Canada’s government has established a secret committee of senior officials that reviews foreign investment for national-security risks, according to three people familiar with the matter.
The chairman of the committee is Public Safety Deputy Minister Francois Guimont, and it includes the heads of Canada’s two spy agencies as well as Prime Minister Stephen Harper’s National Security Adviser Stephen Rigby, according to one of the people, who asked not to be identified because the information is confidential.
The existence of the shadow panel shows the Harper government’s growing preoccupation with national-security concerns, adding complexity to a foreign-investment review process that investors have complained is already too opaque. The government amended its foreign-takeover law in 2009 to add national security to the list of issues that can trigger a review, and while it has outlined some steps in the process, it hasn’t revealed the committee or described how it weighs risks.
“We don’t have to date any real sense of the approach the government is taking,” said Peter Glossop, a lawyer who advises on foreign takeovers at Osler, Hoskin & Harcourt LLP in Toronto. “It leaves us unable to provide advice that clients can base their decision-making on.”
Canada cited security concerns in October in rejecting Manitoba Telecom Services Inc. (MBT)’s C$520 million ($477 million) sale of its Allstream unit to an investment firm co-founded by Egyptian billionaire Naguib Sawiris. The panel was set up after the rejection, one of the people said.
“Foreign investment, regardless of its dollar value, may be subject to a national security review if a potential security threat is identified,” said Industry Canada spokesman Michel Cimpaye, in an e-mail in response to questions about the committee. Josee Picard, a spokeswoman for the Public Safety department, referred questions to Industry Canada.
The government’s attention to national security has increased since the middle of last decade, when state-owned enterprises became more active in seeking acquisitions abroad, said Dany Assaf, co-chairman of the competition and foreign-investment group at legal firm Torys LLP in Toronto. He called the current process for national-security reviews “time consuming” and “opaque.”
Government officials appear to be keenly interested in transactions that affect telecommunications networks or resource assets such as pipelines, Assaf said, adding that Burger King Worldwide Inc. (BKW)’s C$12.5 billion purchase of Tim Hortons Inc. (THI) is unlikely to trigger a security review.
Tim Hortons shares lost 2.6 percent to C$86.42 yesterday, retreating from a record. Some investors are either considering or already have sold their stakes in the coffee-and-doughnut chain after the stock’s 33 percent rally over the previous three days.
The Canadian Security Intelligence Service warned in 2012 that some foreign state-owned enterprises may represent a threat to national security. Later that year, Canada banned state-owned enterprises from acquiring businesses in the nation’s oil sands outside of “exceptional circumstances,” after approving Beijing-based Cnooc Ltd.’s purchase of Nexen Inc. of Calgary. At the time, the government said it would also “carefully monitor” transactions involving foreign state-owned firms throughout the economy.
The Canadian committee contrasts with the Committee on Foreign Investment in the United States, which is headed by Treasury Secretary Jacob J. Lew and discloses the government agencies that are represented on it. CFIUS also publishes an annual report that provides details including the number of cases in which investors agreed to measures to mitigate security concerns. CFIUS doesn’t disclose information on specific cases, because it’s prevented by law from doing so, according to Treasury spokeswoman Holly Shulman.
One of the people familiar with the Canadian committee’s operations said that while Canada is using CFIUS as a model, the government wants to retain discretion to accept or reject each case, limiting the amount of information it is willing to disclose.
Glossop said the opacity of the Canadian process leads him across the border in search of clues. “The irony is, we end up looking at the U.S. report and their disclosure to get a sense of what would be of concern in Canada,” Glossop said.
The emphasis on national security comes as Harper’s government tries to attract investors to finance the development of the nation’s natural resources, which include the world’s third-largest crude reserves. The government has said there are hundreds of resource projects planned that will require C$650 billion in capital spending over the next decade.
Under Canadian law, Industry Canada officially administers the country’s foreign investment review process. The deputy industry minister is a member of the shadow committee, the people briefed on the matter said, along with Royal Canadian Mounted Police Commissioner Bob Paulson and deputies from economic portfolios such as finance and natural resources.
The Investment Canada Act calls for an automatic review of acquisitions of companies with an asset value of at least C$354 million to see if the deal provides a “net benefit” to Canada. The act also empowers Industry Minister James Moore to order a review of any investment he believes could be “injurious to national security.” Cabinet has the final say, and Moore can share confidential information about any transaction with a number of departments and agencies, including the Canadian Security Intelligence Service and Communications Security Establishment Canada, the country’s two spy agencies, according to the law.
Industry Canada’s annual report on foreign takeovers doesn’t mention the security committee, nor do regulations governing security reviews or the department’s website.
“We don’t comment on matters related to national security,” Harper spokesman Carl Vallee said yesterday in an e-mail, when asked to comment on the committee.
In creating the security panel, the government is trying to prevent the kind of impasse that led to the Allstream deal being blocked, said one of the people briefed on the matter. The panel can advise Industry Canada on ways that security risks can be mitigated, and these can be communicated to the parties involved, the person said.
The Allstream transaction raised concerns within government, because the company helps manage data and voice networks for federal departments. Both MTS and Accelero said they were surprised by the rejection, adding they responded “openly and constructively” to Industry Canada’s requests for information. The government didn’t respond to Accelero’s proposed mitigation measures, according to a person familiar with the deal.
Canadian officials also discouraged BlackBerry Ltd.from pursuing a deal with Chinese computer maker Lenovo Group Ltd. (992) last year on the grounds it could compromise security, according to a person familiar with the matter. Harper said in an Oct. 18 interview that BlackBerry should be wary of potential takeovers that present security risks.
Harper’s Conservatives, who came to power in 2006, have adopted a stricter approach to foreign takeovers than previous governments. In 2008, the government blocked the sale of MacDonald Dettwiler & Associates Ltd. (MDA)’s space business to Minneapolis-based Alliant Techsystems Inc. (ATK), marking the first rejection under the Investment Canada Act since the law was created in 1985. Harper also denied Melbourne-based BHP Billiton Ltd. (BHP)’s bid to buy Potash Corp. of Saskatchewan Inc. in 2010.
While it’s good to see Canada moving toward a more formal system for security reviews, it’s important for the government to provide some transparency, said Assaf of Tory’s. “Just tell people what you’re doing and what you think is in the best interests of national security, and people can make their decisions.”
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