Torys LLP is a highly respected international business law firm with offices in Calgary, Toronto, Montreal, and New York. Our lawyers work together to offer legal services to clients throughout Canada and on both sides of the U.S.-Canada border. This article highlights what you can expect to see in foreign investment review in Canada this year.
As demand for commodities grows, particularly in Asia, we have witnessed an upsurge in foreign direct investment in Canada’s oil and gas sectors. The involvement of state-owned enterprises in these investments is challenging the traditional parameters of Canada’s foreign investment review regime. Recent policy updates and continued regulatory uncertainty will increasingly prompt foreign investors to modify their investment strategies. Foreign investors will adapt by varying the structures of their transactions, engaging proactively with key stakeholders and strengthening the terms and conditions of their merger agreements.
Traditionally, investment in the Canadian oil and gas industry has been structured in the form of joint ventures or partnerships with Canadian counterparties, which have not triggered foreign investment reviews under the Investment Canada Act (ICA).
However, foreign entities have recently employed more assertive modes of investment, including outright acquisitions. In 2012, CNOOC put forward a US$15.1 billion proposal to acquire all the shares of Nexen Inc. Also in 2012, Petronas announced that it planned to acquire Progress Energy Resources Corp for approximately C$5.5 billion.
The transactions mentioned above are notable not only for the method of acquisition but also for the changing face of the acquiror. While multinational corporations continue to execute takeovers in the Canadian energy industry, investments are increasingly being made by state-owned enterprises (SOEs).
Although the Canadian government approved the closely observed acquisitions by CNOOC and Petronas, it issued new SOE guidelines which are particularly rigorous in respect of the oil sands sector. In the future, proposed SOE investments to acquire control of an oil sands business will only be approved on an exceptional basis; non-controlling investments in the oil sands (including joint ventures) will however continue to be welcomed. As a result, SOE investment in the oil sands will now likely revert to focusing on minority stakes and joint venture arrangements not subject to review. Indeed, shortly after the announcement of the new SOE policy, Encana Corp. and Petrochina Co. announced a C$1.18 billion joint venture in which PetroChina will get a 49.9 per cent stake in Encana’s Duvernay Shale acreage in a non-reviewable transaction.
Merger parties have sought to respond to the current regulatory regime in three ways. First, they are structuring transactions to avoid a review or to minimize the risk of non-approval. Second, they are adopting proactive government and public relations strategies to minimize the risk of popular and political opposition. Third, they are managing risk through provisions in their merger and acquisition agreements.
Merger parties have been prepared to offer significant, specifically-tailored and creative commitments to the government to obtain approval. For example, CNOOC agreed to pay a large premium for its proposed acquisition of Nexen. It also offered to establish Calgary as CNOOC’s North and Central American headquarters, retain Nexen’s management team and employees, and list its shares on the TSX.
Merger parties should plan to manage all key stakeholders in high-profile M&A transactions involving foreign buyers, particularly at the level of provincial governments. Having support from other stakeholders, such as unions, employees and the media, is also increasingly important. When Glencore agreed to acquire Viterra, the Saskatchewan government commissioned a report on the deal’s “net benefit to Saskatchewan.” Similarly Nexen is also reported to have met with a variety of government agencies prior to announcing the transaction.
Merger parties are also managing risk through the terms of their M&A agreements. We are seeing increased use of so-called hell or high water clauses that outline the steps that buyers must take to obtain regulatory approvals. In the extreme, these covenants can require buyers to agree to any terms and conditions imposed by regulators as a condition of obtaining their approval. More commonly, these clauses contain caps or limitations to obligations that can potentially be imposed on buyers by the regulators. For example, buyers may be permitted not to accept terms and conditions that would have a material adverse effect on the acquired business. Parties may also agree to longer than ordinary outside dates to accommodate extended reviews and to make reverse break fee payments to targets in the event that a transaction does not proceed as a result of the failure to secure regulatory approvals.
The regulatory uncertainty brought on by the rising incidence of foreign investment in Canada, particularly by SOEs, will inevitably encourage parties to address regulatory risk in pursuing their inbound investments in 2013. While we expect that most foreign investments into Canada will proceed in the normal course, for some investors, prudent management of their investment strategy will help put the odds of clearance on their side.
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