May 25, 2012 / 1:41 PM / in 6 years

Canada lifts threshold for foreign takeover reviews

OTTAWA/TORONTO (Reuters) - Canada will boost the threshold at which it will review proposed foreign takeovers of Canadian companies, the industry minister said on Friday, but he stopped short of fulfilling a government pledge to clarify the criteria for approving them.

Sharpening its focus on the biggest deals, the government will gradually raise the threshold for mandatory reviews to proposed acquisitions with at least C$1 billion in enterprise value. The current threshold is C$330 million ($320 million) in asset value.

“I think C$1 billion is a reasonable number,” said Thomas Caldwell, an outspoken investor who is chairman of Caldwell Financial. “We want to have some kind of number that doesn’t create an administrative nightmare.”

Industry Minister Christian Paradis said enterprise value -the price offered for the equity adjusted for the assumption of liabilities and cash assets - is a better measure of a deal’s worth than the book value alone.

“Enterprise value better reflects the value of a business as a going concern and the increasing importance of service and knowledge-based industries,” Paradis said in the statement.

Paradis said the Conservative government was following recommendations of a policy review panel that concluded in 2008 that the current way of reviewing proposed foreign investments needed to be changed.


Ottawa has come under pressure to explain the way it handles foreign takeover bids since it surprised markets in late 2010 by rejecting an attempt by Australian miner BHP Billiton Ltd (BHP.AX) to buy fertilizer maker Potash Corp POT.TO.

The Investment Canada Act requires that all foreign takeovers over a certain size carry “a net benefit” to the country, but the law fails to define the concept more specifically, leaving investors uncertain.

Soon after the BHP decision, the government promised to spell out what “net benefit” means in terms of a foreign takeover, but it has yet to do so.

“I welcome the changes, but would have preferred if they had said something about what ‘net benefit’ means and when they are going to intervene,” said John Turner a Toronto-based lawyer who heads Fasken Martineau’s global mining team.

The opposition Liberal Party was quick to take the government to task for its omission.

“What Canadians and investors really want is to know what constitutes a ‘net benefit’ to Canada,” the opposition Liberal Party industry critic Geoff Regan said in a statement.


The investment review threshold will initially rise from C$330 million in asset value to C$600 million in enterprise value. After two years, it will go up again to C$800 million, and rise to C$1 billion two years later.

“Enterprise value is a better marker than asset value,” said Turner, who has advised on a number of acquisitions. “It is a better consideration of what the business is actually worth, versus asset value where you can get into anomalies.”

A case in point was the auction of patents owned by bankrupt telecom company Nortel Networks Corp NRTLQ.PK in 2011. The book value of the wireless patents was nominal, and it did not merit a review under the asset value test.

In the event, a group that included Apple Inc (AAPL.O), Microsoft Corp (MSFT.O) and Research In Motion Ltd RIM.TO paid $4.5 billion when the portfolio of 6,000 patents was auctioned.

Oliver Borgers an expert in competition law said the move to use enterprise value rather than asset value may be, in part, a reaction to the sale of the Nortel assets.

“There will be a whole other class of transactions, similar to the Nortel wireless deal that will now be caught,” said Borgers, who is a partner at the law firm McCarthy Tétrault in Toronto. “I think the near-term effect will be neutral, in terms of the number of deals reviewed.”

($1=$1.03 Canadian)

Editing by Frank McGurty

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