Prices subject to change without notice, to applicable taxes and shipping and handling. employment and production levels. Th e minister approved the takeover in October 2007 partly because of those com- mitments. But as the global economic crisis shook the North Ameri- can economy over the next 18 months, U.S. Steel laid off or retired 2,400 workers and cut back production at its two plants in Ontario. In May 2009, the minister sent a demand ad- vising the company that it had contravened the undertakings dealing with employment and production levels. In doing so, the government required the company to cease the contra- vention, remedy the default, show cause as to why there were no contraventions or jus- tify its non-compliance. cutbacks, but the minister found the company's expla- nation unsatisfactory. In July 2009, he asked the Federal Court to enforce compli- ance and impose a penalty of $10,000 per day for each breach of the undertaking, an amount calculated from Nov. 1, 2008, until the date U.S. Steel came into compliance. U.S. Steel responded to the suit by applying to the court for an order that s. 40 of the act was unconstitution- al because it violated s. 11(d) of the Charter, which provides that anyone charged with an of- fence is presumed innocent un- til proven guilty in accordance with due process. For its part, s. 40 puts the burden on the in- vestor to show why no contra- vention has occurred. "U.S. Steel based its argu- ments on the premise that an order under s. 40 is either by its nature a criminal proceeding or involves the imposition of true penal consequences," says Neill May, a partner at Good- mans LLP. Justice Dolores Hansen, however, concluded otherwise in a ruling that noted that s. 40 proceedings aren't crimi- nal matters. "In a section 40 proceeding, the investor is not being called to account to the public," she wrote. "Th e inves- tor is being called to account to the government for a failure to honour commitments made to the government." Hansen also ruled that ad- ministrative monetary penalties weren't a "true penal consequence" but rather "a way to promote and ensure the attainment of the leg- islative objectives." Th e mere size of the sanctions didn't necessarily make them penal consequences as long as the statutory scheme as a whole didn't fall afoul of the Charter. Th e proceedings against U.S. Steel, then, were more of a civil enforcement mechanism than a criminal proceeding and there- fore didn't off end the Charter. But Wakil says it's too early to treat the government's ac- tions against U.S. Steel as the beginning of a trend. "Th ere's always the temptation to look at a case like this and draw broader conclusions. If we saw a second such case in the near future or a third or a fourth, conclusions about a trend would be on fi rmer ground, but right now it's too early to go in that direction." Still, the decision will have practical implications in the mergers-and-acquisitions market. "Some investors may have been too lax in their assumptions about what it would take to satisfy their undertakings," May says. "But the fact that the regulators have become active is a sure sign that they will be dealing with commit- ments more seriously than they have in the past." LT 8/27/10 10:39:02 AM

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