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PP RUEHGA RUEHHA RUEHMT RUEHQU RUEHVC
DE RUEHOT #0581/01 2081908
ZNR UUUUU ZZH
P 271908Z JUL 09
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC PRIORITY 9705
INFO RHEHAAA/WHITE HOUSE WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHME/AMEMBASSY MEXICO 2007
RUCNCAN/ALL CANADIAN POSTS COLLECTIVE

UNCLAS SECTION 01 OF 03 OTTAWA 000581 
 
SENSITIVE 
SIPDIS 
 
STATE FOR E, EB/DCT, WHA/EX, WHA/CAN 
 
STATE PASS USTR (SULLIVAN) 
 
COMMERCE FOR ITA/MAC (WORD AND BARRAGAN) 
 
TREASURY FOR IA (NEPHEW) 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV EIND PREL CA
SUBJECT: Canada's Foreign Investment Reforms Create A More Open 
Market But Do Not Spare U.S. Steel from Canadian Court Action 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY 
 
¶1. (SBU) Summary: Canada's July 17 federal court action against U.S. 
Steel attempts to force the company to meet the production and 
employment commitments it made to the Federal Government in 2007 in 
exchange for permission to take over Canada's Stelco.  At that time, 
the GOC exercised its legal right make foreign acquisition of 
Canadian assets conditional on the fulfillment of certain 
performance requirements.  However, at the same time as the Federal 
Industry Ministry is cracking down on investor behavior, the 
Conservative government is also implementing changes to the national 
investment regime that would make Canada a more open and transparent 
investment destination for foreign investors.  Although most of the 
proposed regulations are not controversial, some foreign investors 
will be dismayed that Canada's new security requirements demand 
increased disclosure of confidential information and increase the 
possibility that the government might disallow an investment on 
security grounds even after the transaction has been completed. End 
summary. 
 
U.S. Steel 
---------- 
 
¶2. (U) On July 17, Minister of Industry Tony Clement announced that 
the Government of Canada was launching an action against U.S. Steel 
in the Superior Court of Canada to remedy an alleged breach of 
Canadian investment law.  The American steelmaker's 2007 acquisition 
of Ontario-based Stelco was predicated upon the company maintaining 
minimum levels of Canadian employment, capital expenditures and 
production.  In May 2009, the industry minister threatened legal 
action after U.S. Steel cut production and laid off employees at its 
Canadian operations in tandem with the global economic recession. 
 
ICA Undertakings 
---------------- 
 
¶3. (U) Canada's Investment Canada Act (ICA) permits the Industry 
Minister to bind foreign investors to obligations on matters such as 
local production and employment levels in order to ensure that the 
investment provides a 'net benefit' to Canada.  Following a recent 
exchange of letters with the company, Clement stated, "I remain of 
the view that U.S. Steel is not complying with its undertakings, and 
I am not satisfied by its explanations for non-compliance."  If the 
Canadian court finds that an investor has breached an ICA 
undertaking, remedies include curing the breach, fines or forced 
divestiture of the investment.  In this case, the Industry Minister 
has asked the courts to levy a C$10,000-a-day fine against U.S. 
Steel, retroactive to the November 2008 Canadian layoffs. 
 
¶4. (SBU) Although the terms of the undertakings a company makes to 
the government are generally confidential, the Canadian media is 
reporting that when U.S. Steel bought the bankrupt Stelco in 2007 
for C$1.16 billion, it promised to boost production at Stelco mills 
by 10 per cent in each of the first three years of ownership and to 
maintain 3,105 full-time employees.  Today, some 2,400 workers have 
either retired or been laid off by U.S. Steel, and the company has 
halted steel output in Hamilton and Nanticoke, Ont.  In its court 
filing, the government alleges that the company has defaulted on 77 
percent of its employment commitment.  (Comment: Since U.S. Steel 
Qpercent of its employment commitment.  (Comment: Since U.S. Steel 
has not responded publically to the GOC court action it is not known 
whether the company's undertakings included any exemptions for 
exogenous economic downturns.  End comment.)  This is the first time 
the Canadian government has taken a foreign company to court over 
promises made as part of an acquisition (although it has threatened 
similar action against the Brazilian mining company Vale Inco which 
has laid off approximately 400 workers). 
 
¶5. (SBU) Some Canadians are criticizing the government's move for 
the negative message it will send to other potential foreign 
investors. A Globe and Mail editorial argues that although Ottawa 
may be legally entitled to its actions, Stelco's 2007 commitments 
are unreasonable in today's volatile economic climate. The paper 
speculates that Canada's hard line against Stelco may be intended as 
a warning to General Motors and Chrysler that they will be similarly 
held to the employment commitments they made in exchange for federal 
 
OTTAWA 00000581  002 OF 003 
 
 
bailout funds.  Nevertheless, the Globe concludes, "Ottawa should 
refrain from intervening in future foreign takeovers. In a world 
where economic volatility can render hard-won promises 
impracticable, it simply isn't worth it." 
 
