Canadian COMPETITION LAW

Bloomberg has reported that federal Industry Minister Christian Paradis has again raised the prospect of amending Canada’s Investment Canada Act (the “ICA”) in remarks he made in New York last week (see: Canada Open to Changing Foreign-Takeover Law, Paradis Says).

The Industry Minister’s comments closely follow a C.D. Howe Institute report also issued last week calling for fundamental changes to the ICA to stimulate foreign direct investment in Canada, including a change to the overarching test for foreign investment approval (replacing the current “net benefit to Canada” test with a national interest test) (see: New Publications – C.D. Howe Institute Report – Reforming the Investment Canada Act: Walk More Softly, Carry a Bigger Stick).

In the C.D. Howe Institute’s report, its authors Philippe Bergevin and Daniel Schwanen criticize the current test for approval under the ICA as “highly subjective and unpredictable”, arguing that by adopting a national interest test “Canada could reduce uncertainty and costs to businesses while improving transparency and accountability with respect to Canadians and foreigners alike, without compromising the federal government’s ability to implement national objectives and policies.”

Some of the highlights of the C.D. Howe Institute’s recent report include:

– The OECD ranks Canada as one of the most restrictive places in which foreigners can invest, especially among its OECD peers.

– Canada receives poor FDI rankings internationally based on the fact that it is one of the few countries with a formal investment review or screening process for all proposed foreign investments above a certain threshold (which is also lower than in most other advanced countries with similarly general and compulsory screening processes).

– Concepts that are not formally recognized under the ICA are “creeping into” Canada’s foreign investment review process: “[w]hile national security is a concept whose application sometimes can be used to shield industries from change for purely protectionist reasons, an even more elastic concept, and one that is creeping into Canadian debates on FDI even though it has no basis in the Investment Canada Act is that of ‘strategic’ economic sectors, firms, or other assets such as natural resources.  Simply by virtue of being dubbed ‘strategic’, these assets, the argument goes, should be protected from foreign ownership.”  One recent example being the debate around BHP’s proposed $40 billion hostile bid for Potash Corporation last year, for which approval was refused (which raised widespread debate about whether Potash was a “strategic asset”).

– The authors of the report argue that the current reliance on a net benefit test is unsatisfactory from the point of view of both openness to productive foreign investment and also the desirability of maintaining “a clear, predictable, transparent, and accountable foreign investment review regime”.

– On this basis, they argue that a “more encompassing, but clearer and more meaningful test” should be adopted – namely, a national interest test, which would consider if a proposed investment would threaten the Canadian government’s ability to (i) apply Canadian laws as to a similar Canadian investor or (ii) achieve significant policy objectives (including national security).

In an interesting, though critical, op-ed article in last Friday’s National Post (see: Foreign Investment Needs a Better Test), the authors of the C.D. Howe Institute report had this to say about the current test for review under the ICA:

“What difference does the net benefit test make? That’s not possible to quantify because we don’t know what future economic activity would have occurred had a blocked acquisition taken place. What’s more is that while sounding objective, the net benefit test is secretive and unpredictable, and often prevents the government from clearly articulating why it would oppose a proposed investment.

If the federal government examined large acquisitions of Canadian-owned firms by other Canadian-owned firms on the same basis, we would be correct in concluding that its actions represented an intrusive and ineffectual form of interventionist industrial policy. In the context of the Investment Canada Act, however, such intervention is acceptable because the investor is foreign – that is, the policy discriminates against foreign investors, and against Canadians who want to sell what they own to foreign investors.”

In his recent remarks following the C.D. Howe Institute’s report, Minister Paradis said that “we are always open to improving the regime” and that “if there are some things we can do to better address this and provide certainty, we will certainly be happy to look into it.”

Given, however, that some amendments to the ICA made in March 2009 are still not in force, including raising the monetary threshold for review of direct investments by WTO investors and altering the test to calculate a Canadian business’ assets (based on the “enterprise value”, or essentially market value, of the assets of the Canadian business rather than gross book value), it is unclear whether any significant changes to the ICA can be expected anytime soon.

Having said that, following the failed BHP bid for Potash last year, then Minister of Industry Tony Clement said that Canada’s existing foreign investment review regime needed to be reviewed to provide “greater clarity to Canadians and greater certainty to international investors.”

This led to a move for the federal Industry Committee to review the ICA, including based on concerns relating to the level of transparency of Ministerial review.  While the Industry Committee’s review of the ICA was interrupted by the last federal election, it remains to be seen whether the recent renewed criticisms of the ICA will result in another Government review of the existing ICA review regime.

____________________

For more information about our regulatory law services contact us: contact

For more regulatory law updates follow us on Twitter: @CanadaAttorney

Comments are closed.