Michael Bloom Vice-President Organizational Effectiveness and Learning

The Government of Canada has done the right thing in approving the Nexen and Progress Energy deals, and in setting out guidelines to govern foreign takeovers and investments by state-owned enterprises (SOEs) in Canadian companies. The government’s actions reflect the Conference Board’s long-held view (based on analysis) that SOE investments need to be viewed through different criteria than other mergers and acquisitions. The decisions are a “win” for Canadian enterprise and its international investors–current and potential–and a “win” for Canada as a country.

From the perspective of investors, the decisions allay market concerns about lack of transparency over foreign investment reviews and concerns on the part of potential investors on how and/or whether to proceed. The clarifying guidelines to the Investment Canada Act covering investments by SOEs and the restatement of the government’s policy on foreign takeovers (notably in the resource sector) have answered many investors’ questions.

Simultaneously, the government’s decision to approve the Nexen/CNOOC and Progress/Petronas deals makes it clear that Canada values its economic relationships with China and Malaysia and calms concerns that Canada might no longer be “open for business.”

From a national perspective, Prime Minister Stephen Harper made the accurate observation that “purchases of Canadian assets by foreign governments through state-owned enterprises are not the same as other transactions” because they “may go well beyond ... commercial objectives.” This differentiation protects Canada’s national interests.

The Conference Board is on record as saying that takeovers by SOEs need to be treated differently than deals involving privately owned companies because commercial decisions could be politically driven. The acquisitions and subsequent behaviours of SOEs could upset the proper functioning of markets, to the detriment of consumers, Canadian businesses, and the country as a whole.

What did we learn in the announced policy and guidelines? What are their impacts?

On the positive side, the policies and guidelines added much-needed clarity on how the Government of Canada will assess the merits of each proposed acquisition by an SOE. It is our opinion that the six stated criteria are comprehensive and touch on many of our major concerns about national competitiveness. In addition, the guidelines make explicit the commitments (“undertakings”), required as part of any deal, that are vital to buttressing Canadian interests (e.g., appointment of Canadian independent directors).

One area of concern for some players is that these changes will put a speed bump on the highway of capital entering Canada, notably for the capital-intensive resource sector, thereby slowing or reducing investment in this critical sector.

While this is a legitimate concern, the Investment Canada Act guidelines are unlikely to do much long-term damage to foreign investment as long as many other avenues are still open. SOEs can still make substantial equity investments in Canadian resource companies, provided that their overall position does not constitute a controlling interest. Chinese SOEs have already taken advantage of this investment route and will continue to do so. Importantly, there is no change in the ability of privately owned foreign companies to make acquisitions or investments in the Canadian economy. 

More work still needs to be done in order to achieve the desired goal of representing Canadian interests. The government will need to add more precision to the undertakings for these deals, such as the proportion of Canadian directors on the board, the percentage of the stock float that is listed on Canadian markets, and the number and location of senior managers. However, the government must be recognized for approving these deals and for articulating clearly the conditions under which it will accept foreign investment in the future.