Annual Report 2009–2010 (lk81132)

4. Summary of Activities Under the Investment Canada Act

This section provides information on investment activity under the Investment Canada Act (ICA or the Act). While it focuses on activity over the 2009-10 fiscal year, it provides a brief overview of investment activity in Canada and globally over the past decade. Also, given the need to protect confidential information about specific investments, it is not possible to report on certain data for the year 2009-10 alone. Where this is the case, aggregate information over a five-year period is provided.

Decade Overview

The global economy witnessed generally strong, albeit uneven, growth over the last decade. The year 2000 started the decade on a very strong note, with growth in real global gross domestic product (GDP) exceeding 4 percent. However, the implosion of the dot-com bubble led to a sharp slowing in global growth in 2001.

This was followed by three years of gradual recovery with growth progressively inching upward, approaching the strong pace of 2000. The global economy grew at a brisk pace from 2004 to 2007, but the decade ended with the 2008-09 global recession, triggered by the global financial crisis that pushed the global economy into negative territory in 2009 (see Figure 2).

Figure 2. Real GDP Growth

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Given its pro-cyclical nature, foreign direct investment (FDI) generally followed economic growth during this period (see Figure 3).

Figure 3. FDI Inflows by Types of Economy

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Following sustained strong increases throughout most of the 1990s and at the turn of the millennium, global FDI inflows fell sharply by 51 percent in 2001^{Footnote 6} and continued to fall at more modest rates in 2002 and 2003. Thereafter, FDI grew very strongly between 2004 and 2007. This period was marked by two major trends on the investment front: consolidation in the extractive sector (particularly mining), supported by sustained strong growth in commodity prices; and the continued rise of emerging economies as major players on the investment landscape. Outward investment flows from Brazil, Russia, India and China (the so-called BRIC countries) reached a peak of $147 billion in 2008, compared with $6 billion in 2000.^{Footnote 7}

The financial crisis and subsequent global recession led to sharp declines in global FDI, with inflows falling 16 and 37 percent in 2008 and 2009 respectively. In 2009, merger and acquisitions activity contracted by 66 percent.^{Footnote 8} Overall, however, the impact of the global recession on FDI inflows was less severe for developing and transition economies than for developed economies.

Global FDI posted a modest, yet uneven, recovery in the first half of 2010, which was consistent with global growth patterns.

Investment Activity Under the ICA Over the Last Decade

As explained in Section 2 of this report, the Act requires that foreign investors file either an application for review or a notification when they acquire control of a Canadian business. An acquisition of control of a Canadian business with an asset value below the established threshold or a notification is required where there is an establishment of a new Canadian business. These investments are not subject to a net benefit review under the Act. An application for review is required when a foreign investor acquires control of a Canadian business with an asset value that is equal to or greater than the established threshold. These investments are subject to a net benefit review.

As figures 4 and 5 show, the trend in investment activities that were subject to the ICA largely mirrors the movements in global FDI over the decade. Figure 4 illustrates the evolution in the number of approved applications for review and certified notifications since 2000. Figure 5 provides the total asset value of both applications for review and notifications by fiscal year.^{Footnote 9}

Figure 4. Number of Applications and Notifications

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Figure 5. Asset Value of Applications and Notifications

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Transaction volumes and asset values tended to follow similar patterns. A notable exception was fiscal year 2005-06 in which the total asset value for notifiable investments was affected by large investments in foreign companies outside of Canada with Canadian subsidiaries (indirect acquisitions).

During the global recession, there was a considerable decrease in the number and total asset value of both applications for review and notifications in the fiscal year 2008-09, followed by a weak recovery in 2009-10 (see figures 4 and 5). More specifically, from the peak of investment activity in 2007-08, total asset value of investments in 2009-10 was down by half.

The Year in Review (2009-10)

In fiscal year 2009-10, Canada and the world began to recover from the global recession. Statistics on investment activity under the Act reflect this recovery.

It is important to note at the outset that the need to protect investor confidentiality severely restricts the ability to publish information that applies to just one year. As all information provided by investors is strictly confidential and can be released only under very narrow circumstances, the practice in this report is not to report on individual transactions. Furthermore, to protect the identity of investors, the general practice is not to report on data involving fewer than four observations if doing so could jeopardize the protection of confidential investor information. Where confidentiality restrictions do not allow us to report for 2009-10 individually, information over a five-year period is provided to give a more complete account of the various characteristics of investment activity under the Act.

Investment Activity by Asset Value

As Table 1 shows, investment activity rose sharply in 2009-10, with the total asset value of transactions subject to the Act (both applications for review and notifications) nearly doubling to $61 billion from a relatively low figure of $33 billion in 2008-09. This increase was due to significantly larger average asset values. The average asset value of reviewable investments rose from $766 million in 2008-09 to $1.34 billion in 2009-10, that of notifiable investments grew from $30 million to $73 million.

