May 27, 2011 / 5:19 PM / 8 years ago

UPDATE 2-Court clears way for Canada suit vs U.S. Steel

* Government argues U.S. Steel broke job-protection pledges

* Company claims rights violated by Investment Act (Adds details; In U.S. dollars unless noted)

TORONTO, May 27 (Reuters) - A court has cleared the way for Ottawa to seek penalties of up to C$10,000 a day against U.S. Steel (X.N) for allegedly breaking job-protection promises made when it bought Canadian steelmaker Stelco.

Canada’s Federal Court of Appeal struck down U.S. Steel’s efforts to overturn Canadian investment law — the second such court decision to go against the company — after almost two years of procedural and legal challenges by the Pittsburgh-based steelmaker.

The Canadian government sued the company in 2009, claiming U.S. Steel’s decision to shut down two former Stelco plants violated promises it made about maintaining employment levels.

U.S. Steel bought Hamilton, Ontario-based Stelco in 2007 for $1.1 billion, and the decision to idle the facilities affected about 1,500 jobs. The company blamed weak demand for the shutdowns and denies it broke any promises.

The official agreement between U.S. Steel and the Canadian government that allowed the acquisition of Stelco to go ahead has not been publicly disclosed.

All deals over C$300 million ($306 million) involving a foreign buyer are required to pass a government review to ensure that the takeover provides a “net benefit” to Canada.

While the government does not detail what “net benefit” means, it considers employment, technology development, productivity, competition and the effect a takeover will have on national policies.

In approving the Stelco takeover, the federal government cited job protection as one of the benefits.

But when demand dropped for its products in the aftermath of the global financial crisis, U.S. Steel decided to shutter most of its Canadian operations.

“If they commit to a given level of employment, and there isn’t the clause saying ‘assuming the global economy doesn’t tank’, then they’re obligated to maintain that,” said Walid Hejazi, a professor of international competitiveness at the Rotman School of Management in Toronto.

The Investment Canada Act gives the government the authority to ask the courts to fine U.S. Steel up to C$10,000 a day until its commitments on job protection are honored.

Hejazi said he does not see the ruling as negative for investment in Canada, but he said it will likely lead to more clarity on the specifics of “net benefit” in future agreements between the government and foreign investors.

The United Steelworkers union (USW), which represents workers at the former Stelco facilities, said that it hopes the case can now proceed toward a resolution.

“The courts have now made it clear — twice — that the penalties set out in the act are legitimate, as is their purpose to protect Canada’s economy and enforce promises made by foreign investors,” said USW Canadian Director Ken Neumann.

U.S. Steel declined to comment on the development.

The Investment Canada Act was in the news last year, when the federal government rejected a $39 billion takeover bid by Anglo-Australian miner BHP Billiton (BHP.AX) for Saskatchewan-based fertilizer producer Potash Corp POT.TO, saying the deal was not of “net benefit” to Canada.

A $3 billion bid by the London Stock Exchange (LSE.L) to buy TMX Group (X.TO), operator of the Toronto Stock Exchange, is now undergoing a “net benefit” review. [ID:nN26282442]

$1=$0.98 Canadian Reporting by Julie Gordon; editing by Rob Wilson and Peter Galloway

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