On October 7, 2013, Minister of Industry James Moore announced that the “Government of Canada has concluded its review of Accelero Capital Holdings’ proposed acquisition of the Allstream division of Manitoba Telecom Services Inc. (MTS) under the national security provisions of the Investment Canada Act. The result of this review is that the transaction will not proceed.” The announcement, which came more than four months after Accelero announced its proposed $520 million acquisition of Allstream, took the market by surprise.
This is only the third transaction that the government has blocked under the Investment Canada Act (ICA) (outside the cultural area) since the legislation was enacted in 1985. The others were Alliant Techsystems’ (Alliant’s) proposed acquisition of MacDonald Dettwiler and Associates’ (MDA’s) Information Systems Business in 2008 and BHP Billiton’s hostile bid for Potash Corp in 2010, as explained in a 2010 Osler Update. It is also the first transaction to expressly be disallowed on national security grounds since the national security regime (NSR) was added to the ICA in 2009.
Under the general provisions of the ICA, a non-Canadian seeking to acquire control of a business in Canada exceeding prescribed monetary thresholds must obtain ministerial approval on the basis that the proposed investment is of “net benefit” to Canada. In addition, the Canadian government has broad discretionary powers under the ICA’s NSR to review, prohibit and impose conditions on a broad range of investments by non-Canadians if it determines that the investment is “injurious to national security.” Even minority investments by foreigners that would not constitute an acquisition of control of a Canadian business under the generally applicable ICA rules may be reviewed under the NSR. The standard for review is purposefully opaque and, like the situation applicable to decisions regarding whether a particular investment is of net benefit to Canada, the government is not statutorily required to provide reasons for decisions it makes under the NSR.
Although several transactions were quietly rejected or abandoned because of national security concerns prior to Allstream-Accelero, this transaction marks the first affirmative rejection of a foreign investment specifically on national security grounds since the NSR was added to the ICA in 2009. Other transactions include the following:
In April 2008, the Minister rejected the proposed acquisition of MDA’s Information Systems Business by U.S. defence contractor Alliant. Alliant would have gained access to MDA’s proprietary Radarsat technology as a result of the acquisition, which had been described as a tool to protect Canadian sovereignty. As there was no formal NSR under the ICA at the time of this transaction, the acquisition was disallowed on the grounds that it did not satisfy the general net benefit test under the ICA.
In November 2008, Canadian-based uranium producer Forsys Metals Corp. (Forsys) announced that it was being acquired by George Forrest International Afrique S.P.R.L. (GFI), an African conglomerate involved in the civil engineering, mining and manufacturing sectors. However, in August 2009, Forsys announced that GFI had received a letter from Industry Canada prohibiting it from completing the proposed transaction pending further notice (see Forsys press release). Although Forsys terminated the transaction shortly after the notice was received and no further details were released by Industry Canada, media reports pointed to security concerns relating to the potential supply of uranium by GFI/Forsys to Iran.
In October 2012, Orascom Telecom Holding S.A.E. (Orascom), a subsidiary of Vimpelcom Ltd., announced plans to acquire control of Globalive Wireless Management Corp. and its subsidiary, Wind Mobile (Wind). In June 2013, Orascom announced that it was withdrawing its application for approval under the ICA. Although Orascom gave no specific reasons for its withdrawal and the Minister did not issue a final decision under the ICA, media reports suggested that the proposed transaction gave rise to national security concerns as a result of the ownership of Vimpelcom Ltd. and Wind’s use of Chinese-supplied technology in its wireless network infrastructure.
The government’s decision to reject the Allstream-Accelero transaction on national security grounds sends a strong signal to prospective foreign investors that the Canadian government actively reviews foreign investment through a national security lens. It also is of particular importance for the following reasons:
Increased uncertainty for investors. There have been long-standing concerns about the inherent lack of transparency in the government’s application of the general net benefit test under the ICA. What exactly constitutes a net benefit is unclear, and, at least from a foreign investor’s perspective, the application of the test is unpredictable because it seems to vary considerably from deal to deal. These concerns were heightened by the government’s decision in December 2012 to restrict state-owned enterprise (SOE) investment in the oil sands and to implement more restrictive rules and broader discretionary powers in regard to the government’s review of SOE investments generally (see Osler’s December 2012 Update and May 2013 Update. The government’s decision in the Allstream-Accelero transaction exacerbates these concerns because it highlights the opaqueness of the “injurious to national security” test in the ICA. The Minister provided no reasons for the decision to reject the deal on national security grounds except to state that “MTS Allstream operates a national fibre optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada.” Accelero is reported to have offered to make a number of concessions to address the government’s concerns, including discontinuing carriage of sensitive government data and refraining from using certain Chinese-sourced telecom equipment in the Allstream network. The failure to provide an explanation as to what type of risk the Accelero deal posed, combined with the government’s broad discretionary powers under the ICA, increases the existing considerable uncertainty for potential investors and sellers.
Mixed messages and confusion for potential investors in the telecom sector. The Harper government has made significant efforts to attract foreign investment in the telecom sector, including liberalizing the foreign ownership restrictions for the small telecommunication carriers market (as explained in a May 2012 Osler Update and a March 2010 Review), eliminating foreign ownership restrictions in the satellite industry and, most recently, actively soliciting Verizon and other foreign investors to participate in the upcoming auction for spectrum in the 700 Mhz band (see Osler Update).
In light of its very public efforts to increase foreign investment in the telecom sector, the Harper government has now blocked a significant foreign investment in this sector. The confusion created by this decision is compounded by the fact that this government is quite familiar with one of the principals of Accelero, Mr. Sawiris, who was the former head of Orascom, the original backer of Wind. In fact, in 2009 the government took the unprecedented step of overruling the Canadian Radio-television and Telecommunications Commission after it had determined that Wind was not Canadian-controlled. Then, following more than two years of legal proceedings, the government changed the foreign ownership rules to permit non-Canadian control of carriers holding less than a 10% share of the overall communications market.
Implications for BlackBerry’s sale process. The day after the Allstream-Accelero decision was announced, Tony Clement, Treasury Board President and former Minister of Industry, stated that the government will be reviewing any foreign investment from a national security perspective. When asked if the government wants BlackBerry to remain Canadian-owned, the media reported that Mr. Clement responded: “What we want is obviously a stable environment. I think that we’ll let the marketplace respond. We have a role to play obviously, which involves national security and making sure that what occurs is in the public interest and we take that responsibility seriously. It’s not my place here to speculate on what would or would not be inside or offside that. So we’ll let it play out in the marketplace and if and when the government has to respond, we certainly will.”
As previewed by Mr. Clement, the NSR will feature prominently in the sale of BlackBerry. The Accelero-Allstream decision will likely add to the uncertainty regarding BlackBerry’s future.
In 2008, as reported in an Osler Update, the government-commissioned Competition Policy Review Panel recommended a number of changes to the ICA, many of which have been implemented. One of the recommendations that has not (yet) been implemented is the recommendation that the ICA be amended to require the government to assume the burden of demonstrating that a foreign investment was contrary to Canadian interests in order to block a particular transaction. The Panel indicated that such an amendment could reduce uncertainty for Canadian businesses and foreign investors without compromising the federal government’s ability to implement its investment objectives. We will watch to see whether the government’s recent rejection of the Allstream-Accelero transaction will renew calls for improvements to transparency and accountability with respect to decision making under the ICA.