Canada’s Prime Minister Announces Plan to Relax Foreign Investment Restrictions

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

by Kim D. G. Alexander-Cook (Stikeman Elliott LLP)

Prime Minister and Conservative Party Leader Stephen Harper announced on September 12 that his party would seek to lift some of Canada’s restrictions on foreign investment if it is returned as the government in the October 14 federal election.

Currently, Canada’s Investment Canada Act requires review and approval of direct acquisitions of Canadian businesses by non-Canadians where Canadian assets exceed a $295 million (adjusted annually) threshold, with lower thresholds applying to direct and indirect acquisitions of Canadian businesses in four “sensitive sectors” — uranium mining, financial services, transportation services and “cultural” businesses. In addition, Canada has sector-specific legislation and/or foreign ownership restrictions in broadcasting, telecommunications, cultural industries, transportation services and uranium production. As well, the financial services sector is subject to ownership restrictions of general application (but not foreign ownership restrictions).

The Prime Minister announced that a Conservative government would open up the airline and uranium-mining sectors to allow increased foreign investment, "subject to negotiation with our trading partners and to considerations of national security." In particular, airline ownership limits would be raised to 49 per cent from the current 25 per cent, as long as Canadian companies were offered reciprocal rights in other countries.

Only foreign investments of more than $1 billion would be reviewed under the Investment Canada Act, up from the current level of $295 million that applies to direct acquisitions, with the change phased in over a four-year period.

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China: The M&A Due Diligence Process

Excerpt from Practical China Tax & Finance Strategies
published by WorldTrade Executive

By Lefan Gong (Zhong Lun Law Firm, Shanghai)

China has been going through an extraordinary period of mergers and acquisition activities. However, making successful investments and striking good deals in this turbulent market requires more than a gold-rush mentality. Investors doing M&A transactions in China are often faced with a number of unique risk and pitfalls, such as restrictions and limitations on deal structures, unfamiliar customs and practices, difficulty in discovering hidden liabilities and other problems, a “sellers’ market” created by a significant influx of investment capital, and a legal and regulatory system that is still in a state of flux.

An initial matter that a foreign investor needs to assess in setting its expectation is how the Chinese regulatory restrictions and the personal views of the applicable approval authorities may affect the structure and process of the deal. One of the first things that a buyer may want to look into is whether the target company, after being acquired by a foreign investor, can continue to conduct its business and operations in the same manner without becoming subject to additional regulatory restrictions.

There are still a number of business sectors in China that are not fully open for foreign investors, and in which such investors cannot establish wholly foreign-owned enterprises (“WFOEs”) or even joint ventures. A foreign investor should determine as early as possible whether there are percentage limitations on its potential ownership in an enterprise in a given industrial sector, as this will directly affect the deal structure. For example, if the target company is a conglomerate, some assets may need to be carved out to make sure the post-closing target company will steer clear of the sectors that are “prohibited” or “restricted” for foreign investment.

“Trust, But Verify” – the Assets You Acquire
In China, the verification of the ownership of assets can present substantial challenges. Publicly available information and government records, if they exist, may be inadequate or unreliable. For private companies, the internal documentation is usually not well kept and organized, and it may be insufficient to show what assets belong to whom. For the state-owned enterprises, the situation may not be significantly better, and requests for information often meet with reluctance and the “state-owned” attitude of secrecy.

It is important to realize that a target company’s assets may have been used in related-party transactions. For example, one company’s assets might have been pledged for another’s bank borrowings, and the same assets might have been used multiple times for making (registered) capital contributions in different companies. The buyer also needs to be extremely careful if substantial assets of a target company were bought from a bankruptcy auction of a state-owned enterprise. If the process was not properly supervised by the court and the case was not effectively closed, the sale could risk being overturned for reason of a flawed auction process.

More information on China M&A Due Diligence

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Pensions Issues in European Mergers and Acquisitions

Excerpt from a recent issue of International Finance & Treasury
By Rosalind J. Connor, Daniel C. Hagen, Emmanuelle Rivez-Domont, Georg Mikes, Friederike Göbbels, Carla Calcagnile, and Chantal Biernaux, of Jones Day

Pensions-related issues have long been a major concern in M&A transactions in the United States. Issues relating to funding can color the attractiveness of a transaction, and liabilities relating to multi-employer plans and to postretirement medical expenses can have a significant effect on the economic viability of the transaction.

Pension obligations continue to cause problems, particularly given growing longevity, which gives rise to significantly increased costs. The growing global trend towards more disclosure of pension liabilities in company accounts has also moved pensions further up the agenda in corporate transactions.

These matters are of growing concern across Europe, which is experiencing both increased longevity and enhanced disclosure requirements. However, the particular issues are very much country-specific, and it is important to be aware of what particular issues may arise in any specified jurisdiction on an international M&A transaction. The latest issue of International Finance & Treasury, published by WorldTrade Executive, reviews the pension provisions in a number of European jurisdictions and the issues to be alert to in a transaction involving pensions plans. Among the findings:

United Kingdom. The United Kingdom is most like the United States in terms of benefit provision. As in the U.S., businesses in the U.K. that provide pensions usually do so through a trust held separate from the company's assets and, as in the U.S., the company has obligations to ensure the pension plan is properly funded following regular plan valuations, which in the U.K. are carried out every three years.

The U.K. Parliament has closely followed ERISA in its recent reform of pension funding and, in particular, established a Pensions Regulator and a Pension Protection Fund, which have between them powers very similar to those of the Pension Benefit Guaranty Corporation. However, some of the powers are significantly more expansive, as the U.K. is eager to avoid the deficits that the PBGC is presently facing.

Any acquisition of a U.K. company with a defined-benefit pension plan may raise significant issues. It is worth obtaining local actuarial advice as to the funding level of the plan, as the plan valuations may not be accurate. This is not only because the valuation is triennial and therefore may be very out of date, but because the basis for agreeing valuations changed in 2005 and is significantly more onerous and less predictable as a result.

In addition, the U.K. Pensions Regulator has the power in a number of circumstances, including where it believes the plan sponsor is insufficiently resourced to meet its pension liabilities, to bring a direction against any group company requiring it to fund the pension plan. Group companies and shareholders that may be subject to this requirement include non-U.K. companies and, in fact, the Pensions Regulator is in the process of issuing one such direction against Sea Containers Ltd., a Bermudan company that is presently in chapter 11 bankruptcy proceedings in the United States.

In order to limit the risks from the Pensions Regulator, it is common practice for the purchaser to seek clearance from the Pensions Regulator as a condition of closing.

France. In France, most pension contributions are made by way of mandatory contribution to a national social security system that also covers health care and welfare benefits. The contributions are very significant but are a standard cost of employing staff in France and should be reflected in cash flow. Due diligence is important to ensure these costs are understood.

The major concern in France will relate to senior employees, who are often provided with a top-up pension. These benefits can be very generous, although they are tax-advantageous. Appropriate due diligence is necessary to understand the extent of these liabilities and costs.
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