Proposed Amendments to the Investment Canada Act on State-Owned Enterprises

On April 29, 2013, the Canadian government tabled Bill C-60, which includes proposed amendments to the Investment Canada Act (ICA) to implement the policy on investments in Canada by foreign state-owned enterprises (SOEs) announced by the government in December 2012.

Bill C-60 introduces a new definition of "state-owned enterprise" in the ICA and provides for separate lower net benefit review thresholds that will be applicable to acquisitions of Canadian businesses by SOEs. The Bill also proposes to introduce new deeming powers for the Minister of Industry that could, with retroactive application, impose net benefit reviews on (i) direct acquisitions of control of Canadian businesses by entities that would otherwise qualify as "Canadian" under the ICA, and (ii) direct acquisitions of certain minority interests in Canadian businesses that would not previously have been subject to a net benefit review under the ICA.

December 2012 SOE Policy Announcement

When it approved the CNOOC/Nexen and Petronas/Progress transactions in December 2012, the government also announced new restrictions on further SOE investments in the Canadian oil sands and possibly other concentrated sectors and an intention to maintain lower net benefit review thresholds for direct acquisitions of Canadian businesses by SOEs, even after higher enterprise value review thresholds are implemented generally. For more information on the December 2012 announcements and ICA reviews see, "Canadian Government Clarifies Policy on Foreign Investments by State-Owned Enterprises".

Bill C-60

Consistent with the December 2012 policy, Bill C-60 proposes to amend the ICA by adding a very broad definition of an "SOE". For example, an SOE would include an entity that is controlled or influenced, directly or indirectly, by a government of a foreign state (whether federal, state or local) or an agency of such a government. Notably, the concept of "influence" is not defined in the Bill.

The Bill also creates the prospect of the retroactive imposition of an ICA net benefit review requirement on a direct acquisition of a Canadian business by a Canadian-owned entity if (i) the Canadian business has assets with a book value in excess of the $344 million review threshold and (ii) the Minister determines that the acquiring entity is "controlled in fact" by an SOE. (Indirect acquisitions of non-cultural Canadian businesses (e.g., an acquisition of a foreign corporation that controls a Canadian subsidiary) by or from most non-Canadian entities remain exempt from ICA net benefit review.)

In particular, Bill C-60 proposes to give the Minister the ability to determine that an entity that otherwise qualifies as a Canadian-controlled entity (and meets the definition of a "Canadian" in the ICA) is in the Minister's opinion controlled in fact by one or more SOEs. In that event, the entity would be deemed not to be a "Canadian" for the purposes of the ICA. Such a determination may be retroactive to a date not earlier than April 29, 2013, so that a direct acquisition above the review threshold by such an entity on or after that date could thereby become subject to an ICA net benefit review.

In addition, the Bill would give the Minister the power to deem a transaction to have been an acquisition of control of an entity for the purposes of the ICA if the Minister considers that there has been an acquisition of "control in fact" of that entity by an SOE. Normally the ICA deems an acquisition of less than a one-third voting interest in a corporation not to be an acquisition of control. However, with the deeming provision, the Minister could, for example, in light of all the circumstances, determine a direct acquisition by a non-Canadian SOE of, say, a 30% voting interest in a Canadian corporation carrying on a Canadian business to be an acquisition of control in fact, and therefore subject to an ICA net benefit review (if the book value of the assets of the Canadian business exceeds the $344 million review threshold).

Potential Implications

The new proposed definition of an SOE does little to address the uncertainty created by the December 2012 policy as to when the lower review threshold and the new SOE policy framework will apply. Absent guidance from the Minister, it may be difficult for many foreign-controlled entities to determine whether they are subject to sufficient influence (let alone indirect influence) by a foreign government or government agency to be considered an SOE under the ICA, whether by Ministerial determination or otherwise.

Further, uncertainty regarding which review threshold applies to particular investors may create significant challenges when there are competing bids for a Canadian company.

Foreign SOE minority investments in the Canadian oil sands sector of less than a one-third interest could, if Bill C-60 is passed, be reviewed and prohibited if the Minister considers that persons subject to foreign government influence thereby control the relevant Canadian entity in fact and the $344 million threshold is exceeded. (Currently, such investments are not subject to net benefit reviews.) Such foreign SOE investments in other sectors could also be reviewed.

As noted above, under Bill C-60, not only would lower review thresholds and the limitation on Canadian oil sands (and possibly other) investments apply to foreign-controlled entities subject to foreign government influence, but they could also apply to a Canadian-owned entity that the Minister deems to be controlled in fact by an SOE. While, as a practical matter, it may be that the Minister would use this deeming power sparingly (for example, there is little public information on how often the Minister has used similar deeming powers for cultural businesses and national security reviews), the expansive definition of an SOE would appear to give the Minister wide discretion to deem an entity controlled in fact by an SOE to be a non-Canadian and determine direct acquisitions of Canadian businesses by such an entity above the review threshold to be subject to ICA net benefit review. For example, would the Minister consider an otherwise "Canadian" company to be subject to the "influence" of an SOE because the SOE can nominate one director to a multi-person board? If so, the company could be considered an SOE, and its subsidiaries could be deemed by the Minister to be non-Canadians.

As yet, the government has not indicated a willingness to provide guidance or advance rulings on whether an entity qualifies as an SOE for the purposes of the ICA. To the extent that such guidance is made available, it would be important for the Minister to set out the basis for his opinion in sufficient detail to enable an entity to determine whether subsequent events are material enough to change its SOE or non-SOE status.

National Security Reviews

Bill C-60 also proposes to implement the previously announced intention of the Canadian government to provide flexibility for the government to extend the time periods for national security reviews under the ICA. The outside limit of such extensions is to be set out in regulations.

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.


George N. Addy

Mark C. Katz

Jim Dinning

Richard D. Elliott

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