On April 26, 2012, the Canadian government introduced Bill C-38 (known as the Jobs, Growth and Long-term Prosperity Act), an omnibus bill that includes proposed amendments to the Investment Canada Act (the "ICA") and the Telecommunications Act. Highlights of these proposed amendments are described below.
1. Proposed Amendments to the ICA
The proposed amendments to the ICA would introduce two principal changes to the review process under that legislation. First, the Minister of Industry (or Minister of Canadian Heritage, in respect of cultural businesses) would be authorized to accept a security payment from investors in respect of any possible penalties that a court might order if the investor is subsequently held to be in breach of its undertakings to the government. Second, the Minister would be authorized to publicly disclose certain information at various stages in the ICA review process.
The acquisition by a "non-Canadian" of control of a business carried on in Canada may be subject to review under the ICA to determine if it is likely to be of "net benefit to Canada" based on certain statutory criteria. In order to demonstrate "net benefit", and thus secure ministerial approval for an acquisition, foreign investors are typically required to provide binding undertakings to the Canadian government covering various aspects of the operations of the Canadian business being acquired.
Recently, the Canadian government settled protracted litigation with U.S. Steel over the enforcement of undertakings provided in connection with U.S. Steel's 2007 acquisition of a Canadian steel company (see our Flash of December 13, 2011). Some critics of the ICA focused on this matter as evidence that the legislation lacks sufficiently robust enforcement mechanisms.
The Bill C-38 amendments regarding security payments appear to be the government's response to these criticisms. Pursuant to the proposed legislation, the Minister would be authorized to "accept" security from investors towards the payment of a potential court-imposed penalty arising from, among other things, the investor's failure to comply with its undertakings at some point in the future. The purpose of this amendment is to improve the government's ultimate ability to enforce undertakings provided by foreign investors.
Although Industry Canada has indicated that these amendments would simply authorize the Minister to "accept security, when offered by an investor", the concern is that the Minister may now require that investors "offer" security payments as a matter of course when providing undertakings as part of the ICA review process. Such a practice would threaten to make the negotiation of undertakings more difficult, with disputes likely to occur over the appropriateness and quantum of such payments.
Another criticism that has been leveled against the ICA is an alleged lack of transparency in the Minister's decision-making process. Bill C-38 is also intended to address this criticism by expressly authorizing the Minister to make public disclosure in the following circumstances (among others):
when the Minister sends a preliminary notice to an investor indicating that the Minister is not satisfied that the investment is likely to be of net benefit to Canada (and advising the investor of its right to make representations and submit undertakings); and
when the Minister accepts security posted by an investor in conjunction with undertakings (as described above).
In the case of a preliminary notice, the Minister will also be able to publicly disclose the reasons for the initial conclusion that the transaction is not likely to be of net benefit to Canada (although not if the investor satisfies the Minister that disclosure of certain information would be prejudicial to its interests).
The ICA already permits the Minister to disclose final notices sent to an investor indicating whether the Minister is or is not satisfied that the investment is likely to be of net benefit to Canada, along with any reasons for the finding. The Minister is also permitted to disclose undertakings provided by an investor to the government. In practice, though, the Minister rarely makes such disclosures. Even if Bill C-38 is enacted, it remains to be seen how often and to what extent the Minister will be prepared to disclose the reasons for tentatively finding that an acquisition is unlikely to be of net benefit to Canada. Based on precedent, it is also unlikely that this issue will arise very often because there have been very few cases in which the Minister has issued unfavourable provisional decisions.
2. Proposed Amendments to Telecommunications Act Foreign Ownership Restrictions
Bill C-38 also proposes to amend the foreign ownership restrictions that constrain the ability of non-Canadians to control telecommunications companies ("carriers") operating in Canada.
The Telecommunications Act currently imposes a cap of 46.67% on foreign ownership of the voting shares of Canadian telecommunications carriers and also prohibits foreign "control in fact" of such carriers. For some time now, the Canadian government has indicated its intention to permit greater foreign participation in the Canadian telecom sector. Most notably, the government overruled a 2009 decision of the CRTC which would have prevented a new entrant with foreign investment ties from offering wireless services in Canada (see our Perspective of February 9, 2011). The government's decision to overrule the CRTC was challenged but ultimately upheld by the Federal Court of Appeal (with the Supreme Court of Canada recently denying further leave to appeal in the matter).
Bill C-38 proposes to advance the government's objective further by permitting non-Canadians to acquire control of Canadian telecommunications carriers that account for less than a 10% share of overall Canadian telecommunications services revenues, as determined by the CRTC. (The government first made this intention public in an announcement by Canada's Minister of Industry Christian Paradis, on March 14, 2012 (View the complete announcement.)
The Bill C-38 amendments also provide that foreign-controlled carriers that subsequently increase their revenues above the 10% threshold will continue to be exempt from foreign ownership restrictions provided that the growth in revenues is not the result of either (i) the acquisition of control of another Canadian carrier or (ii) the acquisition of the assets of another Canadian carrier used to provide telecommunications services. To monitor this aspect of Bill C-38, the CRTC will have to be notified when any carrier operating pursuant to the 10% exception acquires control of another Canadian carrier or acquires assets used by another Canadian carrier to provide telecommunications services.
The proposed amendments in Bill C-38 offer foreign investors the opportunity to obtain an initial "toe-hold" in the Canadian telecom sector, with the possibility of expanding over time (other than through acquisition). Significantly, however, a similar opening has not been made for the Canadian broadcasting sector, where foreign investors will continue to be prohibited from acquiring de jure or de facto control over broadcast undertakings.
If you have any questions regarding the foregoing, please contact George Addy (416.863.5588), John Bodrug (416.863.5576) Anita Banicevic (416.863.5523) or Mark Katz (416.863.5578) in the Toronto office or Hillel Rosen (514.841.6443) in the Montréal office.
Davies Ward Phillips & Vineberg LLP is an integrated firm of more than 240 lawyers with offices in Toronto, Montréal and New York. The firm is focused on business law and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its clients, regardless of borders.
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.