Industry Committee on May 21st, 2013

[Paul Halucha]

To be clear, the Prime Minister spoke on behalf of the government at length on this last December. He did not say under what exceptional circumstances a transaction would be approved. This had been left to the discretion of the minister.

He did note, and I would echo it here, that there is a legal obligation under the act for every transaction to be considered on its merit. It's a case-by-case legal obligation in the act in order to conduct that review. So it would be difficult for the government to essentially make a prohibition vis-à-vis a certain sector. So that would be a statement.

I would note a quote from the December press conference. The Prime Minister stated, “...we should not expect to see future transactions involving controlled interests in the oil sands approved”.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I'll ask my next question in English.

In terms of state-owned enterprises, will proposed foreign acquisitions of Canadian companies by SOEs under $1 billion merely be rubber-stamped as well, provided they are not operating in the oil sands?

[Paul Halucha]

I would take issue with the characterization of the application of the act as “rubber-stamping”. No transactions are rubber-stamped. It's a careful analysis. There is a set of consultations outside of government, and also with the investor.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

You're right, I shouldn't use that expression. But will they have to go through the process? Let's say, if it's not in the oil sands, would they have to go through the process if it's an SOE that is acquiring something under the...?

[Paul Halucha]

Yes, so if they were still within the threshold and were acquiring a controlling share, or if the minister at the end of de facto control determined that they were taking control, they would be reviewed under the act. The provisions in the SOE guideline would be maintained as well. So there would be a continuous effort to get mining undertakings to have them, to ensure that they're commercially oriented, to ensure that they encourage them to list on stock exchanges, to be transparent in their operations. So all the types of activities that the minister has done in the past would continue. But the commitment is very specific around the exceptions. It's only in the oil sands. Outside of the economy, it's just to monitor.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I would like to touch on the differences between asset value and enterprise value. Also, what are the consequences of the number of transactions? I think I've seen there would be fewer transactions because the enterprise value would be a little higher than the asset value.

[Matthew Dooley, Acting Director, Investment, Insolvency, Competition and Corporate Policy, Department of Industry]

As Paul mentioned earlier, the analysis we did historically was about a 30% reduction once you got to $600 million of enterprise value. So that's the basis we give it on both the increase in the threshold and the switch to enterprise value. So it's all together.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

What comprised the enterprise value? I leave that up in the air.

Up, no, maybe not.

[The Chair, Conservative, David Sweet]

Go ahead and finish it. I'm trying to keep it within reason. It's fairly clear.

[Paul Halucha]

Matt is looking up the technical definition at this point.

But it's to get a better market approximation of the value of the company versus a book value. So, for example, company assets like intellectual property would not necessarily be captured in the asset value but would be much more likely to be factored into the market price of the company.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

But that's a big question.

[Paul Halucha]

In terms of the actual mechanics, the proposal is to go back about two months and look at a period of 20 days prior to the bid because you don't want to have a case whereby the bid results in an increase. Market prices jump because of a bid in an acquisition, as often happens, so you go back to a period before the bid. It's a 20-day period prescribed in the regulations. We take an average of that period. We add liabilities because those are costs that the investor would be taking on and that gives us the market value.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Halucha.

Mr. Dooley, do you have the technical explanation there quickly?

[Matthew Dooley]

Certainly. The calculation for publicly traded companies, as Mr. Halucha just said, is the market capitalization based on our going back two months and over 20 days, plus assumed liabilities. It's a cost that the investor will incur less any cash on hand because it's money the investor is receiving.

For privately held companies, it will be the price to be paid according to the terms of the agreement that the parties enter into plus assumed liabilities less cash on hand.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Dooley.

Now I'll move on to Mr. Carmichael.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Chair.

Gentlemen, I'd like to follow my colleague's questions with regard to the letter we received from the Canadian Bar Association. I'd like to come back to a better understanding of the de facto control issues, so I'm clear.

The question that was raised was:

Notwithstanding the lower monetary threshold applicable to SOE investors, because of the way those thresholds are calculated (“enterprise value” for non-SOE WTO investors and “book value” for SOE WTO investors), an SOE investor could fall under the threshold for “net benefit” review while a non-SOE WTO investor could be subject to a review for the same proposed transaction. The CBA Section does not believe this to be the Government's intention.

I wonder if you could clarify that for us.

[Matthew Dooley]

Certainly. What they're describing is a situation where, in an SOE, because the valuation of the company is based on asset value, the asset value could in some circumstances be higher than the enterprise value. Perhaps the stock of the publicly traded company has been depressed for some reason. Therefore, its book value or asset value is higher.

