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Flash: Federal Government Clarifies Rules on Investments by State-Owned Enterprises in Canada
December 11, 2007 |
Historically, SOEs have accounted for only 2% of foreign direct investment into Canada. However, that level of investment is expected to rise dramatically due to a number of factors, including: (i) excess foreign reserves from exports and strong commodity prices; (ii) lower restrictions on international capital flows; and (iii) greater recognition of the benefits of diversification.
The Canadian government's main concern about foreign SOEs investing in Canada is that they operate according to sound principles of corporate governance and commercial orientation. For most foreign SOEs, this will not be an issue. However, there may be instances in which a lack of transparency and adherence to non-commercial objectives could raise questions about whether a proposed investment is of "net benefit to Canada" (the test under the ICA).
The SOE Guidelines are intended to address these issues. For example, the Guidelines state that the Minister will examine the corporate governance and reporting structures of foreign SOEs as part of the assessment process under the ICA. This will involve assessing factors such as the extent and nature of state control over the SOE and whether the SOE adheres to Canadian standards of corporate governance (such as a commitment to transparency and disclosure and to the independence of board and audit committee members).
The Minister will also assess whether the acquired Canadian business will continue to operate on a commercial basis under the SOE's ownership (e.g., with respect to where the Canadian business will process and export its products). In addition, the Minister will look at factors such as the impact of the investment on Canadian participation in the business, capital expenditures and support for ongoing research and development. (These are standard criteria for review under the ICA.)
The Guidelines also encourage foreign SOEs to submit draft undertakings as part of the materials they file in support of their proposed acquisitions (undertakings are typically required to obtain ICA approval). Examples of undertakings that could be appropriate in this context include: (i) the appointment of Canadians as independent directors on the board of directors; (ii) the employment of Canadians in senior management positions; and (iii) the listing of securities of the acquired business on a Canadian stock exchange. (Again, it is not unusual for the Minister to seek these commitments even when SOEs are not involved.)
The Minister's speech makes it clear that the Canadian government remains committed to attracting foreign investment to Canada, including by SOEs. The SOE Guidelines are designed to deal with the rare case in which closer scrutiny may be required. The Guidelines thus represent a refinement to the ICA review process but are not intended to introduce a significant obstacle to the flow of investment into Canada by non-Canadians.
The foregoing is a summary of a recent development in Canada's foreign investment review law. If you would like additional information about this topic, please see the following items on our website:
Please also feel free to contact George Addy, John Bodrug, Mark Katz, Richard Elliott, Anita Banicevic, Christopher Margison, Elisa Kearney or Srijan Agrawal in the Toronto office at (416) 863-0900 or Hillel Rosen in the Montréal office at (514) 841-6443.
Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.
The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.
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December 11, 2007
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