While the government has had the power to reject deals under the act since 1985, with this announcement, the federal government seems prepared to break what has been a long standing taboo on using it. Over 23 years, the government has looked at about 16,500 deals and reviewed almost 1,600 of them. Never before did it formally and publicly reject a proposed transaction.
While a final decision of the government is pending, the deal that appears to break this taboo is the $1.3-billion purchase of B.C.-based MacDonald Dettwiler and Associates Ltd. by Alliant Techsystems Inc. Alliant is a Minnesota-based weapons and space contractor. MDA is Canada's leading satellite and aerospace company, which has benefited from hundreds of millions in government funding, made the Canadarm, and provides images and information that could be relevant to Canadian sovereignty in the Arctic. Last week, Industry Minister Jim Prentice formally informed Alliant the transaction did not meet the long-standing "net benefit" to Canada test under the Act.
In many ways, this deal highlights a very typical Canadian business dilemma: foreign investment in Canadian companies such as MDA is a compelling strategy for expanding clients and markets beyond Canada's borders. This is true, whether you're selling maple syrup, hockey pucks or sophisticated aerospace technology.
Canadians should realize that the worst-case prospect of Investment Canada's decision last week is that MDA may be forced out of business because it simply does not have enough growth opportunities in Canada. Its sale to a company such as Alliant may not be ideal, but it's far better than MDA failing. Now it appears that the government has embarked on a delicate balancing act between asserting Canada's national security interests while maintaining Canada's continued strong national interest in encouraging foreign investment in our economy.
So why now? Why use the Investment Canada Act for the first time ever to formally block a foreign takeover? There were other options. Given the specific remote sensing technologies involved, the federal government could have used another review process to effectively scuttle this deal on more technical grounds. Instead, it felt it was necessary to publicly remind everyone that the Investment Canada Act has teeth and may be used to kill a deal.
The reason is that Canada and the world have changed dramatically since 1985. No decision is made in a vacuum, and this decision needs to be viewed in the proper context.
Three new strands of concern drove the decision to halt the purchase of MDA-national security, the alleged "hollowing out" of corporate Canada and the emergence of new investment players such as sovereign wealth funds have all worked to cast a brighter spotlight on foreign takeovers. When you consider that the MDA transaction involves sensitive information within a strategic industry, in today's context, you get the response Mr. Prentice gave last week.
While analogies are never perfect, you can think about it like a drive home from work. For years you have taken the same route. This includes passing by a street that's marked "No Right Turn." While you've never made the turn, you've heard from neighbours that they have made the turn for years and it's never been a problem. So the next time you are driving home, you decide to make the turn yourself, but there's a police officer there who gives you a ticket. He's always had the right to do so, but because he has never done it before, initially it seems not to make sense.
You would wonder why you got a ticket now. Maybe a pedestrian almost got hit at that corner the night before. Or maybe some neighbours had enough and began complaining to the police. Whatever the reason, a couple of things will change. First, most drivers will now not make the same turn and will seek a new route. And those who still make the turn will know they could very well get stopped and ticketed any day.
Does all of this mean that Canada is becoming hostile to foreign investment? The answer is no. Foreign investment has been good-and necessary-for the Canadian economy. It's clearly in our national interest and this is not going to change. The federal government's policy positions, and recent speeches by important ministers, recognize the value of foreign investment. Also, there have been several studies that have measured how foreign investment has been good for Canada and Canadians, bringing jobs, prosperity, and opportunities that protectionism does not. As a result, while deals will be looked at more closely in some cases, our government and Canadians will want to continue to see foreign investors invest in us and our ideas.
Also, of some comfort to Canadians is the fact that we are not the only country wrestling with these issues. Many of our trading partners are strengthening or adopting new legislation that allows governments to block foreign takeovers that threaten national security, a broad and subjective concept that is open to interpretation. Recently, the OECD reaffirmed its acceptance of national security clauses to be applied to transactions, while cautioning that the rules should not be used as a "general escape clause" from commitments to open investment policies. Against this backdrop, it is unlikely that Canada will be targeted as an unreceptive home for foreign investment.
Mr. Prentice issued a big traffic ticket to Alliant last week and told the world the Investment Canada Act is now is now policing the streets in a new way. This truly crosses a new threshold in the history of the Investment Canada Act. Business needs to accept this, prepare for their deals more comprehensively, and, in some cases, be ready to make changes to their deals such as carving out sensitive assets from their transactions and finding ways to keep them in Canadian hands. The taboo has been broken-it's now up to companies and investors to adapt to the new foreign investment climate in Canada.
