The Changing Relationship of Canadian Business and Foreign Investors

Corporate Counsel | December 20, 2011

When the Australian mining and natural resources giant BHP Billiton Limited bid $40 billion to buy Canada's Potash Corporation of Saskatchewan Inc. in 2010, the Canadian government was quick to slam the door in its face, proclaiming that the merger would not be of "net benefit to Canada."

The decision floored legal experts. In trashing Billiton's hostile takeover on "net benefit" grounds, the government relied on the language of the 1985 Investment Canada Act (ICA). The act had been used only once before to block a deal, in 2008—and that one had potential national security implications.

Coupled with the earlier veto, the Billiton rejection seemed to transform a law once regarded as little more than a formality into a potential booby trap. It also stirred controversy about whether Canada was creeping into a protectionist cocoon—which the government vigorously denies.

Then something remarkable happened. Lazarus-like, Billiton came back two months later, announcing that a plan to develop the world's largest potash mine in the very same area had reached an advanced stage in the company's approval process. The difference was that no acquisition of a company was involved. Billiton was using land it had already acquired. And this time the same provincial leader who led the charge against the buyout scheme was trumpeting the benefits of the project.

The ripple effects of these contradictory official responses to the two projects are still being mulled by legal experts. They highlight an unexpected wrinkle for foreigners who want to invest in Canada. From now on, apparently, they will have to pay as much attention to politics and community relations as to the law, if they want to keep their deals on track. Especially when the federal and state governments they must deal with are in the throes of election campaigns.

"Ultimately, it is a political decision, and it doesn't hurt to have good political relationships," observes Peter Glossop, a partner in Osler, Hoskin & Harcourt's Toronto office, who, like the other lawyers quoted in this article, is knowledgeable about Canadian M&A but wasn't involved in the Billiton matter. (Billiton wouldn't comment.)

George Addy, a partner with Davies Ward Phillips & Vineberg in Toronto, believes in doing your homework. "You have to plan, and plan early," he says. "And you have to have feet on the ground—people in Canada who know the complexities of the various stakeholder interests."

As companies from all over the world—including China—rush to discover and exploit Canada's vast mineral, oil, and natural gas reserves, the question of "net benefit"—and whether it will kill a deal—is keeping many lawyers busy.

U.S. investors are in the front line of those who could be affected. In 2010 U.S. direct investment in Canada totaled more than $306 billion, or 55 percent of Canada's foreign direct investment, according to Canadian government figures. (U.S. statistics show that Canadians directly invested $206 billion in the United States in the same year.)

At the heart of the uncertainty is the fact that "net benefit" ultimately comes down to what many lawyers say is a subjective—and often political—decision by a single individual, the minister of industry, or, in some cases, the minister of Canadian heritage.

This is true even though the law lists the factors the ministers must take into account in reaching a decision on an acquisition. These include considerations ranging from the deal's impact on Canada's economic activity and competitiveness on world markets to the number of Canadians in senior management. By law, the review must be completed within 45 days, though the minister may take an additional 30 days.

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