The Canada Report

A best practices guide to doing business up North

Without a doubt, companies face challenges when doing business in other countries. Whether they are just beginning to expand internationally or upholding their long-term global presence, businesses must continually navigate foreign customs, politics and rules in order to maintain successful operations outside their native countries.

But some companies—particularly U.S. companies—may find that conducting business in Canada presents far fewer challenges than operating in other nations overseas. One clear advantage is that Canada is geographically close to the U.S. Additionally, Canada and the U.S. share many cultural similarities.

“There is a common language and a common legal system,” says DLA Piper Partner James Blanchard, who is co-chair of the firm’s Government Affairs Practice Group and was the U.S. ambassador to Canada in the mid-1990s.

Canada’s current majority Conservative federal government further enhances the ease of doing business in the country. Prime Minister Stephen Harper’s business-friendly outlook combined with the Canadian government’s general backing of President Obama make for friendly relations between the U.S. and Canada.

“We are very supportive and very interested in having American companies up here, and that’s across every industry,” says Craig Brown, a partner at Fasken Martineau and chairman of the firm’s Private Equity Group. He and other Canadian corporate lawyers say that some of the country’s top industries include mining, oil and gas, clean technology, automobile manufacturing, and financial services.

Given Canada’s educated workforce and pursuit of innovation, experts say the opportunity is ripe for U.S. companies to cross the border and do business in Canada. “There’s a tremendous amount of talent up here that Americans could be investing in and joint-venturing with,” Brown says.

U.S. businesses also should be aware of Canada’s highly competitive tax regime. According to Brown, Canada currently has the lowest corporate taxes in the entire G20 and the most generous R&D tax credit system in the whole G7. “For companies that are innovation-driven, there’s no better place to do that work than in Canada,” he says.

There is another incentive to doing business in Canada: Compared to the U.S., the country has remained relatively unscathed by the international economic crisis. Experts attribute Canada’s stability to the fact that its banks are more conservative and regulated than U.S. banks.

“Canada did not have the financial scandals and the financial meltdown that the U.S. had,” Blanchard says. “Canada’s banks, to a great extent, were never touched by the subprime crisis. They didn’t need any kind of federal bailout.”

A smooth political and financial landscape makes doing business in Canada that much more enticing to U.S. companies.

On the following pages, InsideCounsel explores the basics of doing business in Canada and guides non-Canadian in-house counsel through the country’s current regulatory and litigation climates.

Regulatory Review

Always of significant importance to investigate before American companies look to do business with Canada is its ever-evolving regulatory landscape. While not at all the same highly charged battlefield that currently exists in the U.S. as Democrats and Republicans duke it out over the Dodd-Frank Act, the Patient Protection and Affordable Care Act, and other recent, divisive rules, Canada still has its share of political and regulatory issues of which Americans should be aware.

When it comes down to it, the majority of Canada’s business regulations are created with the goal of making trade, especially with the U.S., as easy as possible. An exporting country always on the lookout for foreign investment, the nation and its provinces all tend to legislate with an eye toward making the path easier to do business with others.

“Canadians understand and love Americans,” Brown says. “Americans have been our No. 1 trading partner since our first breath. We are absolutely arms-wide-open to the whole world, but we have a great affection and respect for our American neighbors.”

When it comes to trade, Canadians are quick to point out that they’re different from our border to the south, as there are no significant immigration issues or other problems like the U.S. faces with Mexico. “The northern border tends to be a little more porous when it comes to things like that,” says Blakes Partner Sunny Handa. “People often joke of us as being the 51st state.”

To this point, the U.S. used to be responsible for 90 percent of Canada’s trade before the economic crisis hit. That percentage has now dipped to about 80 percent as Canada has made a concerted effort to diversify by doing more business with other growing economies. But its focus is still definitively on working with American companies.

Despite the definite reliance on American trade, not everything between the two nations is warm and fuzzy. The U.S./Canadian relationship took a bit of a hit recently when President Obama included a clause to favor American companies and products in his infrastructure plan. “It wasn’t viewed very well here,” says Clark Wilson Partner Aaron Singer. “In fact, you probably didn’t notice it in the States, but here, when that was announced, it created quite an uproar.”

Singer notes that Canadians also were rubbed the wrong way when a similar clause favoring American companies and products came out with the first round of stimulus money. Canada always has been rather aggressive in enforcing international trade agreements and bilateral agreements with the U.S., so it was quick to point out that Americans violated their international trade agreements. “There’s still a bit of political tension on that front,” he says.

