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FOREIGN INVESTMENT History did not repeat itself. In December, Prime Minister Stephen Harper announced he was approving the take-over along with a $5.2-billion sale of Progress Energy Resources Corp. to Malaysia's state-owned Petronas. But in announcing his decision, the prime minister said his government had made revisions to the Investment Canada Act to toughen up requirements for foreign governments making control bids for Canadian companies — particularly in the oil sands. With just 15 companies operating in the oil sands, he noted, the reserves could come under foreign control with just a handful of transactions. "When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments." He announced foreign-state control of oil sands development has reached the point where further control would not be beneficial to Canada except in "exceptional circumstances." At the same time, he unveiled a series of revisions that tweak the country's foreign take-over rules. The new regime makes the same distinction between types of buyer on foreign take-overs, but the difference in the way they will be treated has widened. Foreign private companies will see the threshold for review gradually rise to $1 billion in enterprise value from $330 million. That means many more small and medium-sized take-over deals can go ahead without the need for review. Stateowned enterprises, or SOEs, in contrast, will hit the threshold of $344 million. Here's what has some foreign investment practitioners uneasy. The revisions expand the definition of a state-owned entity to the point that it is not entirely predictable who will be treated as an SEO for Investment Canada purposes. A foreign purchaser doesn't get to just check a box – private or state-owned? – and have its transaction treated accordingly. Investment Canada will be looking at foreign private companies to see whether they could be operating on behalf of their government. Under the new regime, buyers may be required to prove they are not owned, controlled or influenced "directly or indirectly" by a foreign state. Those that can't will be considered an SOE. "I never had a problem under the old guidelines identifying whether an investor is an SOE or not," says Jason Gudofsky, a partner in the foreign investment group at Blake, Cassels & Graydon LLP in Toronto. "But adding the concept of influence, on top of the fact there is a different threshold for SOEs, that's problematic. "It's no longer just a question of what undertakings I have to provide, now it's also a question of whether I have to go to the government before closing to get an approval." In making the determination, Investment Canada could look at things like whether the foreign government holds a stake in the company – and how significant – whether the government makes board appointments, the level of reporting the company provides it and whether it has the right to vote on or veto any decisions. Gudofsky says he is seeing questions asked of potential buyers that would not have been asked before. "We have a number of deals in front of Investment Canada right now, and I can tell you than on investors that look nothing like SOEs they are sending out SOE questions. Even companies not coming from Asia that look and smell truly private, they want to know what influence, or what degree of interest, a foreign government may have in that investor. This is definitely an issue." The guidelines are agnostic; they can be applied to any foreign government. So does that mean a CalPERS making a privateequity investment can be captured by Canada's new foreign take-over regime? Most corporate lawyers say in theory yes, but in practice, not a chance. "They are not picking governments here in terms of which ones they want to see investments from or don't," says Calgarybased Jay Park, a senior partner at Norton Rose Canada LLP in Calgary and chair of the global resources group. "Everyone's on a level playing field and I think that's only fair. "The real question is how a government behaves with respect to the investments its SOEs make. Let me give you a classic example: Statoil is government controlled, but if you look at its activities, it acts and behaves just like an international oil company. From the point of view of the government of Norway, it's an investor in that company largely as a means by which it makes use of some of its assets for investment purposes. "Therefore, you apply the Investment Canada rules to all companies, all states, all countries — and many if not most will find their SOEs should have no difficulty meeting the test." That doesn't mean they won't feel an impact. WHEN PRIME MINISTER HARPER announced special requirements on foreign take-overs by the CNOOCs of the world, it sparked some naval gazing in Canada about whether it might cool the interest of some of the globe's most important investors — and what that would mean for the deal economy. Less than a week later, PetroChina and Encana announced a $2.2-billion deal to work together in Alberta's Duvernay shale natural gas formation, with PetroChina taking just short of half of the project, putting it outside the bounds of federal review. Most corporate practitioners say that is the way of the future, as they expect blockbuster take-overs to give way to more joint ventures — especially when it comes to natural resources or other areas that could be politically sensitive. With the Investment Canada revisions, however, there could turn out to be bumps in the road even with minority partnerships, says Omar Wakil, chair of the foreign investment review practice at Torys LLP in Toronto. "The terms in a lot of joint venture transactions have rightof-first-refusal provisions that would permit the SOE to take out its joint venture partner," says Wakil. "In the new environment there's a big question mark about whether that would be possible. So you have to ask yourself whether that takes away from the commercial desirability of entering into even a joint venture agreement." He says private companies hoping to sell to a foreign entity could look at altering their structure to avoid being caught up in review; they could investigate transferring their assets into a foreign holding company so any acquisition would be indirect, 20 | LEXPERT • June 2013 | www.lexpert.ca B-00-Features.indd 20 13-05-23 10:22 AM