Canada saw some big foreign deals in 2019 — and, generally, the country is hospitable to foreign investment. With a stable minority government, Canada’s environment for competition and foreign investment is a relatively safe one, lawyers agree.
“I don’t think there’s a [foreign] deal that’s going to put the government at risk,” says Jason Gudofsky, head of the Competition/Antitrust & Foreign Investment Group at McCarthy Tétrault LLP in Toronto. “For the next year or two, it’s a fairly safe environment politically.”
Stability is important for investors, notes Paul Collins, co-head of the competition & foreign investment group at Stikeman Elliott LLP in Toronto; but the global landscape in 2020 remains to be seen.
“Business folks, M&A doesn’t like uncertainty; it likes predictable conditions,” says Collins. “They don’t have to be predictably good; but when you have things like what [U.S. President Donald] Trump is doing with tariffs, it makes things unstable.
“That uncertainty can strangle deal-making and foreign investment.”
Here’s a look ahead to the regulatory environment and the competition and foreign investment landscape in 2020, as well as a look back to the year (and a bit) that was.
Canada’s big deals
Fintech deals such as PayPal’s acquisition of Hyperwallet in late 2018 and Global Payments’ merger with TSYS in September are U.S. deals that have had “Canadian aspects” and are more closely scrutinized by the Competition Bureau, says Julie Soloway, a partner in the competition, antitrust & foreign investment group at Blake Cassels & Graydon LLP in Toronto.
Fintech is a branch of the digital economy, and, last year, the Bureau made a “call-out” to stakeholders for information on potentially anti-competitive conduct. It also hired a chief digital enforcement officer. Soloway anticipates seeing “movement in that area” as changes enacted by the Competition Bureau apply domestically but equally to foreign mergers. “Many of these giant tech companies are foreign.”
Some of the biggest deals of 2019 were in the cannabis sector, with the American Altria Group buying a 45-per-cent stake in the Canadian Cronos Group; Constellation Brands’ $5-billion investment in Canada’s Canopy Growth; and Canopy Growth’s plan of arrangement with Acreage Holdings in the U.S., giving it an option to acquire it in future once federal laws concerning the cultivation, distribution and possession of cannabis change in that country.
“Cannabis deals are a beast unto themselves,” says Elisa Kearney, a partner in the competition and antitrust & foreign investment groups at Davies Ward Phillips & Vineberg LLP in Toronto, calling last year’s cross-border cannabis deals “novel and highly innovative.”
But Kearney predicts less significant investments and novel transactions in the cannabis sector in 2020. “What we’ll end up seeing is a consolidation of existing Canadian cannabis companies through asset sales, bankruptcies and consolidation of smaller players,” she says. “We won’t see another significant Canadian investment until the industry here has matured a little.”
Otherwise, big cross-border deals were across all industries, including: the U.S.’s Newmont Mining buying Canada’s Goldcorp Inc.; Parmalat, owned by the French Lactalis, buying the Canadian natural cheese business from Kraft Heinz Co.; Blackstone Group buying Canada’s Dream Global REIT for $6.2 billion; the $5.2-billion majority acquisition in GardaWorld by BC Partners; and Hasbro Inc.’s purchase of Canadian media company Entertainment One Ltd. for $5.3 billion.
In the Hasbro-Entertainment One deal, a Canadian-controlled affiliate of Entertainment One will maintain control for purposes of Canadian regulations that restrict foreign ownership in the film production and distribution space, Kearney says, “so they had to be creative” in forming that deal. However, a report is expected to be delivered to the government early this year that may recommend changes to foreign ownership restrictions under the Broadcasting Act, she says.
Also in the cultural sector, Collins notes the end-of-year announcement that U.K.-based Cineworld Group PLC would buy Cineplex Inc., Canada’s largest chain of cinemas, for $2.8 billion in a deal that was notable for the way the break fee was structured, he says.
Regulatory environment for foreign investors
Cross-border investments are governed by the Investment Canada Act, under which all investments into Canadian businesses by non-Canadian investors are subject to at least notice to the government and possibly a full-scale government review. Different thresholds apply to different countries, and investors qualify for higher investment thresholds from the European Union, the United States and other countries with which Canada has free-trade agreements.