Political Structure

In terms of the political climate, Canada’s current government is possibly the most “pro-American” regime to come to power in the past 15 years. Last year, Canadians elected a majority for the Conservative Party, which had been a minority government the previous two terms—meaning that, like in the U.S., it was the ruling party but it didn’t have sufficient voting power to push its agenda. There likely won’t be another election for another four years, so the political climate should remain relatively static for the foreseeable future.

Despite having a British-style parliamentary system, unlike in the U.S., the Canadian political parties aren’t nearly as polarized. Compared to the U.S., Canada’s politicians tend to be more center-left, including the Conservatives, who are akin to socially progressive U.S. Republicans but may still be slightly left of U.S. Democrats on certain issues, says Osler, Hoskin & Harcourt Partner Terry Burgoyne.

“We are more for smaller, smarter, more-efficient government,” Brown explains. “[Stephen] Harper … is a socially progressive guy. He is much closer to the middle than most. So we are very comfortable working with the Obama administration because, from a progressive social perspective, we see the world a lot like he does.”

As a result of the now-stable Conservative government, the two nations have begun harmonizing many regulations, beginning with transportation and issues related to food and food safety.

Upcoming Initiatives

While the new Conservative government has yet to establish any major regulatory reform, activity is expected to heat up in the coming year.

There are a number of areas that, on the surface, are worth noting that may be immediately different from U.S. regulations. Because Canada is officially a bilingual country, all product labeling is supposed to be in both French and English. Also when labeling products, U.S. companies should note the obvious: Canada, like most of the rest of the world, uses the metric system.

Of particular note for U.S. companies is the Investment Canada Act, which is a federal statute that applies to all non-Canadians who want to do business in Canada whereby they must establish how their investment will benefit the nation.

“Generally speaking,” Singer says, “it’s a notification requirement. Non-Canadians have to provide notice if they’re coming up to Canada to do business. If you’re investing in a significant business or looking to acquire a large business, you might be subject to review.”

Although rare, there already have been a few transactions where the Canadian government declined an investor or refused a foreign investment. Australian mining company BHP Billiton’s high-profile $38.6 billion bid last year to acquire the Potash Corp. of Saskatchewan was blocked. There was another instance in which U.S.-based Allied Tech Systems wanted to acquire the software and technology business of Canadian firm MacDonald, Dettwiler and Associates, which developed the robotic Canadarm for space shuttles. This case eventually prompted a legislation change to allow for a national security review, and was eventually rejected on that basis.

“[The rejections] in both of those cases, I think most people would agree, were largely political,” Singer says. “Canadians wanted to protect the high-level technology that MacDonald Dettwiler had developed. And for PotashCorp—that company was largely Canadian-owned. It was a public company but also sort of a national treasure for Canadians, so they didn’t want a foreign company taking it over.”

Additional changes have been made in regard to merger review under the Competition Act in an effort to modernize the process and make it more consistent with the U.S. regime for foreign investment. Under the new Competition Act, the government has jurisdiction to review any investment in Canada where there’s an acquisition that could have a material or adverse effect on competition. “That’s usually only for larger investments and in investments where there’s a lot of concentration within one industry,” Singer says.

Another regulatory area where Canada differs from the U.S., and which may receive a more-significant overhaul soon, is the telecommunications industry. The Canadian government already has begun deregulating ownership and control of satellite carriers above the country, but the extent of that deregulation is still in question.

“Is it going to be complete openness to foreigners owning and controlling [satellites], or will they just simply allow greater percentage control in ownership and some more control?” Handa asks. The answer remains to be seen.

Cultural Restrictions

However, one aspect of the regulatory landscape of significant importance to Canadians but likely unknown to Americans is how protective the country is of its cultural identity. Sharing a massive, porous border with the world’s leading exporter ofculture—be it movies, television, music, magazines, books, etc.—it’s understandable that Canadians would fear being overwhelmed by a tidal wave of American content.

“We all grow up watching American television, so there has had to be some level of cultural protectionism, otherwise we will really have no distinctiveness from our friends to the south,” Handa says.

In an effort to preserve its cultural identity, all American media exports are subject to review by the Department of Canadian Heritage under the Investment Canada Act. This doesn’t mean that all U.S. cultural expansion efforts will be blocked, but there are significant roadblocks in place.

