Current Approaches to Foreign Investment Review in Canada
James M. Spence, Q.C.*
The author discusses the recently enacted
Investment Canada Act which repealed the
Foreign Investment Review Act and provided
a new approach to foreign investment regu-
lation in Canada. After providing a short
summary of the new Act, he sets out some
potential areas of complication, examining
the new Act in light of its predecessor.
Uauteur commente la r~cente Lof sur Inves-
tissement Canada qui amende ]a Loi sur
1’examen de I’investissement tranger et qui
instaure une nouvelle approche A la r~gle-
mentation canadienne de l’investissement
tranger. Apris un brefr~sum6 de la nouvelle
loi, rauteur rel~ve d’6ventuelles mati6res
problmatiques lors d’un examen des nou-
velles dispositions A la lumi~re des anciennes.
I.
Introduction
In December 1984, a few months after the new Progressive Conserv-
ative government took office in Canada, Prime Minister Brian Mulroney
announced to the Economic Club of New York that “our message is clear
here and around the world. … Canada is open for business again.” In that
address, the Prime Minister emphasized his hopes for a “restoration of good
and sound relationships between our two countries”. 1
The Prime Minister’s statement coincided with the tabling in the House
of Commons in Canada of the Investment Canada Bill which the new gov-
ernment proposed to replace the ten-year-old Foreign Investment Review
Act, which had originally been brought into law by the Liberal Government
of Prime Minister Pierre Trudeau. 2
Following the tabling of the Bill, Industry Minister Sinclair Stevens
made these statements:
The Investment Canada Bill … represents the fulfilment of our campaign
promise to change both the name and mandate of the Foreign Investment
Review Agency.
*Partner in the law firm of Tory, Tory, DesLaurfers & Binnington, Toronto. The material in
this paper appears in revised form as part of chapters 1 and 2 in J.M. Spence & G.G.S. Takach,
A Guide to the Investment Canada Act (Toronto: Butterworths, 1986). The paper was written
in 1985.
IE Harrison & G. Gherson, “Mulroney’s Investment Message to U.S. Like ‘Fresh Air” The
Financial Post (15 December 1984) 6.
2Foreign Investment Review Act, S.C. 1973-74, c. 46 [hereinafter FIRA], as rep. Bill C-15,
Investment Canada Act, 1st Sess., 33d Parl., 1984-85, now Investment Canada Act, S.C. 1985,
c. 20, s. 46 [hereinafter the Act].
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We are proposing to replace FIRA with a new agency, Investment Canada.
The Agency will have a new, positive mandate to encourage and facilitate
investment, the kind of investment that creates jobs, introduces innovative
ideas and technologies, and expands Canada’s economic and industrial base.
Canada’s interests will be advanced by encouraging Canadian and non-Canadian
investment, not by discouraging it. We propose positive measures to achieve
positive goals. 3
This legislation became law in Canada at the end of last June, replacing
FIRA and becoming the only law of general application in Canada relating
to the review of foreign investment in our country.4
II. Summary of the Act
The Act establishes a new agency, Investment Canada, which will have
a mandate to encourage and facilitate new foreign and domestic investment
in Canada as well as to assist in the review of foreign investment proposals
which require review. The Act removes from the scope of the review process
a number of types of investments which were subject to review under FIRA.
First, the Act establishes thresholds to limit review of acquisitions by non-
Canadians to acquisitions which are of a major size. For acquisitions below
the thresholds, only a notification of the investment is required. The thresh-
olds for review are:
(a) in the case of a direct acquisition by a non-Canadian, the acquisition of
a business in Canada with assets of $5 million or more; and
(b) in the case of an indirect acquisition (i.e., one resulting from the acqui-
sition of a parent company outside Canada), when the Canadian subsidiary
acquired has assets of $50 million or more (or if the Canadian subsidiary
acquired represents more than fifty per cent of the assets of the acquired
group, the Canadian subsidiary has assets of $5 million or more).
The Act also provides exceptional authority to review acquisitions or invest-
ments that establish new businesses in culturally sensitive sectors, such as
book publishing, film production and film distribution. Apart from invest-
ments to establish new businesses in areas that may affect our “cultural
heritage or national identity”, there is no authority to review proposals to
establish new businesses as there was under FIRA. Instead, with the above
exception, all new business establishments are subject only to the require-
ment of notification.
The standard to be taken into account in determining whether to allow
an investment proposal is whether the investment is likely to provide “net
31nvestment Canada, Statements and Speeches, “Statement by the Honourable Sinclair Ste-
vens Following the Tabling of the Investment Canada Bill” (7 December 1984) at 1.
4Pursuant to SI/85-128 the Investment Canada Act was proclaimed in force 30 June 1985,
except for s. 46 repealing FIRA which came into force 1 July 1985.
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benefit to Canada”. The test under FIRA was “significant benefit to Canada”.
In making this determination the Minister responsible for the Act, the decid-
ing authority, is to consider seven factors focusing on the impact of the
investment proposal on the following:
(i) economic activity
(ii) Canadian participation
efficiency and technology
(iii)
(iv) competition
(v) compatibility with federal and provincial economic and industrial policies
(vi) compatibility with cultural policy
(vii) effect on international competitiveness.
The last two factors are additions to the list which was set out in FIRA.
Under FIRA, the deciding authority was not the Minister but rather the
Governor General in Council, Le., the full Cabinet. As was the case under
FIRA, in the course of the review process, there is to be consultation with
the provinces and the federal government departments that would be sig-
nificantly affected by the proposal.
