Trumpism Doesn’t Play in Canada, Which Just Eased Takeover Rules

(Bloomberg) -- Prime Minister Justin Trudeau, bucking a global trend toward greater protectionism, will loosen foreign takeover rules for more than 50 Canadian publicly traded companies next year, including those in mining, oil and marijuana production.

Finance Minister Bill Morneau announced this week Canada would raise the threshold for automatic government review of acquisitions to C$1 billion ($747 million) in enterprise value in 2017, rather than 2019 as previously scheduled. The hike from the current C$600 million will be enacted through legislation, although the timing hasn’t been set. companies that fall under the new threshold range from miner Dominion Diamond Corp. to marijuana producer Canopy Growth Corp.

The changes are the latest border-opening steps by Trudeau, who has emerged as a champion of expanding trade and globalization at a time when protectionism has fueled the rise of Donald Trump, support for Brexit and opposition to trade pacts -- such as Canada’s with the European Union, signed Oct. 30 after being nearly derailed. Trudeau has also raised his intake of refugees, proposed loosening immigration rules for skilled workers and traveled abroad regularly to push for more investment in Canada.

Removing Burden

The investment changes are “really to indicate that Canada is open to business and we’re kind of jump-starting things by encouraging people to come in here without the burden of having to get an approval like that,” said Peter Glossop, a foreign investment lawyer and partner with law firm Osler, Hoskin & Harcourt LLP in Toronto.

While proposals are rarely rejected, the move will clear the path for more takeover bids. As of close of trading Thursday, there were 53 public Canadian companies with an enterprise value of C$600 million to C$1 billion that under the increase would be exempt from automatic review, data compiled by Bloomberg show.

Shares of the companies that may be freed from foreign investment rules have returned 56 percent this year on average, compared with 15 percent for the Standard & Poor’s TSX Composite Index. Of the companies, 12 are in mining, seven are real estate investment trusts, six are oil and gas firms and three are in forestry.

Morneau announced the measure along with his plan to create a marketing office and an infrastructure bank to woo more foreign direct investment. While Trudeau has already “brought investors to this country, we know that we can continue to do better by doing it systematically,” Morneau said this week.

Security Concerns

Canada has the most restrictive foreign direct investment rules in the Group of Seven, according to a study by the Paris-based Organization for Economic Cooperation and Development. It’s unclear when the new measures will take effect. A government spokesman, Paul Duchesne, wouldn’t say if the new law would pass before a previously scheduled threshold increase to C$800 million on April 24, 2017.

The new threshold would apply in most cases, so long as they don’t raise national security concerns, the buyer isn’t a state-owned enterprise or if there are other sector-specific restrictions, such as for airlines. In an announcement Thursday, the transport minister
said Canada will almost double its limit on foreign ownership of airlines.

“Our government has doubled down on being committed to free trade,” Subrata Bhattacharjee, a partner at law firm Borden Ladner Gervais LLP in Toronto and vice-chair of its competition and foreign investment review group. “I think it’s a very positive message to send to the international investment community.”

Morneau also announced the government would publish guidelines in the next two months about its national security reviews of acquisitions. The vague nature of the rules around those reviews has frustrated Glossop and others.

“Both of these things were unexpected,” Glossop said, referring to Morneau’s two new measures. His hand may have been partly forced. The forthcoming enactment of the Canada-EU trade pact, expected to provisionally kick in next year, will raise the threshold to C$1.5 billion anyhow for EU member nations and other countries where Canada has a trade agreement, including the U.S.

Affected Sectors

The government changes wouldn’t be confined to the 53 public Canadian companies, but could apply also to private companies or foreign public companies that conduct significant business inside the country and therefore are considered a “Canadian business” by the government.

While announcing the changes this week, Morneau was silent on another restriction imposed by the previous government effectively barring state-owned enterprises from buying Canadian energy companies. Morneau said in August he was considering rescinding that restriction -- something China has sought from Canada -- but has not yet done so.

Former Prime Minister Stephen Harper, defeated in an election last year by Trudeau, both approved the $15.1 billion sale of oil and gas company Nexen Inc. to China’s Cnooc Ltd. and said government would, going forward, only allow state-owned enterprises to acquire oil sands companies under “exceptional circumstances."

While Trudeau’s threshold increase has largely drawn praise, his pledge to detail national security restrictions has drawn warnings. Rona Ambrose, a former cabinet minister in the previous Canada government who now leads opposition Conservative lawmakers, said prime ministers are purposefully vague on those details to give themselves leeway to make difficult decisions.

National security reviews are there to protect assets such as ports, airports and bridges, and sectors such as banking, communications and natural resources, said Ambrose. “The argument in favor of having some opaqueness is the prime minister and cabinet have to make difficult decisions about national security.”