The chilling effect of uncertainty – foreign direct investment by state owned enterprises in Canada's resources sector


Financier Worldwide Magazine

November 2013 Issue

November 2013 Issue

Foreign direct investment in Canada is down significantly in 2013 – both in terms of the number of deals and in the size of deals. While there is no doubt more than one reason for this, a significant portion of the decline can be attributed to Canada’s new foreign investment rules. Canada’s resource industry, an engine of Canadian growth, has been hit hard. State-owned enterprises or ‘SOEs’, a significant source of funding for the resource industry’s highly capital intensive development dollar requirements, have been told that while their dollars are still welcome in Canada, they are not. 

In December 2012, Canadians anxiously awaited approval (or not) by the Minister of Industry of two significant investments by SOEs in Canada’s resources sector: CNOOC’s (China National Offshore Oil Company) $15.1bn bid to acquire Nexen Inc. and PETRONAS’ $6bn bid to acquire Progress Energy Resources Corp. Both had been waiting for months to get a ruling. While both were ultimately approved, it was the Prime Minister of Canada, Stephen Harper, rather than the Minister of Industry, that made the announcement – and with the announcement, a caution – “Canadians, generally, and investors specifically, should understand that these decisions are not the beginning of a trend, but rather the end of a trend.” In a short televised statement, the Prime Minister of Canada announced that “all investments are not equal.” In particular, the Prime Minister announced that investments by SOEs in the Canadian oil sands will be approved only in exceptional circumstances. However, the Prime Minister assured Canadians and investors alike that investments by SOEs to acquire non-controlling minority interests in Canadian businesses would still be welcome. 

Proposed amendments to the Investment Canada Act (the ‘Act’) were tabled on 29 April 2013. The proposed amendments with respect to foreign investments in Canada by SOE’s were passed into law and became effective on 26 June 2013 (the ‘Amendments’) with retroactive effect to 29 April 2013. Unfortunately, the Amendments went well beyond the framework announced by the Canadian government in December 2012 and have introduced an uncertainty that is having a significant chilling effect on all direct foreign investment in Canada by SOEs. First, there is no certainty under the new Amendments as to whether an investor is, or is not, an SOE; and second, there is no certainty as to whether there is, or is not, an acquisition of control of a Canadian business by an SOE. 

The Amendments define an SOE to include an entity that is controlled or influenced, directly or indirectly, by a government, and also provide that an SOE can be an individual who is acting at the direction of a government or agency, or who is acting under its influence, directly or indirectly. Ownership of the entity by a state is not a requirement. In addition, the Minister of Industry has the discretion to deem that an entity that is otherwise a Canadian controlled entity under the Act is nonetheless an SOE if the Minister determines the entity is ‘controlled in fact’ by an SOE. The Amendments further give the Minister of Industry the right to deem that a proposed investment by an SOE is, in fact, an ‘acquisition of control’ of a Canadian business that is reviewable and subject to approval of the Minister of Industry even though it would not otherwise constitute an ‘acquisition of control’ of a Canadian business for any other foreign investor. Practically speaking, the ‘rules’ (such as they are) require investors to establish, to the satisfaction of the Minister of Industry, that an entity is not ‘controlled in fact’ by an SOE or foreign government, or that an acquisition by an SOE is not an acquisition of ‘control in fact’. 

According to the policy framework for SOE investment issued by the government in December 2012, whether or not there is ‘control in fact’ by an SOE will depend at any given time, on the industry in question and the level of foreign investment by SOEs in that industry at that time. For ‘clarity’, the Canadian government wrote in the Statement Regarding Investment by Foreign State-Owned Enterprises published by the Canadian government following its public announcement that “In applying the ICA, the Minister of Industry will … monitor SOE transactions throughout the Canadian economy … [and] …closely examine the degree of control or influence an SOE would likely exert on the Canadian business that is being acquired; the degree of control or influence an SOE would likely exert on the industry in which the Canadian business operates; and, the extent to which a foreign state is likely to exercise control or influence over the SOE acquiring the Canadian business. Where due to a high concentration of ownership a small number of acquisitions of control by SOEs could undermine the private sector orientation of an industry, and consequently subject an industrial sector to an inordinate amount of foreign state influence, the Government will act to safeguard Canadian interests.” 

This means that what constitutes ‘control in fact’ will apply differently to different investors, in different industries and at different times. For example, the rules are unlikely to apply to Statoil ASA, a Norwegian SOE, in the same manner as they will apply to CNOOC, Sinopec Corp. or PetroChina Company Limited, all of which are Chinese SOEs. But what about the Korea National Oil Corp (KNOC) or the Abu Dhabi National Energy Co. (TAQA), each of which have, thus far, played a welcome role in Canada’s resources sector? And while acquisitions of ‘control in fact’ of Canadian businesses in the oil sands sector have been specifically named, recent experience suggests that the entire resource industry will be impacted.

Foreign direct investment by SOEs in Canada, and in particular, in Canada’s resource sector, has become highly politicised. As with most highly political decisions, there is little transparency in the decision-making process. And indeed, recent experience has shown us that the Investment Review Division, the agency responsible for administering the Act and making recommendations to the Minister of Industry on reviewable investments, has itself been paralysed by the uncertainty of the Canadian government’s position. It now appears to require significant political direction before it can act. 

The impact has not only been felt by the decline in new foreign investment by SOEs, it is likely to also impact SOEs that have current investments in Canada. If they own their business 100 percent, they may be unable to grow the business in the same way as their competitors. (Which, ironically, means that the Canadian government has actually limited an SOE’s ability to act in a commercial manner). SOEs that have invested billions of dollars in Canadian businesses, particularly in Canada’s resource sector, by joint venturing or partnering with Canadian companies are likewise impacted. Have the new rules sterilised the SOE’s ability to exercise key rights under these arrangements to protect their significant investments? These are typical investment protections that are negotiated between commercial enterprises that include, for example, the right, if a partner is in default, to acquire the defaulting partner’s interest in the joint venture, the right to exercise a right of first refusal in the event of a proposed sale by the other partner, and potentially, the right to remove the other partner as ‘operator’ if the joint venture operations are grossly mismanaged or the other partner becomes insolvent. 

Unfortunately, neither the Prime Minister nor the Minister of Industry has published any guidelines as to what constitutes ‘control in fact’ or what indicia will be relied upon to make that determination. Sources within the Investment Review Division say that none are currently expected. Indeed, in a recent statement to the media, Prime Minister Harper confirmed that Canada’s policy “involves the use of discretion when it comes to state-owned enterprise”. From the perspective of an outsider looking in, it appears that Canada has simply decided that it will ‘make up the rules’ as it goes. Only time will tell what the full impact will be. But this much is certain: there is very little certainty.


Alicia K. Quesnel is a partner at Burnet, Duckworth & Palmer LLP. She can be contacted on +1 (403) 260 0233 or by email:

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Alicia K. Quesnel

Burnet, Duckworth & Palmer LLP

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