The time limits under the two acts are different. Under FIRA, if the
government was unable to reach a decision within sixty days, it was entitled
to extend the time for review for an unlimited period. Under the new Act,
the Minister has a set period of forty-five days for the review of the proposal.
This period may be extended to seventy-five days but can only be extended
beyond that with the agreement of the investor.
As well as streamlining the scope, standards and timing of the review
process, the Act also reduces the number of arrangements that are to be
considered “non-Canadian” and the types of investment which are to be
considered “acquisitions of control”. For example, if two Canadians and
one non-Canadian each own one-third of the voting shares of a company,
that company would ordinarily be considered non-Canadian for FIRA pur-
poses. Under the new legislation the company would have a good prospect
of being considered Canadian, particularly where the shareholders enter into
a shareholders agreement with terms that will qualify them as a “voting
group” under the new Act.
In the case of a public company, if Canadians own a majority of the
voting shares of the corporation, the corporation will be considered Canadian-
controlled if it can be shown that the corporation is not controlled by a
single non-Canadian or by a voting group in which non-Canadian members
own half or more of the voting shares owned by the group. There is no
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CHRONIQUE DE Lt-GISLATION
positive statutory requirement to show that Canadian shareholders are in
control or that a majority of the board of directors is Canadian, which would
likely have been required under FIRA.
If an investor lacks Canadian status, the investor would still be free to
make the following types of investments in a corporation, since none of
these investments is classified as “acquisition of control”:
(i) a purchase of non-voting shares;
(ii) a purchase of less than one-third of the voting shares, whether or not
this results in a change in actual control of the corporation; or
(iii) a purchase of more than one-third but less than a majority of the voting
shares, if it can be shown that control is unchanged.
These rules result in considerably increased opportunities for foreign
investors to make corporate business investments in Canada without being
subject to the review requirements of the new Act.
If the foreign investor cannot structure its investment within these rules,
it will have a further alternative which is not available under FIRA: instead
of investing in an existing Canadian business, it could establish, without
review, a new business which is not of a type prescribed by regulation as
related to Canada’s “cultural heritage or national identity”. Other potential
opportunities exist where the proposed investment is to be structured on a
non-corporate basis, for example, as a partnership or a joint venture.
In the statement referred to earlier, Mr Stevens went on to make the
following remarks about the underlying rationale of the new legislation:
We believe that the establishment of new businesses is beneficial to Canada.
That is why we propose in the new Act to exempt new business investment
from review. We are also proposing to confine the review of investments to
acquisitions that can have an important impact on our economic, industrial
and cultural life. By exempting new business investment and by limiting review
to larger acquisitions, we will reduce by about 90 percent the number of trans-
actions which are now subject to review under the Foreign Investment Review
Act. So, when we say that we want to dismantle needless barriers to enterprise
in this country, we mean it.
At the same time we believe that Canada requires the means to safeguard
its national interests. Industrialized countries do not simply throw their doors
open and invite others to take over the components of their economic, cultural
and political sovereignty. It is for that reason that we have retained a review
mechanism. 5
5lnvestment Canada, supra, note 3 at 2.
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It was generally recognized in Canada that the announcement of the
new legislation was a major initiative on the part of the new government.
The Financial Post (Canada) remarked on the event as follows:
The perception of the Foreign Investment Review Agency, and the legislation
that underpinned it, may have been worse than reality. But perception counts
heavily when it comes to decisions on where to do business and where to put
your money. And it’s plain that many foreign investors steered clear of Canada
because of Fira. That’s why the government’s decision to replace it with a new
agency called Investment Canada as announced by Industry Minister Sinclair
Stevens, is most welcome …
Ofjust as much value as cutting down on the review process is the agency’s
fresh mandate to aggressively promote new investment, especially joint-venture
projects with Canadian partners and investments in the high-tech field. This
is the sort of activity, along with the positive message Prime Minister Brian
Mulroney gave to U.S. executives this week in New York, that should help
dispel the negative perception many business people have of Canada. 6
HI. The Experience to Date
At a superficial level it is quite easy to state what the experience to date
has been with the Progressive Conservative government in the area of for-
eign investment review and to show how that record contrasts with the
record of the previous government. The Conservative government has not
turned down any case which it has decided, either under FIRA or under
the new Act. In contrast, under the Liberal government which was in power
for most of the ten-year lifetime of FIRA, there was typically some per-
centage of disallowed cases, ranging from a high in the teens to a low of
under ten per cent.
That contrast may, however, be superficial and inadequate for a number
of reasons. First, the Conservative government has been in power for only
one year and the record shows only the cases decided, and not the cases
which have been submitted for review but, for one reason or another, have
not yet worked their way through the system to a decision. As a related
matter it appears that some difficult cases, particularly in the area of the
cultural industries, have been brought before the government but still remain
to be decided; this matter is considered further below. Moreover, there is
nothing in the scheme of the legislation which requires the government to
maintain the level of allowances at any particular percentage. On the other
hand, it seems clear to most observers that the present government is fully
committed to its widely heralded pro-business, pro-investment approach.
It therefore seems highly unlikely that the government would move away,
to any significant degree, from a close-to-full approval record. This should
6Editorial, “Opening the Doors” The Financial Post (15 December 1984) 9.
