Foreign Investment Review in Canada

Extractive Industries: Responses to the new, global challenges Friday, June 22, 2012, 11:40 a.m. (Session #2) Outline

1. Open for Business? – National & Regional Sensitivities in Canada 2. Managing the Twin Track Process – Investment Canada Act: Net Benefit Test – Investment Canada Act: National Security Review – Significant Transactions (2010-2011) – Recent Developments 3. Key Take-Aways 1. Open for Business?

• Despite the economic downturn, Canada attracted C$217 billion in foreign direct investment from 2007 to 2010 placing it amongst the highest in the OECD • Strong growth in investments in the pre-recession period (2004-2007) attributable to consolidation in the extractive sector (particularly mining); driven by high commodity prices • Canada's main trading partner, the U.S., has been the number one investor over the past five years, accounting for more than half of the total number of investments and the total asset value, but... • Key sources of FDI inflow expected to change due to significant rise of FDI from emerging economies Brazil, Russia, India and China (the so-called BRIC countries) • Canada also attracting significant investments from state-owned enterprises and sovereign wealth funds

Canadian businesses, particularly in the oil and gas and natural resources sectors, provide attractive opportunities for foreign investment National & Regional Sensitivities

“Free markets do not mean a free pass. Canada is open for business, but it's not for sale. And like other countries around the world, it's important that we have safeguards in place to protect our interests.” - Industry Minister Jim Prentice, October 9, 2007 "I believe that my decision today [to block BHP’s proposed investment in PotashCorp] is the right decision in the interests of Canada and in the interests of Canadians and that is my bottom line." - Industry Minister Tony Clement, November 3, 2009 “We want to build on our brand as a place where investment from all over the world is welcomed. And we have sought throughout this process to balance that against the need to also protect, for future generations, the strategic interests of Saskatchewan.” - Saskatchewan Premier Brad Wall, October 21, 2010 “I don’t think we would want a situation, especially one that might not be driven entirely by market forces, where the Canadian economy were entirely owned and operated essentially from headquarters and offices based in every place but Canada.” - Canadian Prime Minister Stephen Harper, September 21, 2011 “Our foreign investment review process is sound and encourages investment, economic growth and prosperity in Canada.” - Industry Minister Christian Paradis, May 25, 2012

Encouragement of FDI tempered against unease over loss of control over important industries and key technologies, or putting national security at risk 2. Managing the Twin Track Process

• Investors face additional regulatory complications when a proposed transaction is subject to both the foreign investment and antitrust approvals • Plans to achieve transaction-related efficiencies (which also bolster the antitrust defence) can undermine the attainment of a “net benefit to Canada” determination (or vice-versa) – Foreign investment review process inherently favours domestic purchasers (who are not subject to the Investment Canada Act); the opposite is often true for antitrust review • Introduction of two-stage merger review process in 2009 complicated timing considerations for foreign investment review – If a second request is issued, the investor might be asked to consent to a review period longer than the 75-day period set out in the Investment Canada Act • Significantly less guidance available for foreign investment review process – Minister has the discretion to emphasize/de-emphasize factors on an ad hoc basis – Compare with antitrust review process where multiple sources of guidance/authority are available including jurisprudence (domestic and foreign), enforcement guidelines and other guidance documents, and economic evidence and scholarship

Investors face additional regulatory complications when a proposed transaction is subject to both the foreign investment and antitrust approvals Investment Canada Act: Net Benefit Test

• Investment reviewable if a “non-Canadian” investor: – Acquires “control” of a “Canadian business” • >50% of the voting interests; or • <50% but >1/3 of the voting shares of a corporation , unless no de facto control – Monetary threshold exceeded • Currently C$330 million (indexed annually) in “asset value” for “WTO Investors” • Otherwise, substantially lower

• Reviewable investment may not be completed unless the Minister is satisfied that the investment is likely to be of “net benefit to Canada” • “Net benefit to Canada” assessed using a broad range of factors – Effect on employment, resource processing, utilization of Canadian components and services – Participation of Canadians in the business – Effect on productivity, efficiency, innovation and variety – Effect on competition – Compatibility with industrial policies – Contribution to Canada’s ability to compete in world markets

Direct acquisitions of Canadian business exceeding monetary threshold reviewable; investors required to obtain “net benefit to Canada” approval Investment Canada Act: Net Benefit Test

