Is “Net Benefit” to Canada different for State-Owned Enterprise Investments?

Investments in Canadian businesses by foreign state-owned enterprises[1] (“SOE”) may receive greater scrutiny than investments by non-state owned enterprises.  The Canadian government has made it clear that investments by SOEs will be assessed differently than other investments under the Investment Canada Act.    For example, at the end of 2012, the Minister of Industry indicated that investments by SOEs to acquire control of a Canadian oil sands business will, going forward, only be approved on an exceptional basis[2].  This focus on SOE investors, which will likely result in more SOE investments being scrutinized under the Minister’s pre-closing review and approval, is reflected in recent amendments to the Investment Canada Act and related guidelines:

  • Threshold for review for SOE investments will be lower: Generally, where a transaction involves the acquisition of control of a Canadian business by a non-Canadian, and the gross book value of the assets of the acquired business exceeds C$354 million (2014), the transaction is reviewable by Industry Canada pursuant to the Investment Canada Act.   Under proposed amendments, the review threshold is to progressively increase to C$1 billion[3].  However, the review threshold for SOE investments will be amended such that the existing C$354M threshold will remain in place. 
  • Minister of Industry has broad powers under “Control” and “Acquisition of Control” rules relating to SOEs:  There are new rules in force to determine the “control” of an entity and when an “acquisition of control” occurs, where an SOE is involved.   Under these new rules, the Minister has broad powers to declare an entity to be an SOE and to declare an otherwise non-reviewable acquisition by an SOE to be subject to review.
  • “Net Benefit” review of SOE Investments : For transactions that are reviewable under the Investment Canada Act, the investor must satisfy the Minister of Industry that the investment “is likely to be for net benefit to Canada”.  In late 2012, the Minister released revised guidelines[4] setting out the specific factors for its “net benefit” review of investments by SOEs – which is the focus of this article.

“Net Benefit” Review of SOE Investments

To determine whether a SOE reviewable investment is of “net benefit” to Canada, the Minister will examine[5]:

  • The SOE’s corporate governance and reporting structure, including whether it adheres to:
  • Canadian standards of corporate governance.  Includes commitments to transparency and disclosure, independent members of the board of directors, independent audit committees and equitable treatment of shareholders, and
  • Canadian laws and practices.  Includes adherence to free market principles.
  • The effect on the level and nature of economic activity in Canada, including the effect on employment, production and capital levels in Canada.
  • How and the extent to which the SOE is owned, controlled by a state or its conduct and operations are influenced by a state.

Whether the Canadian business to be acquired will likely operate on a commercial basis, including with regard to:

  • where to export;
  • where to process;
  • the participation of Canadians in its operations in Canada and elsewhere;
  • the impact of the investment on productivity and industrial efficiency in Canada;
  • support of ongoing innovation, research and development; and
  • the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.

SOE Investor Undertakings

In light of the above, an SOE should anticipate that it will be required to provide undertakings beyond those normally expected of non-state-owned companies.

Indeed, the Minister expects an SOE investor to address its inherent characteristics (specifically that it is susceptible to state influence) in its plans for the Canadian business to be acquired and related undertakings.  An SOE will also need to demonstrate its strong commitment to transparent and commercial operations.

The Minister has provided examples of undertakings that an SOE may offer to demonstrate “net benefit”:

  • appointment of Canadians as independent directors on the board of directors,
  • employment of Canadians in senior management positions,
  • incorporation of the business in Canada, and
  • listing of shares of the acquiring company or the Canadian business being acquired on a Canadian stock exchange.

For real life examples, it may be instructive to look to the commitments made by CNOOC Ltd. (Chinese SOE) in its acquisition of Nexen Inc.[6]  According to publicly available information, CNOOC Ltd. agreed to a number of commitments to demonstrate its commitment to Canada and the Canadian oil and gas industry:

  • Establish Calgary as the head office of its North and Central American operations;
  • Seek to retain Nexen’s current management team and employees;
  • Invest significant capital;
  • CNOOC Limited will list its shares on the TSX;
  • Social responsibility; and
  • Support oil sands research.


In light of the increased focus on SOEs, it is incumbent on SOEs to address Investment Canada Actissues very early on in the planning process.  With careful planning and management, we are confident that SOE investments will be approved in Canada.

[1]       A SOE is broadly defined under the Investment Canada Act as: (a) the government of a foreign state, whether federal, state or local, or an agency of such a government; (b) an entity that is controlled or influenced, directly or indirectly, by a government or agency referred to in paragraph (a); or (c) an individual who is acting under the direction of a government or agency referred to in paragraph (a) or who is acting under the influence, directly or indirectly, of such a government or agency.

[2]       “Statement Regarding Investment by Foreign State-Owned Enterprises”,

[3]       Further the threshold will be calculated by enterprise value, which will likely be defined as market capitalization (plus liabilities, minus cash) for publicly listed companies and purchase price for private companies and asset deals.

[4]       “Guidelines – Investments by state-owned enterprises – Net benefit assessment”,

[5]       The specific review factors for SOE investments is undertaken as part of the general assessment of review factors set out in section 20 of the Investment Canada Act.

[6]       See McCarthy Tétrault article “CNOOC Approval Signals Canadian Government Continues to Welcome Foreign Investment … With Some Strings Attached”,

Investment Canada Act investments State-Owned Enterprises



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