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not be taken as a prediction that all of the cases that are approved will go
through the system routinely. While I believe that this will be true in most
cases, I also believe that, even with the present government, there are reasons
to expect that some major cases will encounter delays and demands that
the parties to the transactions may well consider highly significant. In the
following pages I hope to explain some of the reasons for this view and to
indicate some of the forms that these complications may take.
IV. Potential Complications
In considering where complications may arise in the future in the course
of the administration of the new Act, it is instructive to take into account
the kinds of criticisms that were made of FIRA and its administration both
by non-Canadian, principally American, and Canadian critics. In the first
group of factors considered below, the potential for trouble along the lines
of the traditional criticisms is explored. Following that, the discussion moves
on to consider some of the potential complications that could arise with
respect to specific policies of the Conservative government, some explicit
and others not entirely explicit, which bear upon foreign investment review.
1.
Indirect Acquisitions
The requirement for review of indirect acquisitions under FIRA was a
continual source of irritation to critics of FIRA. Here is one formulation of
the criticism:
FIRA review of mergers between U.S. parent companies that involve transfer
of ownership of a Canadian subsidiary (whether or not the merger results in
an increased level of foreign ownership of the Canadian subsidiary) has extra-
territorial applicability and has the capacity to necessitate a forced sale of a
Canadian subsidiary by the acquiring U.S. company. This may have expro-
priatory implications and can reduce U.S. exports to Canada …. 7
Under the new Act, indirect acquisitions are still reviewable, but the force
of the above criticism is considerably weakened by the fact that the thresh-
olds for review in the case of indirect acquisitions have been raised enor-
mously. Under FIRA, any indirect acquisition was reviewable. Under the
new Act the indirect acquisition is reviewable only if the Canadian business
has gross assets of $50 million or, where it represents more than half of the
global assets of the acquired business, it has gross assets over $5 million.
7Issues on United States-Canadian Economic Relations: Hearing Before the Subcomm. on
International Economic Policy and Trade and on Inter-American Affairs of the U.S. House of
Representatives Comm. on Foreign Affairs, 97th Cong., 1st Sess. (21 October 1981) (Statement
of R.J. Waldmann, Asst Sec. for Int’l Policy, U.S. Dept of Commerce) 6 at 11 [hereinafter
Issues on United States-Canadian Economic Relations].
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Although this should reduce the potential for irritation to a very considerable
extent, it will not necessarily eliminate it entirely. For example, it seems
reasonable to expect that in the oil and gas industry some indirect acqui-
sitions will occur from time to time which will exceed the $50 million
threshold, and it would seem that this is an industry where the government
feels bound to assert special requirements for the approval of foreign invest-
ment; this matter is considered further below.8 Moreover, it may be fair to
expect that any transaction involving a Canadian company with gross assets
of $50 million or more will likely require, because of its size and the public
attention it will attract, the government to subject it to a degree of special
scrutiny.
2. Delays
Delays in the review process was a criticism under FIRA at various
times until around mid-1982 when it became apparent that the streamlining
ofFIRA procedures was being implemented effectively. One report in November
1982 described the development this way: “Foreigners are finding it twice
as fast and twice as easy to invest in Canada …. -9 The process of accel-
erating the review process appeared to have taken hold in the administration
of the Act by 1983; it could generally be expected that a smaller transaction
would be decided within about a month and a larger transaction within
about two months. When the Progressive Conservative government came
into power, the general impression was that the decision times were about
the same or perhaps improved.
The new Act seems to contain at least two factors which would poten-
tially make for an elimination or a reduction in delays. One of these is the
provision that limits the review time to seventy-five days except where the
parties agree otherwise. The second is that the deciding authority is the
Minister rather than the Cabinet. It should be noted, however, that an inves-
tor might well wish to extend the review period beyond the seventy-five
days. That might typically be the case where it was apparent that, otherwise,
the Minister would consider himself bound to disallow the proposed invest-
ment. Second, while it will certainly be beneficial to the timing of decisions
that the matter need not go to the Cabinet, the Minister is an extremely
busy man with a number of priority demands upon his time. Consequently,
in a case which he considers difficult to approve, there may be a potential
for delay and a good reason for the investor to agree, albeit grudgingly, to
such delay.
8See infra, note 16 and accompanying text.
9″FIRA’s Rejections are Halved, Proposals Handled Doubled” The [Toronto] Globe andMail
(9 November 1982) B6.
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The government has not yet released information relating to the average
time taken for the review processes under FIRA and the new Act under the
administration of the Conservative government. There has been at least one
decision which would indicate a potential for delays in the operation of the
review process. On 9 August 1985, Industry Minister Sinclair Stevens
announced a decision approving the acquisition by Alexander & Alexander
Services Inc. of New York of control of the business of Reed Stenhouse
Companies Ltd of Toronto. This transaction, which resulted in the formation
of one of the world’s largest insurance brokerage companies, was a carryover
from FIRA, under which it had been submitted for review some six months
previously.10
3. Vagueness of Standards
This point was succinctly put by one American commentator as follows:
In judging an application by a foreign investor, FIRA applies a vague standard:
whether there is a significant benefit to Canada.II
The test under the new Act of “net benefit” is certainly different from
“significant benefit”: it would appear to mean that the prospective benefit
must outweigh the prospective detriment (if any), but that it need not do
so to any significant degree. In this sense, it may not be different from a
test of “no detriment”. However, since the factors to be taken into account
by the Minister in deciding whether there is a prospect of net benefit are of
the same degree of generality, and are in fact largely the same as the factors
under FIRA, there would still seem to be ample room for the exercise of
discretion on the part of the deciding authority. In this respect, it would
appear that the standards are no more specific or objective than they were
under FIRA. On reflection, this should not seem very surprising, given that
the statute has the broadest possible application and that models designed
for specific industries or industry sectors would provide only limited guid-
ance in the formulation of general standards.
