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Canada raises foreign takeover level Shifts measuring stick to enterprise value from book value; will triple threshold for formal review to C$1B of assets within 5 years Gary Park For Petroleum News
The Canadian government is overhauling its procedures and raising the monetary threshold for reviews of foreign-initiated corporate takeovers, coinciding with growing interest by Asian state-owned enterprises in natural gas and oil resources.
“Canada has a strong investment climate and these targeted changes will ensure that our foreign investment review process continues to encourage investment and spur economic growth,” Industry Minister Christian Paradis said.
“Foreign investment is vital to the Canadian economy. It helps Canadians companies find new capital and enables them to expand, innovate and create jobs for Canadians.”
The inflow of foreign capital is also seen by the petroleum industry as vital to develop oil and gas reserves at a time when the traditional U.S. markets are shrinking and Asia is regarded as the best hope of maintaining export volumes.
Under the changes, the asset values triggering a review by federal officials will rise from C$330 million currently to C$600 million for two years, then C$800 million for two years and finally C$1 billion.
There will also be a switch to enterprise value from book value, which the government believes will better reflect the worth of a business.
The change is a key when it involves knowledge-based companies, which have few hard assets.
Voluntary dispute resolution In addition, the government will provide more disclosures on decisions to block foreign takeovers that it judges to be detrimental to Canadian interests and offer a voluntary means of resolving disputes when the industry minister believes a foreign buyer has failed to meet its obligations.
The government said it will accept security bonds from foreign companies should a court impose penalties on a foreign investor for breaking contractual commitments.
The update follows a controversial decision in 2010 when then-Industry Minister Tony Clement vetoed a hostile C$39 billion takeover by Anglo-Australian mining giant BHP-Billiton of fertilizer manufacturer Potash Corp. — just the second time in 25 years that a deal had been rejected.
The proposed new mediation process comes in the wake of an acrimonious feud between the government and U.S. Steel over broken promises the company made to secure approval of its purchase of Stelco in 2007.
U.S. Steel promptly shut down Stelco, triggering a legal showdown which ended last year with an agreement requiring U.S. Steel to keep producing steel in Canada for at least another four years and make major capital investments at its Canadian mills.
Lack of transparency The government has come under fire for lack of transparency in foreign takeover reviews and what constitutes a “net” economic benefit to Canada.
“Net benefit is a little ambiguous and sometimes that’s useful,” said John Manley, a former deputy prime minister and the head of the Canadian Council of Chief Executives. “It wasn’t that easy to clarify, because every transaction is unique.”
Oliver Borgers, a partner in the Toronto law firm of McCarthy Tetrault, cautioned that book value can often undervalue an asset or a company.
He said the lengthy delay in drafting the higher threshold and new valuation methodology is partly due to the difficulty of defining enterprise value, which “can be a moving target.”
Philippe Bergevin, a senior policy analyst at the C.D. Howe Institute in Toronto, said the “net benefit test remains highly subjective and unpredictable.”
He said that because the government views foreign investment as good for Canada it should have the responsibility to prove that a transaction is not in the national interest.
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