Canadian government approves CNOOC/Nexen and Petronas/Progress Energy acquisitions and announces new guidelines for SOE investments
Late last week the Canadian government approved the closely observed acquisitions by CNOOC of Nexen and by Petronas of Progress Energy Resources. The announcement was accompanied by new guidelines on investments in Canada by state-owned enterprises (SOEs).
Although the investments by state-owned CNOOC and Petronas were approved, Prime Minister Stephen Harper announced that, in the future, proposed SOE investments to acquire control of an oil sands business would only be approved on an exceptional basis. That may restrict SOE oil sands acquisitions to situations where there is financial distress and no alternative investors. Non-controlling investments in the oil sands (including joint ventures) will continue to be welcomed and prior practice will remain unchanged for those non-controlling investments.
For SOE acquisitions of control, the government has now imposed three important requirements. While strongly worded, these requirements are unlikely to materially affect the vast majority of SOE investments.
- First, although the government reiterated existing plans to increase the investment review threshold to $1 billion in enterprise value, it will retain the current $344 million asset value threshold for SOE acquisitions. As most oil sands and other significant SOE acquisitions are likely to be well above these thresholds, this change is not expected to result in many more SOE investments being reviewed than before.
- Second, Ottawa will consider the extent to which the foreign government is likely to exercise influence over the SOE or the Canadian business. Although this sentiment was reflected in the prior SOE guidelines under the assessment of the commercial orientation and governance of SOEs, this announcement reflects a renewed and more direct consideration of this issue. Freedom from political influence will be an important factor in the assessment of net benefit, but is one of many factors that will be considered in the decision whether to approve an SOE acquisition.
- Third, before approving further investments in a particular industry, the government will consider the degree of control or influence that SOEs (foreign governments) would likely exert on a particular Canadian industry. It appears that the government may now deny acquisitions that could lead to a high concentration of "foreign government" ownership in an industry to protect its private sector orientation. However, there are few industries in Canada in which there is any obvious risk of such concentration.
Outside the oil sands industry, the practical substance of the new guidelines contains little change compared with the previous SOE guidelines, although the tone of the government’s attitude toward SOE acquisitions has become sharper. Even a strict application of the new approach is highly unlikely to prevent SOE acquisitions in most sectors.
However, there is a risk that the new approach will inadvertently have a chilling effect on SOE investments in Canada due to the perception that the government will not welcome any SOE control investments. We believe that transactions, including those involving SOEs, will continue to be approved under the Investment Canada Act. As before, investors will need to take appropriate steps to secure approval, such as offering strong net benefit packages of proposed undertakings early in the review process and managing the support of government and other stakeholders. For the small number of high-profile politically sensitive transactions that occur every year, investors should be prepared to make a public case for the approval of their transaction. This applies for non-SOE investors as well as SOE investors.
Not to be lost in the details of the announcement is that both the CNOOC and Petronas deals were ultimately approved, and that the prime minister has emphasized that "the Government continues to strongly encourage inward investment in Canada."
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