In the absence of more specific guidance on the meaning of “net ben-
efit”, it seems that the best one can do is to refer to the accumulating
experience under the legislation and the known concerns and priorities of
the government of the day. On this basis, a rough and incomplete list of
types of transactions that would likely be singled out for special scrutiny
under the Act would run somewhat as follows:
10Investment Canada, Release IC-2 (9 August 1985). In its press release of 17 June 1985,
Alexander & Alexander Services Inc. stated that its application for approval of the transaction
was filed on 1 February 1985.
“Issues on United States-Canadian Economic Relations, supra, note 7 (Statement of E.B.
Johnston Jr, Dep. Asst Sec., Economic and Business Affairs, Dept of State) 26 at 37.
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(i) very large transactions;
(ii) acquisitions that might have a strategic effect on the strength and inter-
national competitiveness of Canadian companies;
(iii) acquisitions that will cause a reduction in employment in Canada;
(iv) transactions which, because of highly visible economic consequences or
other reasons, will attract adverse public comment and give rise to polit-
ical concerns and anxieties.
Of course the question in such transactions is what the investor can do
to bring about a favourable decision on its investment. Here it is very likely
that it will be necessary to resort to giving undertakings to the government
relating to the manner in which business will be carried on and/or owned.
More is said on this subject below.
4. Lack of Transparency
The FIRA review procedure was frequently criticized for lacking explic-
itness and openness in its decision-making process.12 This criticism would
seem to be conceptually allied with the criticism discussed above concerning
the vagueness of the standard for decision. Under FIRA, the investor typ-
ically made its submissions to Agency officials and depended on them for
an indication as to how well the file was progressing in the judgment of the
Minister and the Cabinet. It was unusual for the investor to meet with the
Minister and, as far as I know, no investor ever met with the Cabinet or a
Cabinet committee as such. It was my impression that the Agency under
FIRA endeavoured to ensure that the investor had a good understanding
of the strengths and weaknesses of the file as they were seen by the Agency
and I believe this continues to be the practice. However, it was not and is
not the practice of the Agency to disclose to the investor the text of any
written memorandum going forward to the Minister with reference to the
merits of the application and it may well be that there are matters that the
Agency feels, for administrative reasons, it cannot disclose to the investor.
Now that the administration of the legislation is in the hands of a single
minister rather than the Cabinet, there is a better prospect of communi-
cating, where necessary with the deciding authority. Indeed, Mr Stevens has
met with representatives of investors in various cases and has in fact directly
engaged in negotiating with investors undertakings that have been consid-
ered critical to the favourable decision in those cases. For the reasons men-
tioned earlier in connection with the demands upon the Minister’s time,
one would not expect this type of direct communication with the Minister
to occur very frequently.
121bid. at 38; see also G. Howarth, Letter to the Editor, “FIRA’s Operations Chill Investors,
U.S. Envoy Says” The /Toronto] Globe and Mail (8 September 1982) 7.
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5. Undertakings
COMMENTS
FIRA, like the new Act, contained provisions enabling foreign investors
to give undertakings relating to the future ownership and performance of
the acquired business and authorizing the deciding authority to take such
undertakings into account in reaching a decision. 13 One American criticism
of this practice was as follows:
As a condition to the new foreign investment, FIRA signs legally enforceable
agreements with foreign investors specifying when firms must buy Canadian
goods in violation of the provisions of GATT … . FIRA may also require firms
to export a specific share of their Canadian production which distorts trade
flows. Foreign firms may also be prevented from distributing their products in
Canada which can seriously restrict trade.
The United States is seeking here a complete elimination of these
requirements.’ 4
Following these and other criticisms, the Agency’s practice in respect
of undertakings was altered to focus exclusively on matters that were con-
sidered to be “key” to the approval, and to ignore for the most part, possible
undertakings on non-essential matters. Now, with the advent of the new
Act it appears that the role of undertakings is to be diminished further.
According to a report in The Financial Post:
Industry Minister Sinclair Stevens is getting ready to announce a further soft-
ening of the already much diminished foreign investment review process. In
particular, Investment Canada’s controversial practice of negotiating legally
binding “Canada benefits” conditions with foreign investors on certain take-
overs is to be substantially curtailed.
(These undertakings, rarely appreciated by foreign businesspeople, are a left-
over from the Fira days. Mostly, they’re promises to pursue corporate policies
that will benefit the Canadian economy –
for example, to continue local
sourcing, maintain the existing level of Canadian employment, give Canadian
operations a world product mandate, and the like –
in return for government
approval of the investment.) 5
The practice of the Agency seems to be consistent with this report. In
discussions and representations relating to proposed acquisitions, Agency
‘3FIRA, supra, note 2, ss 9 and 21; Investment Canada Act, supra, note 2, ss 19(c) and 21.
’41ssues on United States-Canadian Economic Relations, supra, note 7 (Statement of D.R.
Macdonald, Dep. U.S. Trade Rep.) 2 at 4. In January 1982, the United States requested con-
sultations with Canada regarding FIRA under GATT art. 22. In March 1982 the United States
presented a formal request for the creation of a panel under GATT art. 23 to examine FIRA
and to rule on its compliance with GATT requirements: see S. Clarkson, Canada and the
Reagan Challenge: Crisis in the Canadian-American Relationship (Toronto: James Lorimer,
1982) at 47.
