* Opaque Investment Canada Act sets foreign takeover rules
* Government promised two years ago to clarify conditions
* State-owned enterprises may be a special case
By Euan Rocha
TORONTO, Oct 22 Canada rejected Malaysian state
oil company Petronas' bid for Progress Energy
Resources Corp under the terms of the Investment Canada
Act - an opaque piece of legislation created, in part, to draw
more foreign investment into Canada.
The act gives the industry minister the power to review any
major takeover of a Canadian company by a foreign investor to
determine if the deal is of "net benefit" to Canada.
But despite several promises to explain the issues it looks
at when it decides whether to approve a takeover, Canada has not
clarified what "net benefit" means, leaving frustrated companies
and investors demanding more details.
The act came under the spotlight in 2010 when Canada blocked
BHP Billiton's $39 billion hostile bid for the
world's largest fertilizer maker, Potash Corp, arguing
that it was not of net benefit to Canada.
Industry Minister Christian Paradis used the same argument
late on Friday, saying he was not satisfied that Petronas' $5.2
billion friendly bid for Progress would be of net benefit to
Canada. He would not give any details but said the companies had
30 days to come up with new proposals.
Progress Energy Chief Executive Michael Culbert on Monday
told Reuters he had received no indication from the government
that it had concerns about the deal and blamed a "communications
breakdown" for the 11th-hour veto. Culbert said he believes the
deal can get back on track, with new talks starting this week.
At the time the transaction was announced in June, Petronas
committed to keeping Progress Energy's upstream operations in
Calgary. It also said it would invest substantial sums to build
liquefied natural gas infrastructure in Prince Rupert, British
Columbia for a planned LNG export facility.
The Investment Canada Act, a 1985 replacement for
legislation that allowed Canada to review all foreign takeovers,
lists several factors that the government can take into account,
including jobs, innovation, competition (internationally and
within a sector), and the compatibility of a deal with "national
industrial, economic and cultural policies."
But there is no explanation and little detail about these,
or about a national security clause and rules for dealing with
state-owned enterprises like Petronas and China's CNOOC Ltd
, whose C$15.1 billion bid for Nexen Inc is
also under scrutiny.
"Obviously one question this (ruling) raises is the signal
it sends to other foreign state-owned investors - and CNOOC in
particular," said Subrata Bhattacharjee, a partner with Heenan
Blaikie in Toronto. "It puts practical pressure on CNOOC in
whatever negotiations are under way."
"A rising tide raises all boats - so it is fair to say that
both investors would have to deal with the government's latest
thinking about foreign investment review of these types of
deals," said Bhattacharjee, co-chair of the firm's national
trade and competition group.
The current review threshold is C$330 million -- a fraction
of the size of many takeovers on the market.
Foreign investment and competition lawyers say some degree
of obscurity within the act is necessary to give the government
the leeway to rule on sensitive takeovers, but nonetheless they
say the current legislation could use some additional clarity.
"It would be far from total transparency. It would be more
like, here are the six net benefit factors we consider and we
will tell you how we approach these things," Tony Baldanza, a
partner with Fasken Martineau who heads the firm's antitrust and
competition law group, said of the ways the law might change.
"However, you are not going to be able to tick boxes and
predict an outcome in all cases."
Canadian Prime Minister Stephen Harper on Monday promised to
provide foreign investment guidelines "fairly shortly" that may
provide clarity on how the government reviews bids, especially
ones from state-owned entities.
Despite fears that Canada is adopting a more protectionist
stance with the Progress-Petronas decision, some believe that
the government can minimize the fallout if it does spell out the
factors it takes into account when considering takeovers by
"It may be that the announcement is intended to signal that
Canada will apply a common set of, perhaps tougher, criteria
when assessing whether or not bids by any state-owned entities
are 'likely to be of net benefit' to Canada," said Jay Hoffman,
who is partner and co-chair of the business law group of Miller
Thomson LLP in Toronto.
"If this is the intent and the guidelines for SOEs are
ultimately clarified, the level of foreign investment by SOEs
going forward may not be as negatively impacted by this decision
as a flat out rejection," he said.
(Reporting by Euan Rocha; Editing by Janet Guttsman and Steve