InsideCounsel » December 2007
Building Barriers
Canadian government considers new policies to restrict foreign investment.
The world is hungry for Canada. At least that’s what the statistics on foreign direct investment suggest. In 2006 alone Canada witnessed an influx of nearly $450 billion in foreign investment, up about $40 billion from the year before. And though the numbers aren’t in yet, 2007 looks like it might be Canada’s best year yet.
But all this foreign investment has some Canadians worried about risks to their national security. What concerns them the most are acquisitions orchestrated by state-owned foreign entities. Driving the fear are suspicions that these entities aren’t disclosing their intent behind the acquisition targets—many of which have involved Canadian energy and mining companies.
Leading the charge on this front is Canada’s Minister of Industry Jim Prentice, who oversees foreign investment deals. In an October speech before the Vancouver Board of Trade, Prentice called for regulations that would raise the level of scrutiny on some foreign takeover bids. “I will examine the need for guidelines on takeovers by state-owned enterprises,” he said.
Most experts now believe it’s inevitable that Canada will pass some kind of law in 2008 to address Prentice’s concerns. Nobody, though, knows what the final legislation will look like.
“The view of the legal community in Canada is that no one wants to go backward by putting more restrictions on foreign investment so that we look protectionist,” says Michelle Lally, partner at Osler, Hoskin & Harcourt in Toronto. “The exception to that is this whole issue that has arisen regarding foreign takeovers by foreign state-owned enterprises.”
Fear of Foreigners
Canada currently has no laws on the books that restrict foreign state-owned enterprises or foreign companies from acquiring Canadian companies based on national security concerns.
The only authority the Canadian government has to restrict foreign investment is through the Investment Canada Act. Under this law the government can
scrutinize deals involving a foreign acquirer to determine whether they provide a “net benefit” to Canada.
“What comprises a net benefit is really very general economic criteria such as positive effects on employment,” says Julie Soloway, associate at Blakes, Cassels & Graydon in Toronto. “No investment under that statute has ever been rejected.”
But now Canadians are rethinking the safety of such an open-door policy—especially when it comes to foreign state-owned companies.
“People are concerned that they might have noncommercial objectives, which then leads to scrutiny over the transparency and reporting standards of such deals,” Soloway says.
Deals involving China are garnering the most attention. With a population topping a billion and a quickly ballooning economy, China has aggressively hunted for natural resources beyond its borders. One of its prime targets recently has been Canada.
