M&A activity in Canada in 2012 was roughly consistent with 2011. Activity was spread across all sectors, including notable transactions in the oil and gas, mining, real estate and telecommunications sectors. Three prominent transactions involving the acquisition of Canadian companies by foreign buyers (CNOOC's USD15.1 billion acquisition of Nexen, Petronas' CAD5.5 billion acquisition of Progress Energy and Lowe's proposed CAD1.8 billion acquisition of Rona) raised significant issues under Canada's foreign investment review regime.
Foreign Investment Review
Foreign acquisitions of control of Canadian businesses above certain dollar thresholds are subject to review under the federal Investment Canada Act (ICA) to determine whether they are likely to be of 'net benefit' to Canada. Historically, foreign investment review has rarely presented a material obstacle to acquisitions by foreign acquirers.
However, there has been increased political and media focus on foreign investment review since 2010 when the Canadian government announced that BHP's proposed USD40 billion unsolicited acquisition of Potash Corporation of Saskatchewan (PCS) was unlikely to be approved, which led to BHP's withdrawal of its offer. Although BHP had offered extensive undertakings to establish a net benefit to Canada, regional political considerations and opposition to the transaction by the government of the Province of Saskatchewan, in which the operations of PCS are based, were sufficient to sway the federal government. Since the BHP decision, successfully navigating the foreign investment review process has become one of the most important issues for a foreign entity considering a reviewable acquisition in Canada.
Foreign investment issues came to the forefront again in connection with the USD15.1 billion acquisition of Nexen by CNOOC, a Chinese stated-owned enterprise (SOE), and the CAD5.5 billion acquisition of Progress Energy by Petronas, a Malaysian SOE. In October 2012, the Canadian government announced an interim decision that it was not satisfied that Petronas' proposed acquisition of Progress Energy was likely to be of net benefit to Canada. The reasons for that decision were not clear, but some media reports suggest that the rejection was based on Petronas' refusal to agree to extend the review period for the ICA approval process. There is a widespread belief that the government delayed a final decision in order to have more time to develop its policy for the review of investments by SOEs.
In December 2012 the Canadian government approved both the Progress Energy/Petronas and Nexen/CNOOC transactions. Concurrent with those approvals, the government released revised guidelines for investments by foreign SOEs that are subject to net benefit review in Canada. Among other things, the guidelines are directed at ensuring that the acquirer has an appropriate governance and reporting structure and will operate on a commercial basis.
While the new guidelines make it clear that future acquisitions by SOEs of control of companies operating in the Canadian oil sands will be approved only in exceptional circumstances, the government also signalled that the same principle could be applied in other sectors, in particular where the transaction would result in SOEs having, in aggregate, a high degree of control in a particular sector.
Also, while the government previously proposed to progressively increase the dollar thresholds that trigger a 'net benefit' foreign investment review, investments by SOEs will continue to be subject to the existing thresholds and will not benefit from the escalation of the thresholds.
Local Regulations Targeting Foreign Acquisitions
In the summer of 2012, Lowe's Companies announced an unsolicited CAD1.8 billion proposal to acquire Rona, a Québec-headquartered chain of Canadian home improvement stores. A day later, a provincial election was called in Québec, and the proposed acquisition of Rona quickly became an election issue. Some Québec politicians declared Rona 'an important strategic asset' and vowed to ensure that it remained a Canadian (and Québec) company. Faced with an unreceptive target and a hostile local political environment, Lowe's abandoned its acquisition proposal.
In the context of the election and with the proposed Rona acquisition at centre stage, a variety of promises were made by Québec politicians aimed at protecting Québec incorporated companies from foreign acquisitions. In late 2012, the newly elected Québec government announced an intention to enact legislation that would make it more difficult for foreign buyers to acquire Québec companies on a hostile basis. Among other things, the legislation would allow boards of Québec companies to look beyond the interests of shareholders and take into account other impacts of a proposed transaction in their deliberations. The legislation would also include some measures to shield boards from liability for rejecting a takeover bid. The target board would also be given the authority to refuse to put a proposed takeover bid to its shareholders.
While 'anti-takeover' legislation can be found in some states in the USA, if the proposals are enacted Québec will be the first Canadian province with legislation of this nature. However, there is considerable doubt whether the legislation will, in fact, be enacted, as the ruling party has only a minority government and no other major party has voiced its support for the proposal.
Foreign companies considering the acquisition of a Canadian business will need to be cognisant of the protectionism evidenced by the Nexen, Progress Energy and Rona situations and the corresponding pronouncements from the Canadian federal government and the Québec provincial government:
• Plan and prepare for foreign investment review. Managing the Canadian foreign investment review process will be an important part of achieving a successful outcome. In many cases, a plan to address potential concerns should be formulated in concert with the larger transaction strategy and executed concurrent with (or even prior to) announcement of the deal.
• Provincial politics matter. Although foreign investment review has historically been an area of federal responsibility, provincial political support or, perhaps more importantly, resistance can be a key factor in the success or failure of a transaction.
• Be mindful of the election schedule. With the increased awareness and sensitivity of foreign investment reviews, transactions announced near or during an election can become highly politicised. Depending on the circumstances, the timing of transactions with significant potential local impacts or in sensitive industries may need to be managed to avoid becoming fodder for those seeking to use opposition to the transaction as a tool to obtain elected office.