Lawyers raise concern about foreign investment changes in Bill C-38

Anthony Baldanza

Lawyers are adding their voices to those who see the federal government’s massive budget bill, Bill C-38, as problematic. As the NDP opposition tries to slow down the passage of the bill, the Canadian Bar Association (CBA) and other lawyers who advise foreign investors are saying the part of the budget implementation bill that deals with changes to the Investment Canada Act (ICA) require more detail in regulations before they come into force.

The two main updates to the ICA in the bill are a proposal to authorize the federal government to accept security for payment for certain penalties that may be imposed under the ICA and a proposal to authorize the Minister of Industry (and the Minister of Canadian Heritage for investments in cultural businesses) to make public disclosure in various additional circumstances pertaining to notices issued by the Minister under the ICA.

The general assessment from practitioners that Lexpert spoke to is that the security for payment proposals are ineffective at best, and burdensome if they become required for most or all cases, and that the disclosure allowances are weaker than hoped.

Anthony Baldanza, a partner at Fasken Martineau and chair of the CBA’s Foreign Investment Review Committee of the National Competition Law Section, says the goal of promoting compliance with undertakings is laudable but the security for payment proposal is unlikely to achieve the desired outcome:

If you have a situation like US Steel/Stelco, and a penalty is awarded, is the problem really collection of the penalty, or is it getting the judgement that an undertaking was breached and then getting an award for the penalty? I think very much the latter and not the former. That is why I don’t think it improves things in any material way.

Baldanza points out that foreign investors will typically have substantial assets in the country, including the business that they have acquired, so recovery of the penalty is not generally the issue.

Shuli Rodal, a partner at Osler, Hoskin & Harcourt LLP practising competition & antitrust law, says the concern is that foreign investors will now be expected to offer security as part of the process of getting approval for their investment in Canada:

The worry is that it will come to be expected that investors will offer such security routinely i.e. it will not be fully voluntary. While the concept of an investor putting money behind its commitments may be appealing, there is also a significant downside in pressing non-Canadian investors to tie up capital in this way, potentially for years. Investors should not be asked to tie up capital unless there is a clear rationale for doing so.

The disclosure allowances, according to the lawyers Lexpert interviewed, are a step in the right direction, but as proposed they will have little practical benefit for most investors.

“As very few investments ever get to the stage of a preliminary notice of no net benefit, they will not make a difference to the majority of reviews,” says Subrata Bhattacharjee, partner and co-chair of Heenan Blaikie’s National Trade and Competition group.

“It is only permissive, it is not mandatory, the minister may disclose but need not. Based on historical experience, the minister discloses in fairly limited circumstances,” says Baldanza.

The federal government has made other recent announcements about changes to the ICA that are not part of Bill C-38, including a proposal to increase the thresholds for ICA review and make formal mediation procedures available under the ICA. Rodal was positive about the goals of increasing the threshold and encouraging mediation, but voiced some caution about both of these proposals as well:

Revised draft regulations were recently released defining “enterprise value” for purposes of the higher thresholds for ICA review that were part of the 2009 amendments to the ICA. Once these regulations are finalized, the increase in the thresholds for ICA review from the current C$330 million in book value of assets of the Canadian business being acquired to C$1 billion in enterprise value will be implemented (and phased in over four years). We are working through these draft regulations to better assess how the new rules would work in practice. Certainly, calculating “enterprise value” based primarily on market capitalization over a specific trading period as is proposed is more complicated that determining book value based on audited financial statements. The most interesting question though, is whether, even if the numerical threshold is raised significantly, moving from a test based on book value to a test based on enterprise value will result in a decrease rather than an increase in the scope of investments subject to review. In this regard, the market capitalization of a public company will typically well exceed the book value of its assets. While the stated purpose of raising the thresholds is to ensure that only the most significant transactions are subject to review, I think it is too early to say that fewer transactions will be reviewed. The greatest risk of a larger number of transactions being caught will be in the first two years where the threshold will be raised to only $600 million.

Mediation as an option makes a lot of sense as long as it is voluntary. It would be concerning if the new guideline signals an intention on the part of the Minister to press foreign investors to agree in their undertakings given to secure Ministerial approval to proceed to a mediated settlement in the event of any future dispute over performance of undertakings.

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