15G. Gherson, “Investment Door Opens” The Financial Post (24 August 1985) 1 at 2.
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officials will frequently ask for clarification or elaboration of items in the
statement of plans contained in the application. Usually, where they are
satisfied that the additional comments are consistent with the original appli-
cation and do not significantly alter the information in it, the enquiry will
stop at that point. If it is felt that the further comments add significantly
to the business plans, the investor may be invited to submit the additional
information as a supplement to the plans. While this seems to be the practice
for the most part, this should not be taken as an indication that undertakings
are never used. On the contrary, undertakings are still used in significant
cases. In particular, based only on personal experience, my judgment is that
where a case is considered important enough to warrant the personal
involvement of the Minister in negotiating some conditions for the approval,
it is ordinarily to be expected that those conditions will be set down in
writing in the form of undertakings. On what sorts of matters might a foreign
investor expect to be invited to give undertakings under the new Act? It is,
of course, too early to tell, but experience to date would suggest that the
most important matters will be the maintenance of Canadian operations
and activities – with related undertakings as to the continuation of employ-
ment in Canada, management of the business in Canada and the head office
of the business in Canada –
and the maintenance or enhancement of the
degree of Canadian ownership in the business.
I think most observers of the present government, when it was in its
formative stages in opposition, would not have expected it to interest itself
in undertakings as to the degree of Canadian ownership; that was usually
thought to be a shibboleth unique to the Liberal government and its nationalist
following. It appears to me that the present government is not likely to seek
such undertakings for traditionally nationalist motives. Instead, the gov-
ernment will be prepared to resort to such undertakings as an additional
means of ensuring continuing business operations in Canada, on the assumption
that operations will to some extent follow ownership, and also to ward off
adverse nationalist comment on its foreign investment decisions. In any
event, my conclusion so far is that this government is not prepared to forego
ownership commitments entirely.
A question of a different type about undertakings concerns undertakings
that were given under FIRA in circumstances where no undertakings would
be required now under the new Act if the investment were made today. For
example, a company wishing to establish an automobile distributorship in
Canada would not need any Investment Canada approval to do so but might
well have required a FIRA approval before last July. If the investor came
in in the earlier period, when FIRA was in force and gave undertakings, it
might well feel that it is potentially prejudiced in its competitive efforts
against new competitors who now enter the market without any similar
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need to provide undertakings. It seems likely that, over time, investors who
feel that they are suffering prejudice in the circumstances will seek some
relief from the government. I would not be surprised if the government
decided to give favourable treatment to those requests in due course but I
would not look for it to happen too soon.
6. Oil and Gas Industry
The Liberal government of Prime Minister Pierre Trudeau introduced,
in 1980, the National Energy Program to enhance the availability to Canadians
of the energy resources in Canada. Included in the objectives of the Program
was the enhancement of Canadian ownership in the oil and gas industry;
specifically, the stated objective was to attain fifty per cent Canadian own-
ership in the industry by 1990.16 Another priority objective of the Program
was to enhance the amount and timing of oil and gas exploration and devel-
opment in Canada, including in particular the frontier and off-shore areas
under the jurisdiction of the Federal government. It was made clear that
FIRA would have a role to play in fostering the achievement of these objec-
tives.17 Accordingly, it came as no surprise to practitioners that it was ordi-
narily very difficult to obtain approval for a significant foreign investment
in the oil and gas industry unless it was accompanied by undertakings of
two types:
(i) commitments to enhance the Canadian ownership in the acquired busi-
ness in a manner that would contribute to the stated government objective
of fifty per cent Canadian ownership within the industry; and
(ii) major commitments to fund new exploration and development activity
in Canada.
While a number of acquisitions in the oil and gas industry were allowed,
they almost invariably were accompanied by press releases indicating com-
mitments along these lines. Perhaps the most spectacular of these was the
allowance of the Getty Oil indirect acquisition of Canadian Reserve in 1982.
At that time, Getty agreed to sell fifty per cent of Canadian Reserve to
Canadians over five years and to spend hundreds of millions of dollars on
petroleum exploration and development and on research projects over ten
years.18
16Canada, The National Energy Program (Ottawa: Energy, Mines & Resources Canada, 1980)
was announced as part of the Federal budget in November 1980 and deals with issues of
pricing, ownership, security and supply, and taxation in the oil and gas industry.
71bid at 50.
18G. Gherson, “Foreign Investment Curbs Still Have Teeth” The Financial Post (16 February
1985) 4.
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Against this background and in the light of some pre-election announce-
ments from Progressive Conservative party spokesmen that their party would
treat oil and gas as a sensitive area requiring special standards of Canadian
ownership, interested observers watched closely to see how the new gov-
ernment would handle the major oil and gas transactions lining up on the
horizon. All four cases that have materialized – Voyager Petroleums, Tex-
aco, Chevron/Gulf and Mobil/Canadian Superior – have been approved,
but in all cases the approvals were accompanied by significant commitments
relating to ownership and performance. Indeed, as is well known, in the
case of the Chevron acquisition of Gulf the ultimate result has been the
disposition of Gulf Canada to Olympia and York Resources Inc. of Toronto
with associated transactions with Petro-Canada and others relating to com-
ponent parts of the Gulf assets.
