IN THE NEWS ~ Maze of Canadian regulators spawns confusion about takeovers

Gordon Isfeld, National Post (National) Financial Post, Page: FP1 / FRONT

OTTAWA - If we have learned anything about the process that ultimately led to CNOOC Ltd.'s successful takeover bid for Nexen Inc., it is how much we did not know.

Often controversial and more often confusing, Canada's corporate investment environment is a maze of regulatory bodies, legislation and opaque terminology - as history shows.

BCE Inc.'s offer for Astral Media was rejected in October because the deal between the two Montreal-headquartered groups would not be in "the best interest of Canadians."

An attempt by Melbourne-based BHP Billiton to grab Potash Corp. of Saskatchewan Inc. two years ago was blocked because the deal was of no "net benefit" to Canada.

Proposed tie-ups in the late 1990s of Royal Bank of Canada with Bank of Montreal and Canadian Imperial Bank of Commerce with Toronto-Dominion Bank were ruled out of bounds because they would have put "too much control in too few hands."

The uncommon thread linking these rejections is that ultimately they were decided by different authorities - in these cases, the Canadian Radio-television and Telecommunications Commission, Industry Canada and the Department of Finance, respectively - and each under different acts of Parliament.

For a market that is medium-sized, to have so many bodies, as many jurisdictions with a role, puts us at a disadvantage compared to other countries

Add to that mix additional oversight by the Competition Bureau and, depending on the circumstances and the players, the Office of the Superintendent of Financial Institutions and Heritage Canada, among others.

"For a market that is medium-sized, to have so many bodies, as many jurisdictions with a role, puts us at a disadvantage compared to other countries," said Michael Bloom, a vice-president at the Conference Board of Canada in Ottawa.

"We have a complex regulatory environment. We don't have a single national securities oversight mechanism. We have lots of different rules or variations on the rules for different sectors. So, yeah, it's a complicated world," he said.

"That's going to probably keep things going a little bit slower than they would otherwise go. Simplification and coordination would be good."

Richard Elliott, a partner at Davies Ward Phillips & Vineberg in Toronto who specializes in investment issues, said "people who are less familiar with may find them little difficult to navigate."

"The Investment Canada Act and the Competition Act are both statutes of general application, so they cut across sectors, generally. And then there are certain specific sectors where there are sectorial regulators," Mr. Elliott said, noting the CRTC covers the telecom and broadcastingsectors, the minister of finance has the ultimate oversight over bank mergers and the minister of transport oversee the transport sector.

The Investment Canada Act - legislation that has been a fixture since 1985 - deals only with takeovers of Canadian companies by foreign operators, but the Competition Bureau and other authorities can look at deals between both foreign and domestic companies, and those between two or more Canadian companies.

"The Bureau is a bit of a strange beast, in that it's part of Industry Canada, reports to Parliament through the industry minister, but meant to be an independent law enforcement agency. So they are supposed to be independent," says Kevin Ackhurt, a partner at Norton Rose in Toronto who deals with international legal practice.

"The industry minister doesn't have a role in the competition side. So, the parties would have to work it out with the Competition Commissioner. And, ideally, reach some kind of accommodation and settlement."

If they cannot do that,"they'll have to roll their dice" at the Competition Tribunal, a quasi-judicial body that hears appeals on investment decisions. If one of the parties disagrees with a tribunal ruling, they can take the matter all the way to the Supreme Court of Canada.

The Investment Canada Act focuses on the "net benefit" of foreign ownership deals, whereas the Competition Bureau is "not nationality-specific," Mr. Elliott said.

" looks at transactions that could adversely impact competition. It could be between domestic companies. It could be an international merger that has a Canadian aspect. It could be a variety of things. But the focus is on the economic impact on competition - and principally whether mergers are expected to lead to higher prices for consumers."

Industry Canada still retains jurisdiction over most areas, unless it relates to, for example, a "cultural industry," such as the production, distribution and sales of books, films and music.

"Jurisdiction for that resides with Heritage Canada and the decision with the minister of Canadian Heritage," Mr. Elliott said. "So, for example, under the Broadcasting Act, there are foreign ownership limits on certain carriers that the CRTC would oversee compliance with."

In the case of China National Offshore Oil Co.'s pursuit of Nexen, the Calgary-based oil and gas producers, the fact that CNOOC was a state-owned enterprise added another barrier to public clarity.

Yet, it was that $15.1-billion bid that stirred the federal government to issue new guidelines on its net benefit rule that is the bedrock of the Investment Canada Act.

Ottawa gave its nod on Dec. 7 to the CNOOC-Nexen deal, along with the $5.2-billion bid by Malaysia's Petroliam Nasional Bhd (Petronas), another state-owned company, for Calgary natural gas producer Progress Energy Resources Corp.

But the Conservative government attached conditions, particularly in the area of corporate governance, to both takeovers and all but ruled out any other deals that give controlling interest of the oilsands by foreign-owned companies.

That attempt to clarify the net benefit issue has not satisfied many critics, given Ottawa's subsequent statement that it would not review a $2.18-billion oil sands joint venture between Calgary natural gas company Encana Corp. and state-owned Petrochina Co., as it does not exceed the equity-level threshold under the new rules. The deal will give a PetroChina subsidiary a 49.9% stake in Encana's shale operation in Alberta.

"Foreign investments that do not involve the acquisition of control are not reviewable under the Investment Canada Act except in respect of their national security implications," an Industry Canada official said in a recent statement.

Peter Julian, the NDP natural resources critic, said government decisions continue to reflect an "incredibly nebulous and confused Investment Canada process" for foreign takeovers. "It's very hard to say what the government is looking for," he argued. "There's no public consultation process at all. No transparency."

The same could be said for takeovers between Canadian companies as well.

With the BCE-Astral deal, the CRTC decision to block the $3.38-billion takeover took participants and other broadcast companies by surprise. What appeared to be a done deal, with many arguing that it met the criteria previously used to judge such takeovers and mergers, was shot down by the CRTC. CRTC chairman Jean-Pierre Blais said the deal was good for BCE "but we were not persuaded it was in the best interest of Canadians."

Mr. Bloom, at the Conference Board, adds, "People still aren't fully sure how those are being thought through by government. It's still a little bit behind the vale. They'd like to see consistency and simplification for sure."

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