“It really depends on what you’re proposing to do as to whether or not it’s going to be an impediment,” Singer explains. “For example, Amazon recently wanted to set up a book distribution center in Canada. While the Canadian government approved the move, there was some local opposition because politically in the Canadian cultural arena, there’s always been a sort of protectionist element in reaction to the U.S.’s massive entertainment complex.”

Litigation Lowdown

American in-house counsel can appreciate one definite perk of conducting business in Canada: Corporate litigation is much less rough-and-tumble than it is in the U.S.

“[Canadians] are definitely a less litigious society,” says Robert Hansen, a partner at McCarthy Tétrault.

Many Canadian lawyers say Canadian businesspeople generally view litigation as a last option and prefer resolving corporate disputes outside of court. This courtroom avoidance reflects the country’s largely cooperative business attitude.

“In Canada, relationships are very important, both with law firms and with businesses,” Blanchard says. “It’s interesting how much networking goes on among business leaders within the same industry and between different industries. One’s reputation is instantly shared.”

Experts say Canada’s friendly business culture can sometimes be a shock to American in-house lawyers who are used to fierce competition and litigation with competitors.

But legal quarrels aren’t completely nonexistent in Canada. In fact, Canadian lawyers are reporting an upswing in class actions in the past three to five years.

Class Actions

Class actions first came to Canada in 1978, when Quebec introduced class action legislation. Ontario enacted its own class action law—the Class Proceedings Act—in 1992. Since then, all of the provinces, except for Prince Edward Island, have enacted their own Class Proceedings Acts.

But unlike the U.S., and very recently Mexico (see “Mexico Introduces First Class Action Law”), Canada doesn’t have a national class action law.

“The Class Proceedings Act, which is a procedural statute that doesn’t convey any substantive rights, is a matter of provincial jurisdiction,” says Crawford Smith, a partner in Torys’ Litigation and Dispute Resolution Practice.

Smith and other experts say the Canadian government isn’t likely to develop a federal class action law because the Canadian constitution dictates that provincial courts, not federal courts, have jurisdiction over almost all civil litigation.

But that constitutional rule has left provinces with overlapping class action proceedings and disagreeing judges.

“There’s a big issue about whether the courts in one jurisdiction should respect the orders of another jurisdiction with respect to class composition,” Smith says.

The Canadian Bar Association currently is considering developing judicial protocol for the management of multijurisdictional class actions.

Procedural Details

American in-house counsel must be aware of some key differences in civil litigation in Canada as compared to the U.S.

First, all of Canada’s territories and provinces are common law jurisdictions, aside from Quebec, which is a civil law jurisdiction and has different laws and litigation procedures from the rest of the country.

For the provinces that operate under common law, civil litigation takes place in the provincial superior courts. Each province also has an appeals court, and appeals from the appeals courts go to the Supreme Court of Canada. The government appoints all judges in these courts.

As for discovery procedures, parties in a litigation must deliver sworn affidavits that list all relative documents that they possess or control, including electronically stored information. Canadian courts have, however, been increasingly open to limiting document discovery obligations.

Oral discovery obligations are much narrower in Canada than in the U.S. Parties typically only must produce one person for the opposing party to depose, and some provinces, such as Ontario, have started limiting the amount of time a party may conduct oral examinations. Canadian lawyers say these oral discovery rules help minimize legal costs.

Excessive legal costs are further discouraged through Canada’s loser-pays system, in which individuals who seek any sort of relief from the court at any stage of a proceeding must pay the other side’s costs if they lose. Experts agree the system acts as a deterrent to frivolous claims, motions and appeals.

Finally, Canadian corporate counsel stress the fact that punitive damages in Canada are rare and rarely exceed $1 million.

Noteworthy Remedies

There are three important injunctions and orders available to plaintiffs and defendants during litigation.

An Anton Piller order, which is one of the most extreme remedies available in Canada, protects evidence in special circumstances. The order allows a representative from a party in a litigation to enter specified premises to search for, seize or copy documents or other evidence. Parties also can use the order to force opponents to reveal passwords to restricted electronic evidence. Additionally, parties can obtain Anton Piller orders without notifying their opponents. Some Canadian lawyers and judges are uncomfortable with the order, saying it too much resembles a private search warrant.

Plaintiffs can seek a Mareva injunction at the beginning of a case. The remedy, which is largely used in cases involving fraud, restricts a defendant from transferring or liquidating any assets, other than ordinary expenditures, before trial.

Finally, a Norwich order lets a plaintiff obtain information from a nonparty in the litigation, such as an Internet service provider, in order to identify an unknown defendant or locate evidence. Norwich orders also allow plaintiffs to obtain information about funds from financial institutions.

