One of the consequences of Potash was the government’s decisions to make amendments to the Investment Canada Act. The timing of this decision was curious because while Minister Clement was at pains to point out that the Potash transaction was made within the ‘net benefit’ test of the Act, in Question Period the PM quickly agreed with the NDP that the Act needed reviewing. The implication was, of course, that there was something about the Act that was deficient during the adjudication of  the Potash transaction.

So how might the Act change? Everyone agrees that acquirer undertakings need to be made more transparent so that the Canadian public can see the commitments that are made and hold the acquirer accountable. That’s the easy change. Tuesday night, however, in the Commons, there was a non binding motion unanimously passed that would go beyond disclosure of undertakings, to include making public hearing mandatory part of foreign investment review. This is pretty wacky stuff if you’re trying to encourage investment in Canada. I don’t think we will see this as part of any legislative amendments table by the government but it is an indication about how risky it is to amend the Act in a minority Parliament.

Changing the ‘net benefit’ test is far trickier. The definition of ‘net benefit’ is purposely vague enough to allow rejection or acceptance of a transaction within the meaning of the term ‘net benefit’.  In case you are unaware – here is the definition:

Under s.20 of the ICA the Minister is directed to consider:

(a) the effect of the investment on the level and nature of economic activity in Canada, including, without limiting the generality of the foregoing, the effect on employment, on resource processing, on the utilization of parts, components and services produced in Canada and on exports from Canada;

(b) the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada of which the Canadian business or new Canadian business forms or would form a part;

(c) the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;

(d) the effect of the investment on competition within any industry or industries in Canada;

(e) the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and

(f) the contribution of the investment to Canada’s ability to compete in world markets.

You can see that the definition allows for a great deal of subjectivity if  a transaction ‘becomes difficult’. On the night BHP Billiton withdrew its Investment Canada application Minister Clement said that the Act needs to provide more guidance to foreign investors as to what constitutes ‘net benefit’. The minister used the words “new ideas, sources of capital and jobs created”. He seemed to be suggesting that investments that are new are preferred, while acquisitions of existing companies are more likely to be scrutinized. I may have read too much into the minister’s comments that evening. After all the government has not finished thinking these issues through. However, Brad Wall made very similar arguments earlier in the week when he called for the opening up of foreign ownership in the uranium sector. He made clear he was not interested in seeing Canada’s largest uranium company, Cameco, sold – but he would be willing to support a foreign investor like French-owned Areva owning 100% of a mine. I hasten to add that NDP Leader Jack Layton seemed to be making a similar case in the commons debate on Potash.

If an investment is incremental to the operations of a company to be acquired (i.e. a new plant or mine), this may be weighted in the ‘net benefit’ test more significantly.  Based on the reasons Minister Clement gave,  BHP Billiton’s inability to commit to the development of the Jansen mine in advance of provincial regulatory approvals and board governance requirements was a key factor for not approving the acquisition. Unfortunately, there are a lot of Canadian companies that are in desperate need of being acquired, either because they are inefficient, technologically antiquated, have scarce capital or their labour policies are out of date. Why would we want to restrict a foreign investor from coming in and upping this company’s game?

Similarly if the government were to amend ‘net benefit’ test by ‘ring fencing’ certain industries for special or strategic treatment, this would buy a whole of lot of trouble from existing shareholders who bought  company stock under different investment assumptions. Shades of income trusts anyone?

So this won’t be easy. I fear that any attempt to mitigate reputational damage done through the Potash transaction may only create new problems the government had not bargained for.  Minister Clement will have to thread this needle very carefully.