Government Could Broaden Definition of State-Owned Companies

OTTAWA - The federal government is poised to pass Investment Canada amendments that will broaden its definition of "state-owned enterprises" and could subject SOEs' acquisitions of minority stakes in Canadian companies to investment reviews to determine whether they represent a net benefit to Canada.

The measures are contained in a budget omnibus bill, tabled by Minister Jim Flaherty last week, and expected to be passed into law before the Commons recesses for the summer next month.

In a written analysis, lawyers at Osler Hoskin & Harcourt LLP say the amendments will add considerable uncertainty to the foreign investment review process for companies that have close ties to foreign governments--even if they are not state-owned--and go beyond what Ottawa promised last December when it first announced heightened foreign-investment scrutiny for state-owned enterprises.

The budget bill "introduces a new level of uncertainty into the federal government's treatment of proposed investments by SOEs which was not anticipated in December 2012," the Osler lawyers write.

Osler partner Shuli Rodal said the proposed amendments remove "safe harbor" assurances that allow foreign companies to acquire less than one-third of voting shares, or a minority interest in a trust, partnership or joint venture, without triggering Investment Canada review. Companies in the cultural sector already have to demonstrate that they are not gaining de facto control through the purchase of minority shares, and now state-owned enterprises will face that same hurdle, Ms. Rodal said in an interview.

At the same time, Ottawa is giving itself broad discretion to decide who is state controlled.

Prime Minister Stephen Harper announced late last year that Ottawa would not allow additional foreign-government investment in the oil sands, even as he allowed CNOOC Ltd.'s C$15.3 billion acquisition of Calgary-based Nexen Inc. and a C$6 billion takeover of natural gas-rich Progress Energy by Malaysia's Petronas. While insisting Ottawa welcomes investment by state-owned enterprises elsewhere in the Canadian economy, the prime minister signaled a clear preference for their acquisition of minority stakes and said Ottawa would assess whether an investment would leave the Canadian firm under the influence of a foreign government, even if it did not involve a majority interest.

Prior to the Nexen decision, the investment banking community expected a wave of new deals involving state-owned enterprises in Canada, but very few have materialized.

Many critics, including the opposition New Democrats, urged Ottawa to clarify Investment Canada rules so that potential foreign investors would know what hurdles they faced before they attempt to do business in Canada. But the December policy announcement and proposed Investment Canada amendments create more, not less, ministerial discretion and greater uncertainty.

"Until somebody tests it, we won't know for sure how it will be applied," said Paul Boothe, a University of Western Ontario business professor and former senior official at Industry Canada. "So someone who wants to do their deal and thinks they're in good shape will test this, and if it works, then we'll have a little more evidence no how this is being applied. But right now, people are going to be unsure about it."

In determining with an investment by a foreign company should be reviewed under SOE guidelines, the minister can look at whether it has minority government investment, commercial relationships with foreign governments or significant relationships with officials within government. So for example, Brazil's Vale SA is a publicly traded company but the Brazilian government exercises considerable influence and holds a "golden share," so Vale could be considered a state-owned enterprise under the new Investment Canada rules.

Copyright (c) 2013 Dow Jones & Company, Inc.

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Government Could Broaden Definition of State-Owned Companies

OTTAWA - The federal government is poised to pass Investment Canada amendments that will broaden its definition of "state-owned enterprises" and could subject SOEs' acquisitions of minority stakes in Canadian companies to investment reviews to determine whether they represent a net benefit to Canada.

The measures are contained in a budget omnibus bill, tabled by Minister Jim Flaherty last week, and expected to be passed into law before the Commons recesses for the summer next month.

In a written analysis, lawyers at Osler Hoskin & Harcourt LLP say the amendments will add considerable uncertainty to the foreign investment review process for companies that have close ties to foreign governments--even if they are not state-owned--and go beyond what Ottawa promised last December when it first announced heightened foreign-investment scrutiny for state-owned enterprises.

The budget bill "introduces a new level of uncertainty into the federal government's treatment of proposed investments by SOEs which was not anticipated in December 2012," the Osler lawyers write.

Osler partner Shuli Rodal said the proposed amendments remove "safe harbor" assurances that allow foreign companies to acquire less than one-third of voting shares, or a minority interest in a trust, partnership or joint venture, without triggering Investment Canada review. Companies in the cultural sector already have to demonstrate that they are not gaining de facto control through the purchase of minority shares, and now state-owned enterprises will face that same hurdle, Ms. Rodal said in an interview.