Key Cases

It behooves American in-house counsel to stay abreast of the major business-related cases and decisions emerging from Canadian courts.

Smith says Ontario is seeing an increase in class action overtime claims, and judges are both certifying and denying certification to classes in these cases. The Ontario Court of Appeal will hear at least some of the cases within the next year, he adds.

One recent M&A case, BCE Inc. v. 1976 Debentureholders, has significantly influenced corporate deals. The 2008 case concerned the sale of major Canadian telecommunications company Bell Canada Enterprises (BCE). After a bidder proposed a highly leveraged transaction that would have had an adverse impact on some of the company’s bondholders, the bondholders challenged the deal, claiming it was oppressive and unfair. Ultimately, the Supreme Court of Canada dismissed the bondholders’ claim. The court also delivered guidance on what boards of directors should consider when determining whether to accept a takeover bid.

“The court concluded that the directors’ fiduciary duty is owed to the corporation as a whole, as opposed to just individual stockholders,” Hansen says. “The board needs to take into consideration the interests of not only stockholders, but also creditors, employees, the community, the environment—a wide variety of stakeholders—in concluding what’s in the best interest of the corporation.”

Canadian lawyers also say American companies should beaware of increased activity among Canada’s regulators. Brown says he’s seeing more litigation concerning securities law enforcement. “There had been criticism that those regulators didn’t have enough teeth—they weren’t putting enough guys in jail, they weren’t imposing significant enough fines and they weren’t getting enough convictions. That is beginning to change, and they’re being much more vigilant,” he says.

The Commissioner of Competition, Melanie Aitken, also has stepped up enforcement. “There has been a lot of increased activity by the commissioner clamping down on what she perceives to be anti-competitive conduct,” Smith says. “Businesses can expect fairly active supervision from the Competition Bureau.”

Sidebar: Questions About Quebec

When it comes to doing business in Canada, there’s really only one semi-significant difference of which companies should be aware: Quebec. That’s not to say that doing business in Quebec is overly difficult because it’s not—it’s just a bit dissimilar from the other nine provinces.

The most notable departure from the other provinces is that Quebec ascribes to a civil law system, whereas the rest of the nation follows common law. Mitigating that somewhat is the fact that the nation has a single Supreme Court, and the different courts of appeal for the various provinces are widely respected in other provinces. Only where there is a dispute between two courts of appeal does the Supreme Court step in and render judgment.

Also noteworthy is that the provinces tend to have a lot of power, especially when it comes to consumer protection, and property and civil rights. Despite some federal involvement in certain national issues, such as aviation and interprovince transportation, Quebec maintains control of its own civil law system. But even with Quebec’s differences, the rules have been harmonized to ensure smooth interprovincial trade.

Otherwise, if a company wants to do business in Quebec, the only other potentially important impediments are the French language rules, especially where consumer businesses are concerned. For example, all product packaging and standard form agreements need to be printed in French in order to sell the product in Quebec.

“What we find is a lot of the American customers that come up here are very nervous about how complicated the rules might be,” says Blakes Partner Sunny Handa. “They find out that they’re not really that complicated, but in consumer retail, they do have to take steps.”

Sidebar: Copyright Reform

Canada’s federal government is attempting again to pass a new copyright bill.

Unveiled Sept. 29, the country’s Copyright Modernization Act will bring current copyright laws, which haven’t been updated since 1997, up to speed with the digital age.

The Conservative Party tried and failed several times in the past to update copyright legislation, but with Prime Minister Stephen Harper at the helm of its new majority, the party is determined to pass the bill before the end of this year. Home to Hollywood and a large entertainment industry, the U.S. also supports the bill and has long pressured Canada to strengthen its provisions in order to crack down on illegal downloads of American movies and music.

One of the bill’s proposed provisions, however, faces opposition because of its restrictive nature regarding digital locks,which prevent duplication. The rules prohibit Canadians from using copyrighted works if a digital lock is present, even if it’s for personal use, greatly limiting users from accessing a wide variety of content.

Still, the House of Commons favors—and most likely will pass—the bill, as it cracks down on online piracy, enhances fair dealing and legalizes regular consumer practices, including storing legally acquired music and recording television shows for home viewing. By giving copyright owners stronger legal tools and expanding the list of exceptions for borrowing copyrighted content, the bill aims to balance and modernize the country’s copyright laws.

—Shirley Li

Ashley Post

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