• Undertakings are required as a matter of course to receive Investment Canada Act approval • Typically, the investor will negotiate a set of undertakings for a 3-5 year period related to employment, participation of Canadians in management, cap ex spending, R&D, etc. • SOEs required to commit to additional undertakings related to transparency of corporate governance and commercial orientation • Timing: 45-day initial review period, followed by 30-day extension at Minister’s discretion; further extensions possible – Acceptability of the undertakings package is a significant driver in terms of timing to complete the review

Undertakings required as a matter of course; acceptability of undertakings a significant driver in terms of timing Investment Canada Act: Net Benefit Test

• Undertakings given in the course of securing approval are binding and enforceable – Often for years after the transaction closes and even if the economic climate takes a turn for the worse – Penalties for non-compliance include fines of $10,000 per day, injunctions, and even possible divestiture of the Canadian business • In a recent, high-profile case, the Canadian government initiated proceedings against an investor for failing to adhere to its undertakings following the 2007 acquisition of a rival Canadian business • The investor’s court challenge was denied and the company ultimately agreed to accept remedial undertakings – Including commitments to operate two facilities until 2015 and to make further capital expenditures • Compliance with undertakings is actively monitored by authorities both through reporting mechanisms and through outside sources, including the media and stakeholder complaints

Undertakings are enforceable and failure to adhere to them can result in significant penalties Investment Canada Act: National Security Review

• Implemented in 2009 to allow Minister to disallow any foreign investment that “could be injurious to national security” – Term not defined in the legislation; as such, little guidance on the circumstances in which a review will be ordered – Based on recent cases, however, it appears that the government has been judicious in its application of the national security provisions

• Not implemented as a screening mechanism to block SOE investment in Canada, but rather was aimed at ensuring that particular investments do not create a national security risk

National security review applicable to all investments; however, regime used judiciously and not used to block SOE investments Significant Transactions (2010-2011)

Significant Transaction Year Transaction Value Outcome of Investment Canada Act Review (Days)* 100% acquisition of PotashCorp by BHP 2010 C$38.6B Deal abandoned † Billiton (75 days)

50% acquisition of Encana’s Cutback 2011 C$5.4B Deal abandoned Ridge Project by PetroChina (>75 days)

Acquisition of 9.03% interest in the 2010 C$4.65B Cleared Syncrude Project by SIPC (<75 days) 100% acquisition of Western Coal by 2011 C$3.3B Cleared Walter Energy (90 days) 100% acquisition of Daylight by SIPC 2011 C$2.2B Cleared (<75 days) 100% acquisition of OPTI by CNOOC 2011 C$2.1B Cleared (>75 days)

* Based on publicly available information † Proposed undertakings available online: http://beta.images.theglobeandmail.com/archive/01007/Read_BHP_s_bid_wit_1007201a.pdf

Transactions are being cleared; however, significant acquisitions of Canadian businesses subject to increased scrutiny Recent Developments

• New regulations will change the WTO Investor threshold to C$600 million escalating to C$1 billion over the next four years – Intended to liberalize investment rules and focus on most significant transactions • Authorization for the Minister to accept a performance bond as part of the undertakings package – Intended to enhance compliance with undertakings • Disclosure of reasons to allow/disallow an investment on “net benefit to Canada” grounds – Intended to render review process more transparent • Other changes: mediation guidelines, publication of annual report

Legislative and policy changes intended to focus reviews on most significant transactions 3. Key Take-Aways

• Investors need to take into account the going-forward costs of adhering to undertakings when negotiating agreements subject to Investment Canada Act approval and factor these costs into the economics of the transaction • Timing considerations are very important – May want to file early to ensure period for a national security review lapses – Considerations especially important when competing bidder involved • Views of other stakeholders are important and must be addressed – Opposition by provincial governments and local Members of Parliament can complicate or even undermine the review process (PotashCorp and TMX transactions) • Well-planned government relations and communications strategy, coordinated by counsel working closely with the investor, can mitigate the likelihood of a transaction being derailed for political reasons

Well-developed strategic approach cannot be underestimated For further information on antitrust and foreign investment review in Canada, please contact:

Blake, Cassels & Graydon LLP Competition, Antitrust & Foreign Investment Group

Brian A. Facey: +1 416 863 4262 | [email protected] Joshua A. Krane: +1 416 863 4187 | [email protected]