Canada Changes Rules for Foreign Investment by State-owned Enterprises

“At the same time the government approved [the Progress Energy Resources and Nexen] acquisitions of control by Asian-based SOEs, the Prime Minister announced important changes to Canada’s policy for reviewing investments in Canada by state-owned enterprises which clearly indicate that the rules of the game for SOE investment have changed.” (Osler)

Earlier this month, Canada’s Prime Minister Stephen Harper announced that his government was changing the rules for reviewing investments by foreign state-owned enterprises (SOEs) that wish to acquire Canadian companies.

The move coincided with the approval of two acquisitions of major Canadian resource companies by foreign SEOs: the purchases of Nexen Inc. by China National Offshore Oil Corporation (CNOOC) and of Progress Energy Resources Corp. by Malaysia’s Petroliam Nasional Berhad (PETRONAS).

But the regulatory change was not driven by nationalism, write Donald Greenfield and Beth Riley of law firm Bennett Jones:

“While the Prime Minister stated that the government continues to encourage foreign investment in Canada, the government has also determined that ‘Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.’” (Bennett Jones)

For your reference, five key changes in the new rules:

1. Access to the Oil Sands will be limited:

“In its policy statement regarding SOE investments in the Canadian oil sands, the Government indicated that, going forward, such investments would proceed on ‘an exceptional basis only.’ While the policy statement indicates that each transaction will be ‘examined on its own merits’” the Minister will generally not find that a foreign SOE acquisition of a Canadian oil sands business is of net benefit.” (Heenan Blaikie)

2. Unchanged review threshold for SOE investments at C$ 300 million:

“The financial threshold for review for investments by foreign SOEs will not rise from the C$330-million GDP-indexed book value number to the enterprise value calculation (which for other foreign investors will start at C$600 million and rise over four years to C$1 billion).” (Bennett Jones)

3. Expanded definition of state-owned enterprises:

The definition of SOEs has been broadened to include companies that are ‘influenced’ by foreign governments, not just those that are controlled or owned by foreign governments.” (Fraser Milner Casgrain)

4. Investments must offer a “net benefit” to Canada:

“The legal test for approval is whether the Minister is ‘satisfied that the investment is likely to be of net benefit to Canada.’ In determining whether an investment is likely to be of net benefit, the Minister considers [a number of] assessment factors.” (Bennett Jones)

5. Specific conditions of “net benefit” remain unclear:

“Interestingly, the New SOE Guidelines do not elaborate upon the nature of specific undertakings that SOEs will be required to give to the government in order to establish a net benefit. For example, the government did not make it mandatory for an SOE to publicly list its shares or those of the Canadian target company on a Canadian exchange.” (Osler)

The updates:

See also: The Canada-China Foreign Investment Protection and Promotion Agreement: A Comparative Analysis to Canada’s Model FIPA – Heenan Blaikie LLP

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