Investment Canada Act: Minister of Industry Blocks Acquisition of MDA by Alliant Techsystems
May 12, 2008
Last Friday, Industry Minister Jim Prentice blocked the proposed $1.3-billion acquisition of the Information Systems Business of MacDonald, Dettwiler and Associates Ltd. (MDA) by Alliant Techsystems Inc. (ATK).
Alliant had applied for the Minister’s approval pursuant to the Investment Canada Act, which provides that where a non-Canadian (such as ATK) proposes to acquire control of a substantial Canadian business (such as MDA), the non-Canadian must file an Application for Review with the Minister of Industry. The transaction can only be consummated if the Minister is satisfied that the proposed transaction is "likely to be of net benefit to Canada."
In a press release, Minister Prentice confirmed his preliminary decision, made a month earlier, that he is not satisfied ATK's proposed acquisition of the Information Systems Business of MDA was likely to be of net benefit to Canada. He also stated: "I reached this decision after an extensive and rigorous review process. Foreign investment plays an important role in the Canadian economy. Foreign investors bring with them capital, knowledge, capabilities and technology that can increase the productivity, efficiency and competitiveness of Canadian firms. However, under the Investment Canada Act, where a significant transaction does not demonstrate net benefit to Canada, it cannot be approved."
Although MDA is currently Canadian-owned, it is ironic that MDA was owned by a US corporation at the time the initial Radarsat agreement was entered into.
Ministerial Rejection is Unprecedented
This is the first rejection by a Minister of a transaction that does not raise Canadian cultural or heritage concerns since the inception of the Investment Canada Act in 1985 (which replaced a significantly more protectionist foreign investment review law, the Foreign Investment Review Act, then known as FIRA).
Over the past number of years, there has been a slow escalation of the rigour of enforcement of the Investment Canada Act by the Minister of Industry, as evidenced by the increase in the length of reviews and the scale and scope of written undertakings that foreign investors were required to give the Minister to secure approval. It should come as no surprise that eventually the Minister would be presented with a transaction that would not, in his view, permit a finding of "net benefit." It appears that the MDA transaction -- unfortunately for ATK and other stakeholders -- was the proverbial "straw that broke the camel’s back."
Within hours of announcing the rejection, Minister Prentice made an announcement that might be viewed as a consolation prize, i.e., that the Canadian federal government had extended by four years an existing maintenance contract held by MDA. This contract with the Canadian Space Agency, worth about $109 million, covers sophisticated robotics work on the International Space Station.
Reason for the Rejection & National Security
The review of the application under the Investment Canada Act is conducted pursuant to very strict confidentiality provisions. Therefore one can only speculate as to why Minister Prentice rejected the transaction. According to news reports, ATK’s desire to buy the satellite imaging and space business from MDA had sparked fierce opposition because of fears of losing Canadian control over what is perceived as a key piece of Canadian space technology. It appears the principal motivation for Minister Prentice’s rejection, then, is related to Canadian national security concerns.
The Investment Canada Act enumerates a number of factors that are "to be taken into account, where relevant" for purposes of determining net benefit. These are:
- 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, resource processing, the utilization of parts, components and services produced in Canada and exports from Canada;
- 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;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- the effect of the investment on competition within any industry or industries in Canada;
- 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
- the contribution of the investment to Canada’s ability to compete in world markets.
As can be seen, none of these factors address national security concerns. In fact, a couple of years ago the Government of Canada introduced amendments to the Investment Canada Act to enhance the review regime by adding national security provisions (that bill died on the order table). Discussion continues about the desirability of such amendments.
It is generally accepted that the Minister’s discretion in determining net benefit pursuant to the Investment Canada Act is broad. It would be difficult to suggest he is precluded from taking national security concerns into consideration in making such a determination (as appears to have been the case here). However, future foreign investors will want to know in advance of proposing a transaction what the Minister’s policy is in respect of the applications of national security considerations. They and their advisors will want some clarity, transparency and predictability in respect of these matters.
The Minister did recently issue guidelines setting out his policy in respect of the net benefit assessment in relation to the acquisition of a Canadian business by a foreign-state-owned enterprise (see http://www.ic.gc.ca/epic/site/ica-lic.nsf/en/lk00064e.html#state-owned). As long as the Investment Canada Act has not been amended to explicitly address national security issues, it would be very helpful to the investment community if the Minister were to issue guidelines that also address the Ministry’s approach to national security.
What does this mean for future investments?
There is no reason to believe the rejection of the MDA deal will have a significant chilling effect on foreign investment in Canada, although the rejection does raise questions in respect of transactions that involve the transfer of important intellectual property to non-Canadians. This development also highlights the importance of early identification and management of sensitive issues. The Government of Canada has clearly signalled its heightened sensitivity to investments that involve foreign-state-owned enterprises and, now, national security. Before bringing a deal that raises these kinds of issues to the Minister for approval, it will be critical for investors and their counsel to carefully evaluate whether there is a sufficient basis for the Minister to reach a positive conclusion.
In short, foreign investors must do their homework on the implications of the Investment Canada Act very early on in the planning stage of a transaction.
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