It is instructive to consider the commitments that were given in each
of the decided cases, according to government press releases. In summary,
they are as follows:
(i) Voyager –
to sell thirty-five per cent of the equity to Canadians within
five years and to offer an additional thirty-five to fifty per cent of the explor-
atory property for joint development with Canadians and to spend $100
million on exploration and development;
(ii) Texaco –
to provide Canadians a full and fair opportunity to acquire
control of the Getty Mining and Minerals Companies which Texaco was
seeking to sell; to offer to sell in Canada within approximately three years
an additional ten per cent, approximately, of common shares of Texaco
Canada; and to make capital and exploration expenditures of not less than
$1.7 billion in Canada by the end of 1988;
(iii) Chevron –
to offer its shareholding in Gulf Canada Ltd for sale to
Canadian-controlled purchasers for a fair and reasonable price, and failing
any such sale, to ensure that Canadians had the opportunity to participate
in the ownership of Chevron’s combined business in Canada, including Gulf
Canada, to an extent greater by at least twenty per cent by the end of 1989,
along with other commitments to maintain Canadian ownership in the
Hibernia interests or to maintain future exploration and development efforts
in Canada at planned levels indicated in the range of $800 million for 1985;
(iv) Mobil –
to increase both Canadian ownership and exploration expend-
itures, including giving Canadians the opportunity to purchase upstream
1986]
COMMENTS
oil and gas properties valued at $350 million within the next four years and
reinvesting $1.4 billion in Canada during that period.19
One assessment in the press of these cases is that they indicate that the
demands being placed by the present government on foreign investors in
major oil and gas transactions are more relaxed than under the Liberals. 20
This may well be so. For example, it would appear that while the government
was concerned to ensure that major commitments on Canadian ownership
were given, they apparently did not feel bound to ensure that those com-
mitments amounted to fifty per cent ownership of each company by 1990.
Industry participants will have to decide for themselves whether the appar-
ent degree of relaxation and flexibility is in fact significant. It certainly
appears to a non-industry observer that the commitments could be fairly
characterized as major from any relevant perspective.
It is equally clear that the government places great importance on the
end result of these transactions. In a release from Investment Canada on 2
August 1985, Mr Stevens is reported to have said: “By this purchase of
Chevron’s controlling interest in Gulf Canada, some $5.6 billion in assets
become Canadian-controlled. This is the largest instance of Canadianization
in the history of the Canadian oil and gas industry. An equally important
fact is that this Canadianization has been achieved through the private
sector.”‘ 21
7. Cultural Industries
As mentioned earlier, the newAct provides for the review of acquisitions
falling below the statutory thresholds and of the establishment of new busi-
nesses of a type “related to Canada’s cultural heritage or national identity”
where the Cabinet issues an order for the review of the investment. Poten-
tially, therefore, any “culturally sensitive” investment, whether by way of
acquisition or by way of establishment of a new business, is subject to review.
This gives critical importance to the definition attributed to the term “Canada’s
cultural heritage or national identity”. 22 The relevant regulation identifies
the following four types of business as being related to Canada’s heritage or
national identity:
19With respect to Voyager, see ibid.; see also R. McQueen,’ “Canada Warms Up to U.S.
Business” Fortune (4 March 1985) 114 at 115-16; A. McCallum, “FIRA Denies Oil Deal is
Major Shift” The [Toronto] Globe and Mail (13 October 1984) B12. With respect to Texaco
and Chevron, see ibid.; see also Foreign Investment Review Agency, Release, “Government
Allows Acquisition by Texaco” (7 February 1985); and Foreign Investment Review Agency,
Release, “Government Allows Acquisition by Chevron Corporation” (7 February 1985). With
respect to Mobil, see Investment Canada, Release (6 December 1985).
20See supra, note 18.
2’Investment Canada, Release, “Gulf Canada Canadianized” (2 August 1985).
22See Investment Canada Act, supra, note 2, s. 15(a).
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[Vol. 31
1. Publication, distribution or sale of books, magazines, periodicals or news-
papers in print or machine readable form
2. Production, distribution, sale or exhibition of film or video products
3. Production, distribution, sale or exhibition of audio or video music recordings
4. Publication, distribution or sale of music in print or machine readable
form. 23
Observers of Canada’s foreign investment regulation did not expect this
area of cultural industries to be a quiet corner of the legislation, and it has
not been. In December 1984, Gulf & Western Industries Inc. of New York
announced its indirect acquisition of Prentice-Hall Canada Ltd of Toronto,
a transaction that was apparently reviewable under FIRA and was continued
under the new Act by reason of a Cabinet order under section 15 of the new
Act. Subsequently, at about the time the new Act came into force, W.H.
Smith and Sons (Holdings) PLC of England announced its proposed take-
over of Classic Book Shops (International) Ltd of Toronto, a transaction
which was also subject to Investment Canada approval. The Cabinet also
directed the review under the new Act of three other publishing/media trans-
actions, one of which was subsequently approved on 12 July 1985. The
W.H. Smith – Classic Book Shops transaction was approved on 26 September
1985, and the Gulf & Western – Prentice-Hall transaction was approved on
12 March 1986.24
On 6 July 1985 Mr Marcel Masse, the Communications Minister,
announced the Government of Canada’s policy on foreign investment in
the Canadian book publishing and distribution industry.
