Investment Canada Act amendments potentially focus on foreign state-owned investors

March 1, 2007

The Investment Canada Act has returned to the national spotlight. As part of the long-term economic plan released in late November called Advantage Canada: Building a Strong Economy for Canadians,1Canada’s Minister of Finance announced, among other things, his intention to review the Act “with the aim of maximizing the benefits of foreign investment for Canadians, while retaining our ability to protect national interests.” While identifying screening procedures under the Act as a factor that restricts foreign investment in the Canadian economy (and stating unequivocally that “both inward and outward foreign direct investment bring substantial benefits to Canada”), the report also noted concerns arising from the “rare” occasions when take-overs of Canadian businesses might damage Canada’s long-term interests.

The only example cited was that of investments in Canada by foreign state-owned enterprises (SOE) with “non-commercial objectives and unclear corporate governance and reporting.” As has recently been the subject of some discussion in Canada (see below), the acquisition by a foreign SOE of a significant stake in Canada’s natural resources might trigger a concern that such resources would simply be funnelled back to the investor’s home country and not sold on the open market. One could also imagine, however, that investment in a defence-related industry by a hostile government might not be in Canada’s “long-term interests.” Moreover, in the highly charged post-9/11 world of international politics, other grounds may also be raised in opposition to certain investments.

Wariness of foreign state-owned investors is neither novel nor unique to Canada. South of the border, national energy security was invoked by members of the United States Congress who objected to China National Offshore Oil Corporation’s (CNOOC) proposed acquisition of Unocal, a U.S.-based oil producer – objections that may have influenced Unocal’s decision to reject CNOOC’s offer in favour of a lower bid by Chevron. Earlier in 2006, a United Arab Emirates state-owned company, Dubai Ports World, announced that it would sell the U.S. port management business it had recently acquired – after a chorus of congressional opposition to the deal. It was also reported in 2005 that the Chair of the U.S. House of Representatives’ Armed Services Committee had urged the Bush administration to pressure Canada to review proposed Chinese investments in Canada’s oil sands projects.2

In Canada, unease with acquisitions by foreign SOEs was demonstrated in 2004, when a number of Canadian parliamentarians expressed concerns about the proposed acquisition of Noranda, a large Canadian mining company, by China Minmetals Corp., a Chinese SOE. Minmetals was not the successful bidder, so the issue of foreign government control over Canadian “strategic assets” was never fully addressed. Since then, however, China Petrochemical Corp. and CNOOC have purchased minority interests in Canadian oil sands projects without objection by the federal government. Nevertheless, the previous Government responded to the controversy in 2005 by introducing a bill into Parliament (Bill C-59) that would have added “national security” as a ground under the Investment Canada Act for reviewing and prohibiting a foreign take-over of a Canadian business. While the then-Industry Minister (responsible for the Act), stated at the time of the Minmetals bid that foreign investment review is “a qualitatively different matter when enterprises are state-owned,”3 foreign state-owned enterprises were not specifically targeted by Bill C 59.4

The scope of the current Government’s concerns, as briefly alluded to in the report (foreign state investments), may be narrower than “national security.” That said, like Bill C-59, any legislation the Government brings forward would likely face similar challenges to articulate the criteria on which to reject an investment, while not appearing to discourage foreign investment in Canada. Indeed, criticism of Bill C-59 targeted the potentially very broad reach and uncertain scope of the term “national security.”5 While the Minister of Industry at the time stated that “national security” in the context of foreign investment review referred principally to acquisitions involving sensitive technology (e.g., satellite or encryption technology) or military hardware, the possibility of an expansive interpretation remained. It is worth noting that the federal Treasury Board guidelines for procurement define “national security” as encompassing threats to economic, environmental and human security.

It remains to be seen whether the new Government’s proposed amendments will zero in on foreign SOEs, or will seek broader discretion to reject foreign investment in Canada on “national security” grounds, and exactly how it will attempt to change the perception that the Act discourages foreign direct investment in Canada. It will also be interesting to see how foreign governments will respond. Canada will need to tread carefully, walking a fine line between offending foreign state investors, on the one hand, and promoting foreign investment in Canada, on the other.

1 Available at
2 “U.S. officials sound alarm on China; Unocal bid painted as reserve grab”, The Globe and Mail, July 14, 2005, p. B1.
3 “PM lauds Chinese takeover of Noranda”, The Globe and Mail, October 22, 2004, p. A1.
4 Bill C-59 died on the Order Paper as a general federal election was called before its enactment.
5 See The Competitor (Stikeman Elliott LLP), July 2005, available at

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