At the same time, Ottawa is giving itself broad discretion to decide who is state controlled.

Prime Minister Stephen Harper announced late last year that Ottawa would not allow additional foreign-government investment in the oil sands, even as he allowed CNOOC Ltd.'s C$15.3 billion acquisition of Calgary-based Nexen Inc. and a C$6 billion takeover of natural gas-rich Progress Energy by Malaysia's Petronas. While insisting Ottawa welcomes investment by state-owned enterprises elsewhere in the Canadian economy, the prime minister signaled a clear preference for their acquisition of minority stakes and said Ottawa would assess whether an investment would leave the Canadian firm under the influence of a foreign government, even if it did not involve a majority interest.

Prior to the Nexen decision, the investment banking community expected a wave of new deals involving state-owned enterprises in Canada, but very few have materialized.

Many critics, including the opposition New Democrats, urged Ottawa to clarify Investment Canada rules so that potential foreign investors would know what hurdles they faced before they attempt to do business in Canada. But the December policy announcement and proposed Investment Canada amendments create more, not less, ministerial discretion and greater uncertainty.

"Until somebody tests it, we won't know for sure how it will be applied," said Paul Boothe, a University of Western Ontario business professor and former senior official at Industry Canada. "So someone who wants to do their deal and thinks they're in good shape will test this, and if it works, then we'll have a little more evidence no how this is being applied. But right now, people are going to be unsure about it."

In determining with an investment by a foreign company should be reviewed under SOE guidelines, the minister can look at whether it has minority government investment, commercial relationships with foreign governments or significant relationships with officials within government. So for example, Brazil's Vale SA is a publicly traded company but the Brazilian government exercises considerable influence and holds a "golden share," so Vale could be considered a state-owned enterprise under the new Investment Canada rules.

Copyright (c) 2013 Dow Jones & Company, Inc.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

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Rosneft, Exxon Mobil Broaden Arctic Shelf Joint Venture

NOVO-OGARYOVO, Russia - U.S. energy giant Exxon Mobil Corp. and Russia's OAO Rosneft agreed Wednesday to broaden their joint venture by adding seven more licenses to develop oil and gas resources on Russia's Arctic shelf and mull a proposal to export liquefied natural gas from the Russian Far East.

The companies also signed a separate deal to give state-controlled Rosneft the option of buying a 25% interest in Exxon's Point Thomson Unit, which Exxon says is estimated to hold a quarter of the known natural gas resources buried beneath Alaska's North Slope. Exxon owns 62.5% of Point Thomson.

The deal, signed by Rosneft Chief Executive Igor Sechin and Exxon's Deputy Chief Executive Stephen Greenlee, further strengthens the budding relationship between two of the world's largest oil companies while competition to unlock the Arctic's vast trove of oil and gas wealth heats up.

The Arctic is one of the few remaining places that can move the needle for oil giants in terms of production and reserves, but the technical challenges are formidable. Earlier this week Royal Dutch Shell Plc said it was sending two Arctic ships operating in Alaska to Asia for repairs following a series of mishaps, a move that is likely to make the Anglo-Dutch oil giant miss the short summer drilling season that starts in July.

Exxon and Rosneft formed an alliance in 2011 to develop potentially huge but largely untapped reserves on Russia's Arctic shelf and shale oil in Western Siberia. The original deal also gave Rosneft the option of participating in U.S. shale developments. Fadel Gheit, an analyst with Oppenheimer & Co., says that Exxon's strategy to allow Russian participation shows that the most successful way to negotiate with Russian oil companies is to deal with them as equal partners. "They want to make it a two-way street," Mr. Gheit said.

Rosneft also has partnership deals with Italy's ENI SpA and Norway's Statoil ASA to develop offshore resources.

Rosneft is currently buying competitor TNK-BP in a deal worth $55 billion that will create the largest listed oil producer in the world and will hand BP PLC a 19.8% stake in the oil giant.

Exxon and Rosneft will conduct a feasibility study on constructing a liquefied natural gas plant on the island of Sakhalin off Russia's Pacific coast. Rosneft is lobbying to be allowed to export LNG, which only OAO Gazprom currently is permitted to do by law.

Angel Gonzalez contributed to this article.

Copyright (c) 2012 Dow Jones & Company, Inc.

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