Ottawa’s new foreign takeover rules won’t work in the real world
Ottawa has made a mistake by allowing the buyout of Nexen Inc. by China National Offshore Oil Corp. (CNOOC) and the buyout of Progress Energy Resources Corp. by Petronas of Malaysia.
Apparently, the lobbying and debate behind closed doors was fierce and, in the end, a “Canadian” compromise was offered up as policy. And this equivocation — “conscription if necessary but not necessarily conscription” — won’t work in the real world.
After the approvals were announced, Prime Minister Stephen Harper framed this as the “end of a trend,” not the “beginning” of a buyout frenzy by more sovereign-owned enterprises (SOEs). He ring-fenced the oil sands from further SOE buyouts unless in “exceptional circumstances” and set lower threshholds for Investment Canada reviews of foreign bids.
But this is not the end. This is the beginning of the beginning.
Phone calls are already being made to launch new buyouts by foreigners here.
The Chinese, Russians and others have gamed and will continue to game our system. I would argue that CNOOC’s bid itself was outrageous: an aggressive, uninvited entry into the Canadian economic space before the issues had been properly debated in the aftermath of the Potash Corp. of Saskatchewan Inc. and TMX Group Inc. takeovers were rebuffed and rejected.
Frankly, CNOOC’s bid should have been rejected out of hand and the company sent packing until Canadians could have a proper policy debate and conversation about the future of our country’s economic structure. They should have been told that clear guidelines and definitions were needed and no one need apply until that was completed.
Then Canada could have gone no further than to emulate the Australian policy regarding SOEs: “All foreign governments and their ‘related entities’ should notify the Government and get prior approval before making a direct investment in Australia, regardless of the value of the investment.
“They [foreign governments and their related entities] also need to notify the Government and get prior approval to start a new business or to acquire an interest in land, including any interest in a prospecting, exploration, mining or production tenement [except when buying land for diplomatic or consular requirements]. This is consistent with the Government’s longstanding practice,” the Australian guidelines say.
The Australian policy stipulates pre-approval — not ambushes like CNOOC pulled off. This is still not stated anywhere, which means that more bids will come along, causing unnecessary pressure on the government, confusion in markets and a field day for lawyers/lobbyists fronting for the foreigners.
Instead, what’s happened has not settled anything. Canada will be tested again, if only because the last two attempts worked really well.
And there are other concerns and questions raised by the announced SOE “policy”:
- Does “extraordinary circumstances” mean allowing the takeover of a company that is in financial trouble? Or does it mean any company that has been trying to find a buyer, but has set an above-market price no one is willing to pay? If so, this is a simple way to game the system because China has shown a willingness to pay 60% above market, in both the Nexen and unsuccessful Unocal bid of 2005.
- What exactly is Ottawa’s definition of an “SOE”? The government’s guidelines described these as an enterprise “owned or controlled, directly or indirectly” by a foreign government as well as one that is “influenced, directly or indirectly” by a foreign government. That’s still somewhat vague: Are the oligarchs from Russia, who operate at the pleasure of the Kremlin, sovereign-owned/influenced enterprises? Are entities owned by dictators or royal families or their trust funds state-influenced?
- Most important, will there be any way to enforce pledges of transparency, listings, governance and adherence to our laws that have been made by CNOOC and Petronas or by future players? Or are these promises as unenforceable as they have been in the past? Missing from these announcements is the creation of huge performance bonds to offset the expense, to Canadian taxpayers, of having to take these companies to court or to police their activities.
- Finally, Ottawa must explain its proposed, one-sided China-Canada trade deal to the public. There is much discussion, and hand-wringing by me and others, about what appears to be a “Trojan Horse,” non-reciprocal approach by Canada with Beijing.
Ottawa’s principal responsibility is to protect the country from those who have a political agenda out of step with Canadian values, not to optimize shareholder values for some corporations at the expense of others. It is also charged with keeping the playing field level by restricting entry to those who have proven they will abide by our laws, regulations, governance protocols and social licence requirements.
I’m a free-trader and a free-enterpriser, but the world has changed and Canada’s a Boy Scout on mean streets. That’s why it is never a good idea to allow the uninvited to crash our economy, then keep the door open slightly for more of the same.