A new policy, outlined Dec. 7 by Canadian Prime Minister Stephen Harper, suggests the ban could be extended to other sectors and that the definition of a state-backed enterprise has widened beyond state-owned companies to include those deemed to be indirectly influenced by a foreign government.
"The prime minister has indicated that there will be limits within certain industry sectors to the amount of foreign state-owned enterprises (SOE) ownership, control and influence that will be acceptable to Canada," noted Fasken Martineau DuMoulin LLP's Toronto-based lawyers Anthony Baldanza, Douglas New and Huy Do. "Canada has decided that existing foreign SOE control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada, the message being that no further acquisitions of control of oil sands businesses by foreign SOEs will be permitted, barring exceptional circumstances."
The announcement of stricter controls on investment in Canada came as the government approved two-state backed deals, clearing the way for Cnooc Ltd.'s $19.4 billion takeover of Nexen Inc. and Petroliam Nasional Bhd's C$5.2 billion ($5.3 billion) takeover of Progress Energy Resources Corp.
The deals were opposed by a majority of Canadians, principally because the two buyers are state-controlled companies, according to polls taken during the government's extended review of the bids.
"Canadians generally, and investors specifically, should understand that these decisions are not the beginning of a trend, but rather the end of a trend," Harper said. "When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments."
Harper's government has found itself trapped between popular opposition to bids from state-owned companies and Canada's need for foreign investment to help it tap its vast oil resources. The country will need about C$630 billion of investment in oil and gas projects in the next 10 years to realize its potential, Natural Resources Minister Joe Oliver said earlier this year.
Cnooc in July bid $27.50 per share for Nexen, its partner in Canada's Long Lake oil sands project, valuing the target's equity at about $15.1 billion. Nexen has roughly $4.3 billion of debt. The deal is both the biggest investment in Canada by a state-owned foreign company and China's biggest foreign takeover. Calgary, Alberta-based Nexen owns leases covering about 5% of Western Canada's oil sands and shale gas deposits, though the bulk of its assets are in the Gulf of Mexico, the North Sea and West Africa.
Canada extended its review of Cnooc's bid twice, giving it time to negotiate concessions from the Chinese company and tinker with its Investment Canada Act, which requires foreign buyers to prove that a deal will deliver a net benefit to Canada.
Those concessions included guarantees on future investment in Canadian oil and gas, the establishment of Cnooc's North and Central American headquarters in Calgary, an agreement to retain Nexen's management team and employees, a timetable to list Cnooc shares on the Toronto Stock Exchange and a commitment to provide the Canadian government with an annual report on its compliance with its undertakings.
Petroliam Nasional, or Petronas, which is controlled by Malaysia, won the support of the government after making its own concessions, including a promise of $9 billion to $11 billion of investment, after Canada said in October that it intended to block the offer.
The Canadian government warned that future bids from state-owned enterprise for its oil and gas reserves will have to clear higher hurdles than the Cnooc and Petronas offers.
"The government of Canada has determined that foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada," Harper said. "Therefore, going forward, the minister will find the acquisition of control of a Canadian oil-sands business by a foreign state-owned enterprise to be of net benefit, only in an exceptional circumstance."
Canada's government said it will take into account the extent of foreign government influence on a bidder, on the business that is being acquired and on the sector that the business operates in. It said that it would, however, encourage state-backed acquisitions of minority stakes in Canadian companies.
Lawyers called for the government to provide further clarification of the new policies and in particular the concept of influence, and the nature of the "exceptional" circumstances that might open the door for a bid.
"Would insolvency or bankruptcy of the Canadian oil sands business without a viable non-SOE purchaser suffice?" Fasken Martin noted. "Aside from energy, and oil sands in particular, what other sectors may give rise to governmental concern?"
There was some good news in the revision for overseas bidders unaffiliated to foreign governments. Canada will increase the threshold that triggers a government review to C$1 billion from the current level of C$330 million for non-state backed bids. Offer from state-controlled companies will remain subject to the C$330 million threshold.
The promises of increased scrutiny of state-backed bidders did little to appease opponents of the deal including the opposition New Democratic Party. "This is a farce," said the NDP's natural resources spokesman Peter Julian in a statement. "While Conservatives admit that under the new rules this transaction is not a net benefit to Canadians, they have approved it anyway."
Cnooc is taking financial advice from BMO Capital Markets Corp. and a Citigroup Global Markets Inc. team that includes Peter Tague, Martin Lovegrove, Jason Johnson, Colin Banfield, Nathan Eldridge and Kasey Fukada.
Cnooc is taking legal advice from Stikeman Elliott LLP's William Braithwaite, John Ciardullo, Mike Devereux, Christos Gazeas, Warren Ng, J.R. Laffin and Chris Nixon and Davis Polk & Wardwell LLP's George R. Bason Jr., Howard Zhang, Leonard Kreynin, Kirtee Kapoor and Ronan P. Harty.
Nexen's financial advisers are Goldman, Sachs & Co. and RBC Capital Markets. It is receiving legal counsel from a Blake, Cassels & Graydon LLP team that includes Pat Finnerty, Jeff Bakker, Ross Bentley, John Eamon, Shlomi Feiner, Michael Gans, Jason Gudofsky and Caroline Helbronner and Paul, Weiss, Rifkind, Wharton & Garrison LLP's Jeanette Chan, Andrew Foley and Edwin Maynard. Nexen's in-house counsel is led by senior vice president Alan O'Brien and vice president Rick Beingessner.
The Nexen board is advised by Richard A. Shaw PC and Burnet, Duckworth & Palmer LLP.
Nexen shares leaped Monday to trade at C$26.57, up C$3.28, or 14%, on their previous close. Shares in Progress Energy traded at C$21.96, up C$2.59, or 13.4%.
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