The decision by the Conservative government to nix BHP Billiton Ltd.’s $38-billion acquisition of Potash Corp. of Saskatchewan Inc. effectively neuters shareholder rights in this country and handcuffs lawyers from rendering any meaningful advice under the Investment Canada Act.
The Potash decision wasn’t about foreign investment principles or protecting Canadian companies from foreign takeovers — though economic nationalists no doubt blindly cheered the ruling. It was about catering to votes and the whims of Saskatchewan Premier Brad Wall, who sought to protect the pricing monopoly of a coveted revenue stream versus allowing shareholders to decide on a deal’s fate, as is normally the case in these matters. Good politics, bad policy.
Joining Wall in opposing the deal were Alberta Premier Ed Stelmach and Manitoba Premier Greg Selinger. Selinger, a lefty, can be forgiven for his stance, premiers Stelmach and Wall, supposed Conservatives, cannot.
The ruling by federal Industry Minister Tony Clement effectively returns PCS to the status of a Crown corporation, controlled by the Saskatchewan government. That certainly isn’t what most shareholders bought when they invested in Potash. It’s a takeover by press release and comes without the premium shareholders expect when giving up control.
What’s most concerning about this precedent, however, is how Wall turned the ICA on its head, introducing a new lexicon into the legislative test. The act is supposed to be about determining the net benefits of a foreign takeover. That’s not how Wall pleaded his case. Rather, he introduced the concept of “strategic resource” and pleaded for the federal government to protect Potash on that basis. However, the words “strategic resource” aren’t in the legislation and are meaningless using a literal interpretation of the act.
It would be interesting to see a judge rule on that language; however, since the federal government never explained its decision or provided written reasons, we don’t really know if the government bought into the strategic resource argument or not. That simply clouds the picture even more, making it harder for lawyers to provide foreign investors with sound advice on takeovers.
Introducing the concept of strategic resource into the ICA process muddies the foreign investment waters. What’s a strategic resource and what’s not?
Surely, Canada’s oilsands, which hold an estimated 170 billion barrels of oil, could be considered a strategic resource. How long will it be before a federal government raises that argument against investment in Stelmach’s oilpatch by a communist Chinese company or for that matter a Korean, Norwegian, or Saudi Arabian company? (Be careful what you ask for Mr. Stelmach.) What will happen when a foreign company tries to buy Ontario’s coveted hand-held device maker Research In Motion Ltd. or one of the Maritime food producers? What about Canada’s forests? Aren’t they strategic resources? Where do you draw the line?
The ICA allows the federal government to review deals that could be injurious to Canada’s “national security.” That was used to block Alliant Techsystems Inc.’s attempt to buy the information systems business of MacDonald Dettwiler and Associates Ltd. There are safeguards.
Wall wailed about the loss of jobs and tax revenues. BHP argued the deal would generate net benefits and made a number of promises, including returning the head office to Saskatchewan, maintaining levels of employment, and undertaking to address the tax-loss concerns. It indicated a willingness to go beyond the requirements of the ICA. Yet, that fell on deaf ears. What BHP seemed reluctant to do, however, was support the continued existence of the Canpotext marketing monopoly — the OPEC of the fertilizer business — whose actions set artificially high prices for the mineral and gouges the farmers who buy it. Perhaps it’s time for Competition Commissioner Melanie Aitken to investigate Canpotext?
Following the ruling, Prime Minister Stephen Harper called for a review of the ICA rules. It’s clear the net-benefit test is too wishy-washy and can be manipulated for political purposes. However, there is no need for a review. All the federal government has to do is adopt the June 2008 recommendations from the Competition Policy Review Panel. It suggested scrapping the net-benefit concept and requiring the minister to show a transaction is “contrary to Canada’s national interest” before disallowing a deal, versus making buyers prove their case.
Sure, we would be fighting over what constitutes “national interest,” but the process would provide greater transparency, encourage foreign investment, and force the government to explain its reasons when rejecting a merger, which could then be reviewed by a judge. That would at least keep the government honest.
Instead, we have the current system where Wall got what he wanted, the protection of potash prices, and Harper got what he wanted, peace in the Conservative hinterland as an election nears. As for shareholders and foreign investors, well, let them eat Potash.
Jim Middlemiss, email@example.com, is a Toronto lawyer and co-owner of WebNews Management Corp. His column will be appearing in every issue of Canadian Lawyer.