The test for approval under the Act is “Net Benefit for Canada,” and a little more than $1 billion in enterprise value for a proposed investment from investors from World Trade Organization countries that are not state-owned enterprises (SOEs) will trigger a full Net Benefit to Canada review.
When acquisitions of Canadian companies exceed that threshold, the minister of Innovation, Science, Economic Development may review or approve those deals. This “doesn’t capture a ton of investments per year,” says Soloway.
“Layered on top of that, what is the more interesting, and controversial, is [the government’s] ability to use national security rules contained in the act to review any investment they want. In recent years, that has meant investments from China.”
In the last annual report from Innovation, Science and Economic Development Canada for the fiscal year 2018-2019, there were four national security reviews from China, one from Singapore and two from Switzerland. China has also featured most prominently in previous years.
The government’s policy is to review any Chinese or Russian acquisition, Soloway says, and although the federal Liberal government had been perceived as very friendly to China in its early days, it became “less friendly and welcoming” over its tenure, notably blocking the purchase of Aecon Group by Chinese state-owned CCCI in 2018.
This was significant because of the embarrassment it can cause a foreign government that has been blocked by another government from investing in the target’s country, “and it does create a chill on future investment from that country,” says Soloway. At the same time, China SOE Zijin Mining Group Co. was allowed to purchase Nevsun Resources Ltd. in 2018, in a less sensitive sector than radio systems.
Even aside from China, Gudofsky sees a lot of interest on the national security side, as countries around the globe beef up their national security review, among them Germany and the U.K. Canada brought in its National Security Review in 2009 under the Investment Canada Act, he says, following the Ericsson-Nortel and the MacDonald, Dettwiler and Associates Ltd. transactions.
“Those deals brought Canada to think about national security,” he says. “A lot of interest these days is around national security.”
Yet the Canadian government is generally considered open to foreign investment, and Kearney notes Investment Canada’s annual report showing that foreign direct investment was up in 2018-2019. Thresholds for net benefit review have decreased, following “a really, really, intense review under the Investment Canada Act,” while the threshold transaction value for net benefit reviews “has increased significantly, to over $1.5 billion for countries that Canada has a free-trade agreement with,” she says.
Gudofsky anticipates relatively few Investment Canada Act reviewable transactions since the threshold has increased. Aside from specific industries such as air transportation, broadcasting, telecommunications and banking, where there are restrictions on foreign ownership, “I think it’s a friendly environment. Most transactions, given the size of the thresholds, don’t require reviews.”
Traditionally, there has been more foreign investment in Canada’s oil and gas industry. “So much of our potential investment is in natural resources and oil and gas, and that's a sector that's extremely challenging” now, says Collins. “You’re seeing companies leave Canada. . . . Kinder Morgan [former owner of Trans Mountain Pipeline] was a big player in the oilpatch, and now they’re gone.”
Collins also cites factors that might make Canada less attractive to foreign investors, including “oppressive tax policies . . . and the ability to raise funds in Canada.” Although some sectors are very active, he says, and private equity is very interested in Canadian businesses, the oilpatch stands out as “very challenged.”
Overall, though, he says, Canada is “a good environment for foreign investment.”
The landscape in 2020
On the competition side, “you can certainly see the Bureau being very enforcement-focused, even searching for non-reportable, non-notifiable deals,” Gudofsky says, “and the Bureau has been having fairly intense investigations in terms of document discovery and so forth.”
On the Investment Canada Act side, investors need to be mindful of articulating for the government, and for the public, what’s good for Canada about the case, and outlining this in the press release of the announcement, he says. “Make sure it’s clear why the deal is good for Canada.”
Kearney sees less uncertainty around “the new NAFTA” — or CUSMA, the Canada-United States-Mexico Agreement — but continued uncertainty around Canada’s relationship with China, as well as the effects of the new Quebec government.
Still, she says, “I feel like 2020 will be a good year for Canada to do business and as a place for foreign investment.”
“When you consider the size of our economy, we’re punching way above our weight,” says Collins. “For the most part, we have an enviable environment from a competition/anti-trust perspective.”