The Government believes that it is essential that there be a strong book pub-
lishing and distribution industry that is owned and controlled by Canadians,
one able to perform effectively its important role in defining Canada’s social
and cultural identity… 25
Mr Masse said that the government will, in accordance with the provisions
of the Investment Canada Act, review all proposed foreign investment, both
direct and indirect, in book publishing.
23Investment Canada Regulations, SOR/85-61 1, s. 8, Schedule IV.
24Report Bulletin No. B15 (July 1985) in P.R. Hayden, J.H. Bums & G.W. Kaufman, Foreign
Investment in Canada: A Guide to the Law, vol. 3 (Scarborough, Ont.: Prentice-Hall, 1974) at
B15-1-B15-3 [hereinafter Foreign Investment in Canada]. See also Investment Canada, Release
(26 September 1985) and Investment Canada, Release (16 March 1986).
25Department of Communications, Release (6 July 1985). According to the subsequent Invest-
ment Canada announcement of the approval of the Gulf & Western acquisition of Prentice-
Hall, the transaction was assessed against the policies in place at the time of the transaction,
which was December 1984, and not under the new policy. The announcement stressed that
the new policy would apply to investments concluded after 6 July 1985: Investment Canada,
Release, “Government Reaches Agreement with Gulf & Western” (12 March 1986) at 2.
1986]
CHRONIQUE DE LRGISLATION
Concerning direct investment, the Minister stated:
The government will look with favour on proposals to establish new businesses
or to acquire directly existing businesses, whether Canadian or foreign con-
trolled, provided the investment is through a joint venture with Canadian
control. For direct acquisitions of foreign-controlled business, allowances will
be possible if the divestiture of control to Canadians occtrs within a reasonable
period (of two years) at a fair market price.26
The Minister stated that the government will review indirect acquisi-
tions case by case. It will generally allow such acquistions provided, first,
that the acquisition would not significantly lessen effective competition by
Canadians in any segment of the book market and, second, that the applicant
undertakes to divest control of the business to Canadians at a fair market
price within two years.
The Minister also said:
This policy confirms the government’s commitment, as enunciated in the
Investment Canada Act, to maintaining Canada’s cultural sovereignty and sup-
porting the economic viability of the nation’s crucially important cultural industries
…. In particular, the government recognizes that the Canadian publishing
industry must have opportunities to grow within its own domestic market and
that foreign investment should not be allowed to jeopardize such development.27
8. The Trade Agenda
Canada’s foreign investment review practices have bumped up against
its international trade policies and treaty obligations in the past. With the
increasing attention being paid to world trade questions generally, and the
question of new bilateral trade negotiations with the United States in par-
ticular, the interaction of foreign investment review policy with trade policy
may become a more urgent matter in the foreseeable future.
In the only challenge to FIRA under GATT to date, the GATT panel
ruled that the Canadian government practice of favouring “buy Canadian”
undertakings from foreign investors breached the GATT provision which
requires GATT members to offer foreign traders “national treatment in their
domestic markets”. 28 The implications of this development were by no
means clear. It seemed possible that Canada might well be able to bring
itself into compliance with the ruling by substituting for the typical under-
taking a new form of undertaking to the effect that the investor would ensure
that Canadian suppliers have an opportunity to bid and that all competitive
26Department of Communications, ibid.
27 Ibid.
28See E.J. Arnett & E.P. Mendes, “Restrictive Trade Policies Could Backfire” The Financial
Post (23 July 1983) 9.
McGILL LAW JOURNAL
[Vol. 31
bids would be given equal consideration.2 9 There was one feature of the
panel decision which was favourable to the Canadian government position:
the panel did not find any contravention in the FIRA practice of receiving
commitments from foreign investors that they would increase their exports
from their Canadian operations. This might have strengthened FIRA efforts
to encourage “world product mandate” undertakings in appropriate cases.
This decision does not necessarily exhaust the range of complaints that
might be made against Canada’s foreign review legislation and practice under
the terms of the GATT. The question has been raised, and may be raised
again, “whether undertakings, exacted under pressure, … after a major
investment has been made, to achieve precentage levels in repair, mainte-
nance and Canadian value added or to use a specific … system are not in
effect more demanding than higher tariff levels or as demanding as quan-
titative restrictions, both of which are prescribed by GATT. ’30
This type of consideration may well give rise to heightened concerns
if Canada and the United States move, as many expect them to, into bilateral
discussions to explore the feasibility of a comprehensive trade agreement.
If the United States government continues to perceive Canada’s foreign
investment policy, even at its present relatively relaxed level, as a type of
anti-free-trade posture, the Canadian government might well come under
pressure for further relaxation of the review process and perhaps its entire
elimination.31 Such a development would not be beyond the realm of prob-
ability. While official American government statements regarding Canadian
foreign investment review law have generally taken care to state that there
is no dispute as to the legitimacy of the legislation as such, American crit-
icism of the legislation always seems to have the potential to move in that
direction. Such a move would be consistent with reflections such as those
contained in the statement of C.E Bergsten to the U.S. Senate Sub-Com-
mittee on International Economic Policy in July 1981, in which he suggested
“the possibility of a new strategy for U.S. international investment policy:
a major multilateral effort to develop … a ‘GATT for investment’….1-32
29P.R. Hayden, “Further Musings on the GATT Ruling” (New Ideas) in Foreign Investment
in Canada, supra, note 24, 2135.
30D.S. Macdonald, “Canadian Industrial Policy Objectives and Article III of GATT: National
Ambitions and International Obligations” (1982) 6 Can. Bus. L.J. 385 at 396 and 404-5.