Table 1 also illustrates that, while 2009-10 was a year of recovery, investment activity was clearly not as robust as it was in the years immediately preceding the recession. In 2007-08, the total asset value of transactions subject to the Act peaked at $122 billion, twice the 2009-10 level. In 2009-10, there were six multi-billion dollar transactions (i.e., with asset values exceeding $1 billion). In 2007-08, there were 21. Overall, the average asset value of reviewable transactions stood at $1.74 billion for 2007-08, $398 million higher than in 2009-10.

ICA-Identified Sectors

A notable development in 2009-10 was the elimination of the lower review thresholds that previously applied to the transportation services, financial services and uranium production sectors. This amendment, part of the Budget Implementation Act, 2009, took effect on March 12, 2009. Prior to these amendments, the threshold for review in these sectors stood at $5 million for direct acquisitions and $50 million for indirect acquisitions. Currently, these sectors are subject to the general review threshold of $312 million (for calendar year 2011) for investors from World Trade Organization (WTO) member countries.

Table 2 shows the number of applications reviewed in the above three sectors over the fiscal years from 2005-06 to 2008-09. Of the 56 transactions reviewed over this period, 89 percent were in the transportation sector and the remainder were in financial services. Transactions in these identified sectors that were below the WTO threshold applicable to other sectors represented approximately 27 percent (40 out of a total of 150) of all transactions reviewed by the Minister of Industry.

Investments by Country or Region of Origin

Canada's main trading partner, the United States, has been the number one investor over the past five years, accounting for more than half of the total number of investments and the total asset value. The region with the next highest number of filings was the European Union (EU) with approximately one quarter the number of U.S. filings (see figures 6 and 7); however, with respect to total asset value, the United Kingdom came second behind the United States.

Figure 6. Application distribution (2005-09)

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Figure 7. Notification distribution (2005-09)

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Consistent with previous years, investments from the United States continued to make up more than half of the total number of investments at 244 and accounted for more than half the total asset value at $31.3 billion in fiscal year 2009-10.

Enforcement Proceedings in the U.S. Steel Case up to March 31, 2010

This section has so far reported on applications for review and notifications under the Act. As discussed in Section 2, another important dimension of the work of the Minister of Industry is monitoring investment performance and, where applicable, enforcement activities in cases where investors are found by the Minister not to be in compliance with their obligations under the Act.

Section 2 has outlined the monitoring of investment process followed by the Investment Review Division. The first stage in the enforcement process, as mentioned in Section 2, occurs where the Minister believes that an investor has failed to implement a written undertaking. The Minister may send a demand letter under section 39 of the Act requiring the investor to cease the contravention, remedy the default, show cause why there is no contravention or, in the case of undertakings, justify any non-compliance with the undertakings. The next stage commences if the investor fails to comply with the demand. A court application may be brought by the Attorney General of Canada on the Minister's behalf seeking remedies. These remedies include directing the investor to divest control of the Canadian business, forbidding the investor from taking any action in relation to the investment that might prejudice the ability of a superior court to effectively order a divestiture, directing the investor to comply with a written undertaking and imposing a penalty not exceeding $10,000 for each day the investor is in contravention of the Act.

Over the 2009-10 fiscal year, the Minister believed that one investor had failed to meet its obligations under the Act and took action under the enforcement provisions of the ICA.

On May 5, 2009, after reviewing the undertakings of United States Steel Corporation (U.S. Steel) and the information that the company provided related to their implementation, the Minister sent a demand letter to U.S. Steel under section 39 of the Act. The letter required U.S. Steel, among other things, to do the following: remedy forthwith the default of the production and employment undertakings, show cause why there was no contravention or justify any non-compliance with those undertakings. U.S. Steel had undertaken that, over three years, it would increase the annual level of production at the former Stelco facilities by at least 10 percent and that it would maintain an average aggregate employment level of not fewer than 3,105 employees on a full-time equivalent basis.

On May 20, 2009, U.S. Steel responded to the demand letter.

By letter dated July 15, 2009, the Minister advised U.S. Steel that, based on U.S. Steel's representations to the Minister, U.S. Steel had failed to remedy the defaults identified in the demand letter, had failed to show cause why there was no contravention and had failed to justify any non-compliance with the undertakings.

On July 17, 2009, the Attorney General of Canada, on behalf of the Minister of Industry, filed a Notice of Application with the Federal Court seeking an order for appropriate measures to remedy the situation. The Crown's affidavit in support of this application was served on U.S. Steel on August 13, 2009.

In September 2009, the Federal Court granted intervenor status with limited participatory rights to Lakeside Steel Inc. and the United Steelworkers Union. U.S. Steel appealed these orders. On October 8, 2009, U.S. Steel filed a motion challenging the constitutional validity of the enforcement provisions of the ICA (sections 39 and 40). The hearing on this motion was held on January 12-14, 2010. On June 14, 2010, the Court concluded that section 40 of the ICA does not violate section 11(d) of the Canadian Charter of Rights and Freedoms or section 2(e) of the Canadian Bill of Rights. The Court ordered that U.S. Steel's motion be dismissed.

Information on developments after March 31, 2010, can be obtained through the Federal Court.