¶6. (SBU) Christopher Sands, a senior fellow at Washington's Hudson 
Institute, notes that the Canadian action puts U.S. Steel in the 
difficult position of having to sideline one government's policy in 
order to comply with another's.  The steel industry has been hit 
hard by the slump in construction and one of U.S. Steel's best 
customers is the U.S. government, which has imposed strict Buy 
American rules. This means that U.S. Steel has a stronger incentive 
than usual to cut Canadian production to maintain higher volumes at 
U.S. mills.  Consequently, Sands suggests, the future decisions of 
U.S Steel "will be determined by which government they fear more." 
 
 
Changes to ICA 
-------------- 
 
¶7. (U) In spite of the actions regarding Stelco, the Harper 
Government is moving forward with commitments to open up the 
Canadian economy to more foreign investment.  In March 2009 
preliminary changes to the Investment Canada Act (ICA) were 
introduced as part of the government's budget legislation. These 
were followed on July 11, 2009 with a number of proposed regulations 
to give effect to the investment changes contained in the budget. 
Among the most important amendments are increased investment 
thresholds -- to determine which foreign investments will be subject 
to a full governmental review -- and the imposition of a new 
national security screening mechanism.  Canada also plans to 
eliminate differential review thresholds for transportation and 
financial services and uranium production. The proposed regulations 
will take effect after a 30-day comment period and do not require a 
vote in the House of Commons. 
 
Higher thresholds, new formulas, same cultural barriers 
--------------------------------------------- ---------- 
 
¶8. (SBU) The ICA requires that direct foreign takeovers of large 
Canadian companies be reviewed and approved based on whether or not 
the investment constitutes a "net benefit to Canada."  (Comment: 
The net benefit criteria are not spelled out in legal terms and are 
open to a range of interpretations depending on the disposition of 
the government in power. End comment.)  Frequently, the government 
will ask the foreign investor to provide negotiated undertakings 
such as those assumed by U.S. Steel.  Under the old rules, an ICA 
review is required for any direct takeover by foreign investors from 
a WTO country of a Canadian company with more than C$312 million in 
gross assets.  The new regulations will increase the review 
threshold, first to C$600 million and ultimately to C$1 billion by 
the end of four years. 
 
¶9. (SBU) Although the higher thresholds mean fewer foreign 
investments will likely be subject to full review, all foreign 
investments must be notified to the government.  Also the 
methodology for determining the review threshold will be expanded 
from considering only the asset value of the proposed acquisition to 
a broader evaluation based on a company's market capitalization, 
assets, and liabilities.  Despite the new regulations, Canada's 
Qassets, and liabilities.  Despite the new regulations, Canada's 
pre-existing regime banning virtually all foreign investment in 
cultural industries remains unchanged, even though the 2008 
government report Compete to Win recommended reforms in this area. 
 
 
Enhanced national security requirements 
--------------------------------------- 
 
¶10. (U) Under the proposed regulations, a foreign investor will have 
to disclose the names of directors, the five highest paid officers, 
any person or entity holding more than ten percent of the investor's 
equity or voting rights, and the name of any foreign state that 
holds a direct or indirect ownership interest in the investor, even 
minor shareholders.  The security disclosure requirements apply to 
all foreign investments (including acquisitions and the 
establishment of new businesses), even those that fall below the 
 
OTTAWA 00000581  003 OF 003 
 
 
review threshold. 
 
¶11. (SBU) The new regulations set out time frames for the government 
to invoke the national security screening process - generally within 
45 days after a notice of investment or review application has been 
filed.  However, in cases of investments valued below the applicable 
review threshold, the government has up to 45 days after an 
investment has been implemented to determine whether it should be 
submitted to a full security screening.  (Comment: Presumably, this 
longer period exists to prevent smaller acquisitions that are not 
subject to other forms of review from slipping under the radar and 
to provide adequate time for the government to obtain more 
information about the proposed investment and investor. End 
comment.) 
 
¶12. (U) The security review could take as long as four months and 
will be conducted primarily by Canada's security and intelligence 
agencies.  If an investment is found to be a threat to national 
security then the investment can be unwound or restricted. 
 
 
Implications of Canadian changes for US investors 
--------------------------------------------- ---- 
 
¶13. (SBU) Although the subjective net benefits test has not been 
eliminated from Canada's foreign investment review process, the 
higher review threshold means that fewer investments will be 
subjected to it.  As well, the addition of a more transparent 
process to ensure that investments are not injurious to national 
security brings Canada's policy more closely into alignment with 
that of the United States.  The clarification of Canada's security 
requirements comes too late to affect the failed 2008 attempt by 
US-based Alliant Techsystems, Inc. to take over the space-assets arm 
of Canada's MacDonald Dettwiler and Associates Ltd (MDA), which 
Ottawa vetoed on national security grounds.  However during a 
meeting with Embassy officials last week, a senior Industry Canada 
official speculated that if the new security framework had been in 
place at the time of Alliant's bid, the outcome could have been 
quite different.