Our response would be that this is a theoretical concern. We can't say in every particular case that, yes, the enterprise value is higher than the asset value. What we have found through our analysis, as we've just discussed, is that in the majority of cases, because as well as going to enterprise value we're also increasing the threshold, there are going to be fewer cases that will run into this wall of having to have a review. As the threshold continues to increase—it starts at $600 million and goes to $800 million and then $1 billion and then is indexed to inflation thereafter—the chance of this happening will fall significantly as we go up each level.

As well, one of the reasons we looked at this is that Canada has trade obligations. We've taken reservations for the application of the Investment Canada Act, and one of the implications is that we can't make the act more restrictive than it currently is. The idea of an SOE staying at asset value and staying at its current threshold means we haven't made the act more restrictive. We're staying where we are. Switching to enterprise value, where we assume from the analysis we've done that enterprise value is usually higher than asset value, and yet staying at the same threshold of $344 million for state-owned enterprises puts us at a risk of going offside of that obligation not to make the Investment Canada Act more restrictive.

We're at a situation where we've maintained the SOE threshold for reviews where it was as per our trade agreements. At the same time, for private sector agreements, we are going to increase the threshold so that only the more significant transactions will be captured.

[John Carmichael, Conservative, Don Valley West, ON]

I don't want to confuse a couple of thoughts that seem to be moving through the room here.

When you talk about those values, are those values a snapshot in time when you do the appraisal, or are they over a longer term sustainability measurement?

[Matthew Dooley]

The calculation is done when a transaction or investment is made. The threshold tells the companies whether they need to make a notification under the act, which is simply advising the government that a transaction is occurring. Alternatively, if they're over the threshold, then they must go through an application for review, at which point the Minister of Industry is entitled to review whether the investment is of net benefit. It is a snapshot at the time of the investment.

[John Carmichael, Conservative, Don Valley West, ON]

Okay, that's clear. Thank you.

Mr. Halucha, when you were providing your comments, you mentioned that transactions can be structured to circumvent guidelines. That's not an unusual concept. It's one that's out there, and I understand that. Thus, I suspect that explains the need for the de facto control element within the bill. Is that correct?

[Paul Halucha]

That's a strong rationale for that policy change being done.

[John Carmichael, Conservative, Don Valley West, ON]

Right. Is that policy change new or amended?

[Paul Halucha]

The de facto power didn't exist for the net benefit test. It's a new authority for that portion of the act. As I mentioned, it already exists for cultural industries. It's quite specific in the cultural businesses sector, because there's often an obligation on the companies in order to qualify for programs, in order to obtain beneficial tax treatment, they need to demonstrate that they are a Canadian business. Obtaining a status review from the Minister of Canadian Heritage is frequently used for that purpose rather than necessarily just for reviews.

For national security, there is an authority as well for a de facto control. If on the national security side they make a determination that a company has de facto control, then they can look at it from a security perspective. We're building very much on those two.

[John Carmichael, Conservative, Don Valley West, ON]

I understand that. Are there other factors that are considered when you're considering de facto control analysis?

[Paul Halucha]

Sure. First, I'll go through some of the factors. We do have a list. The analysis would resemble an undertaking in support of other federal legislation. I just want to underline that this isn't a type of analysis that's done in support of other pieces of legislation, including the Insurance Companies Act, the Bank Act, the Canada Transportation Act, or the Income Tax Act. We have the Telecommunications Act and Broadcasting Act as well.

De facto control can be determined through analysis of a variety of factors—this is a non-exhaustive list—including: the number, type, and distribution of securities; the rights and privileges or features attached to the securities; shareholders' agreements, including the holding of a casting vote and veto powers; commercial or contractual relations of the corporation; and the use of proxies.

For example, one scenario that we thought of in the context of de facto control is that you could have a situation where a foreign state-owned enterprise acquires just beneath the level of legal control and then works through an alliance with another investor that has the shares that together effectively give them acting control of the company.

Then there are factors related to the membership structure, processes of the board of directors and senior management to the extent that you have a non-legal controlling share of the company, but you have three members on the board of directors; you have members who go between a foreign state and the board of directors of a company. These would all be factors, and the minister could say that, while it's not legal control, consideration of all of these others or a subset of them gives reason to believe that there is control. I think that would be the list.

One more I would mention as well is situations of companies already having a history in another jurisdiction. States often own companies that are active in many jurisdictions. If it were to come to the minister's attention that a state had influenced, in a non-commercial way, a company in another jurisdiction outside of Canada, we would want him to be able to consider that in the context of looking at whether this is legal or non-legal control of the Canadian company.