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Canada Cites National Security Concerns in Turning Down Foreign Investment in the Telecom Sector

Download this publication October 9, 2013

On October 7, 2013, Industry Minister James Moore announced that the Canadian government had rejected the proposed acquisition by Accelero Capital Holdings ("Accelero Capital") of the Allstream business owned by Manitoba Telecom Service ("MTS"). The Minister cited national security concerns for this refusal, as provided for under the Investment Canada Act ("ICA").

Although we are aware of a small number of other transactions that have been prevented or abandoned as a result of national security concerns, this appears to be the first time since the national security review provisions were added to the ICA in March 2009 that the Canadian government has publicly announced a decision to prohibit a proposed investment on national security grounds following a completed review.

The Minister's decision to reject Accelero Capital's proposed acquisition of Allstream also appears to create tension with the Canadian government's stated goal of opening up the telecommunications sector to foreign investment. In 2012, Parliament relaxed the foreign ownership restrictions in the Telecommunications Act to permit foreign control of carriers that have a less than 10% market share.

Allstream provides a range of telecommunications services to businesses in Canada. Accelero Capital is an investment group focused on the telecommunications and technologies industries. It was founded by former Orascom Telecom, Wind Telecom and VimpelCom Ltd. executives. Accelero Capital's Executive Chairman, Naguib Sawiris, owned Orascom Telecom prior to its sale to VimpelCom in 2011 and provided, through Orascom, management expertise and much of the financial backing for Globalive (WIND Mobile Canada), a recent Canadian wireless telecommunications entrant.

According to a press release issued by MTS in the wake of the Minister's announcement, Accelero Capital had proposed "far-reaching, comprehensive and binding undertakings to the Canadian government, including a commitment to invest $300 million over three years to pursue Allstream's capital plans". MTS also stated that Accelero Capital's principals possessed relevant expertise, including direct experience in Canada.

In its own press release, Accelero Capital called the Minister's decision "unfounded and unexpected" given that the proposed investment was "structured to promote the Government's stated telecom investment policy, to increase competition, to enhance Canadian productivity, [and] to benefit the Canadian-listed MTS, its stakeholders and all Canadians, while seeking to address any Government concerns".

Whatever the merits of the proposed investment, they were clearly not sufficient to outweigh the Canadian government's national security concerns. Pursuant to the ICA's national security review process, the Canadian government can prohibit the implementation of a foreign investment if it would be injurious to national security. The government can also impose conditions or order divestiture of the Canadian business, if it has already been acquired. The review process can take up to 130 days, with the possibility of further extension once recent amendments to the ICA come into force. This time frame is longer than the typical "net benefit" review process under the ICA.

Unfortunately, Minister Moore's announcement does not provide any explanation of the grounds that led to the Canadian government's decision to turn down this proposed transaction. For instance, we do not know if Mr. Sawiris' reported business interests in North Korea influenced the government's national security determination. The Minister's announcement simply notes that "Allstream operates a national fibre optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada".

This is not the first time that national security concerns have been implicated in a proposed foreign investment in the Canadian telecommunications sector. Following Parliament's relaxation of the foreign ownership restrictions in the Telecommunications Act in 2012, VimpelCom sought to acquire a controlling stake in WIND Mobile Canada. The proposed acquisition was subject to ICA review. However, after a lengthy review process and discussions with the Canadian government, VimpelCom withdrew its application for ICA approval on June 19, 2013. It was reported at the time that the Canadian government had raised national security concerns about the transaction.

While the vast majority of foreign acquisitions of Canadian businesses are unlikely to raise national security concerns, it is important that non-Canadian investors carefully consider any potential issues at the early stages of their transaction planning, and consider the possible impact on deal timing.

As illustrated here, the ICA's national security process is distinct from the "net benefit" review process under that legislation and involves separate considerations. Moreover, it is now clear that national security concerns may trump other potential benefits of a transaction, including where the proposed investment advances other federal government policies and initiatives.

If you have any questions regarding the foregoing, please contact George Addy (416.863.5588), Anita Banicevic (416.863.5523), John Bodrug (416.863.5576), Jim Dinning (416.367.7462), Mark Katz (416.863.5578), Elisa Kearney (416.367.7450) or Charles Tingley (416.367.6963) in our Toronto office or Hillel Rosen (514.841.6443) in our Montréal office.

Davies Ward Phillips & Vineberg LLP is an integrated firm of approximately 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.

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