31J.M. Spence, “FIRA: A Decade of Evolution” in J.M. Spence & W.P. Rosenfeld, eds, Foreign
Investment Review Law in Canada (Toronto: Butterworths, 1984) 315 at 336.
32U.S. Policy Toward International Investment. Hearings Before the Subcomm. on Interna-
tional Economic Policy of the U.S. Senate Comm. on Foreign Relations, 97th Cong., 1st Sess.
(30 July 1981) (Statement of C.E Bergsten, Senior Associate Carnegie Endowment for Inter-
national Peace) I at 6.
19861
COMMENTS
9. The Positive Mandate of the Agency
In any discussion of the potential complications facing the adminis-
tration of the new Act, it is important not to lose sight of the fact that the
government has given the new Agency a specific positive mandate to foster
new investment from foreign sources. 33 While the concept of seeking out
attractive foreign investment is itself not new, there are indications that the
government proposes to carry out a coordinated program with this objective.
A recent report mentioned a program of ministerial visits, the appointment
of special investment counsellors in key foreign diplomatic posts, a stepped-
up advertising campaign and the launching of government-sponsored
investment seminars for prospective investors. Within Investment Canada
itself a new investment development division has been formed and is report-
edly ready to start. 34 There is no question that a positive program of this
type can be of assistance. It is reported that already, “interested foreign
investors are coming to Investment Canada for assistance in locating busi-
ness opportunities or ironing out regulatory red tape.” 35 One area in par-
ticular where the Agency may well be of assistance is in negotiating favourable
rulings or other determinations by other government departments, such as
tax rulings from the Department of National Revenue. The report men-
tioned earlier comments that the Agency will be “monitoring” tax rates,
government regulations and even broader issues such as labour costs, and
making comparisons with other countries). ‘ 36 Early, and potentially dra-
matic, evidence of the prospective success of this range of measures may
be found in recent reports about the results of Mr Stevens’ discussions in
the Pacific Rim and Japan. Proposals for new foreign investment in major
automotive plants in Canada are under way with Honda, Hyundai, Toyota
and Suzuki. At the time of the preparation of this paper, announcements
about some of these projects had been made and other announcements may
be imminent.37 Positive results in these discussions are obviously important
in themselves and could also have significant influence on other prospective
foreign investors.
33For a discussion of earlier proposals for a positive mandate and some related considerations,
see Spence, supra, note 31 at 340-41.
34See Gherson, supra, note 15 at 2.
35ibid.
36Ibid.
37See J. Daw, “Canada May Capture More Auto Plants” The Toronto Star (3 September
1985) DI; T. Walkom, “Stevens Plans to Not Intervene in Toyota’s Choice of Location” The
[Toronto] Globe and Mail (4 September 1985) B2; R. English, “Hyundai’s Canadian Plant May
Spur Others” The Financial Post (7 September 1985) 9.
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[Vol. 31
V. Summary
Whether the government succeeds with the new approach to foreign
investment regulation in Canada depends on a number of possible alter-
native developments and the order in which they occur. If the government
succeeds in arranging new beneficial investment of the type now being dis-
cussed in connection with new automotive plants, it is fair to expect that
that will win good press in Canada and also influence foreign observers. On
the other hand, if new investment develops only very slowly and in the
meantime the government is forced to take some hard decisions on, for
example, the cultural cases, there will be a risk of displeasing significant
constituencies either in Canada or abroad. If, in the meantime, some of the
existing foreign investment in Canada folds up with consequent loss of
employment in Canada this will be bad news domestically and may adversely
affect the government’s posture on foreign investment. Finally, if Canada-
United States bilateral trade negotiations are initiated and these negotiations
turn the spotlight on Canada’s foreign investment policy in a critical fashion,
this could lead to a degree of adverse reaction in Canada detrimental to the
policies themselves and also to the trade talks. It seems to me that it would
be very difficult in the present climate for the Canadian government to
tighten up its foreign investment review controls but it would probably be
equally difficult to loosen those controls to the point of effectively elimi-
nating them.38
38 The question of whether further innovations in Canada’s foreign investment review leg-
islation are needed was addressed in the recent Report of the Royal Commission on the Eco-
nomic Union andDevelopment Prospectsfor Canada, vol. 3 (Ottawa: Supply & Services Canada,
1985) at 430:
The review of foreign investment proposals should be conducted by a quasi-judicial
tribunal to ensure full public disclosure and political accountability. Fast-track pro-
cedures and practices for the handling of commercial confidences would need to
be developed. Commissioners believe that new foreign investments need no longer
be reviewed; the tribunal should review acquisitions only. The threshold for review
should be raised from $5 million in gross assets to at least $50 million in order to
focus resources on the larger and more critical take-overs. The review process should
emphasize the competitive and technological conditions surrounding the proposed
foreign take-over. The government should clarify the standards governing the post-
entry behaviour of foreign investors by promulgating a general code of conduct
applicable to all major firms, domestic and foreign, operating in Canada. To promote
compliance with the code of conduct and to improve our understanding of the
consequences of foreign control, the government should legislate an annual reporting
requirement for all major firms or for corporate groups operating in Canada with
assets in excess of $50 million. Firms should be required to disclose specified types
of information relevant to their observance of these guidelines. Canadian directors
should be required to file an annual statement detailing their firms’s efforts to achieve
the objectives of enterprise performance set out in the proposed code of conduct.
