The 'net benefit' of foreign takeovers

Most foreign takeovers of large Canadian companies in the last four decades have gone through some kind of formal review process.

In the early 1970s, the federal government set up the Foreign Investment Review Agency (FIRA) following growing public concern about foreign takeovers of Canadian companies.

FIRA ended up approving most of the proposed takeovers it faced, but many in the business community complained about the process.

In 1984, the Mulroney government replaced FIRA with a new review process and a new mandate governed by the Investment Canada Act.

The ultimate decision on whether to allow a takeover rests with the federal minister of Industry (except for takeovers in the cultural industry, which are decided on by the minister of Canadian Heritage).

When must a review take place?

There are a number of thresholds that trigger a mandatory review.

When the buyer is from the 153-member countries of the World Trade Organization (which is normally the case), the book value of the target company's assets must be over $299 million (the 2010 threshold). That threshold is scheduled to eventually rise to $1 billion.

Where the buyer is from a non-WTO member, the threshold is just $5 million for a direct acquisition and $50 million for an indirect acquisition.

For businesses in the cultural industry, the threshold is also $5 million, regardless of whether the buyer is from a WTO- or non-WTO country.

What's required for approval?

The key test under the Investment Canada Act is whether the takeover provides a "net benefit" to Canada. What does "net benefit" mean? Well, the Investment Canada Act doesn't actually define it, but there are guidelines that say the minister should consider a number of factors:

• The effect of the takeover on employment.
• Technology development.
• Productivity.
• Competition.
• The effect on national policies.

"An investment will be determined to be of net benefit when the aggregate net effect is positive, regardless of its extent," says one guideline from Industry Canada.

A relatively recent amendment to the Investment Canada Act also allows the government to reject a takeover on national security grounds. Any foreign takeover of a Canadian enterprise can be blocked on these grounds, regardless of how big it is.

Ultimately, the decision to approve or reject is a political one.

If approval is granted, is the takeover a done deal?

The federal government will often attach conditions to a takeover, such as keeping employment at a certain level or keeping plants open. Investment Canada is supposed to follow up on those commitments to make sure that the acquiring company is complying with the undertakings it agreed to.

Critics say it's too easy for companies to backtrack on these commitments by saying market conditions have changed, and point to Xstrata's acquisition of Falconbridge, Vale's acquisition of Inco and Rio Tinto's takeover of Alcan as cases where job promises were later abandoned.

In only one case has Ottawa pursued a foreign company for allegedly violating its takeover commitments. In 2009, U.S. Steel shut down two steel mills in Ontario, prompting the federal government to say this broke employment and production promises the company made when it bought Stelco in 2007. Ottawa is suing U.S. Steel, seeking fines of $10,000 a day.   

What if a takeover is rejected?

Following an initial review, if the Industry Minister finds there's no net benefit of the takeover to Canada, the takeover company has 30 days to make representations to the minister and perhaps change its bid to satisfy the net benefit test.

How many foreign takeovers have been rejected?

Between 1985 (when the Investment Canada Act came into force) and Sept. 30, 2010, Industry Canada reviewed 1,638 foreign acquisitions worth almost $600 billion, and had approved all but one.

In 2008, Richmond, B.C.-based MacDonald Dettwiler and Associates (MDA) tried to sell its information systems, satellite and space mission businesses to Alliant Techsystems of Edina, Minn. This was the part of the company that developed the distinctive Canadarm for the U.S. space shuttle program.

That sale was eventually blocked by Ottawa over national security issues related to MDA's Radarsat-2 satellite.

In November 2010, Industry Minister Tony Clement rejected BHP Billiton's proposed $38.6-billion US acquisition of PotashCorp. While BHP had 30 days to come up with a proposal that would satisfy Ottawa, the company instead chose to withdraw its takeover offer.  

Between 1999 and 2008, Heritage Canada reviewed 101 foreign acquisitions of cultural business, approving 98 and rejecting three.

Isn't this process just a rubber stamp?  

Approval figures like that have given rise to accusations from opposition politicians and nationalists that the whole foreign investment review process has been little more than a rubber stamp for decades. 

Various governments and cabinet ministers typically have two responses to that.

First, they point out that if Canada doesn't allow relatively open access to direct foreign investment, Canadian companies will quickly run into trouble when they try to buy foreign companies (and the stats show that Canadian business does a lot of cross-border shopping). They also say that direct foreign investment, notwithstanding the complaints, is usually very good for the economy.

The second point they make is that some foreign takeovers of Canadian companies don't even get to the formal review stage because the would-be buyers know, or suspect, or have been given broad hints from Ottawa, that their acquisition won't pass the net benefit smell test.  

On that point, unfortunately, there are no stats.