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10 February 2014
Canada's minister of industry shook the Canadian and international M&A community in May when he took the unprecedented action of blocking a major proposed foreign takeover of a Canadian business.
Using the powers granted him under the Investment Canada Act (ICA), minister Jim Prentice scuttled the proposed C$1.3bn (£650m) acquisition of the Canada-based satellite imaging and space business of MacDonald Dettwiler and Associates (MDA) by US defence company Alliant Techsystems (ATK).
Under the ICA foreign acquisitions of control of major Canadian businesses typically require ministerial approval (in addition to the usual antitrust approval). The minister has wide discretion in these matters, and if they conclude the proposed deal is "not likely to be of net benefit to Canada", the parties are prohibited from consummating the transaction.
Leaving aside transactions that involve businesses connected to Canada's cultural and national heritage, the minister has never, since the ICA's enactment in 1985, used their powers to block a deal. Never, that is, until now.
Foreign investment in Canada has become a political issue for the current minority government. While there appears to be persuasive evidence that Canadian companies are acquiring at least as much abroad, and solid economic theory supports the proposition that unrestricted cross-border investment enhances global wealth, an unresolved debate has been escalating among Canadians as to whether foreign-owned companies are 'hollowing out' the land of the maple leaf.
The fact that MDA is the designer and manufacturer of the 'Canadarm' (the robotic arm that allows the space shuttle to retrieve and deliver its payloads, a popular symbol of Canadian achievement), probably did not enhance the proposed deal. The minister's rejection no doubt met with the approval of many who would prefer not to see a non-Canadian corporation take over such an iconic Canadian company.
Ironically, until 2001 MDA was owned by a US corporation that divested it pursuant to an IPO. The ATK deal would therefore have simply re-established US ownership and control, a relatively neutral development in context of the company's recent history. Why, then, did the minister block the deal? Should the international M&A community be concerned that Canada is closing its doors to foreign investment? Will the minister's intervention chill investment into Canada?In his press release rejecting the deal, Prentice took care to point out that foreign investment plays an important role in the Canadian economy, noting that foreign investors bring with them capital, knowledge, capabilities and technology that can increase the productivity, efficiency and competitiveness of Canadian companies. He qualified his reassuring words, however, by reiterating that, if a significant transaction does not demonstrate net benefit to Canada, it cannot be approved.
Because the minister did not give specific reasons, we can only speculate as to what concerns or factors led him to unravel a deal that, according to the press, required ATK to take a $6.6m (£3.38m) charge to cover transaction-related expenses. One possible reason relates to national security and sovereignty issues: one of MDA's main assets is the Radarsat-2 technology, a satellite system that delivers data and images of the Arctic waters over which Canada claims sovereignty. It is certainly not unreasonable for a nation to have an interest in protecting national security and sovereignty.
Still, although the minister and the government officials who administer the ICA have issued a number of helpful guidelines relating to the administration of foreign investment requirements, there is little in their enforcement policy relating to national security, other than acknowledging that it is a concern. The issues, then, may be more broadly based. If the fundamental basis for the rejection relates to the transfer of Canadian-owned technology to a non-Canadian buyer, there may be reason for heightened concern by non-Canadian companies considering investment in Canadian businesses with important technological components. Potential investors in high-tech industries should sit up at this point.
The minister recently stated in a strongly worded speech that maintaining "control of technologies is vital to the future of our industry". So, will it be enough to simply promise employment opportunities and expenditure in Canada in order to get a deal through if ownership and control of knowhow and technology is transferred into the hands of non-Canadians?Only time - or a clear policy articulation by the minister on these matters - will answer this question. In the meantime, what we can take away from the MDA experience is that now, more than ever, foreign investors into Canada must take great care in anticipating the outcome of an ICA review when evaluating the execution risk of a deal.
Oliver Borgers is a partner in the competition law group at McCarthy Tétrault in Toronto