Canadian government settles important Investment Canada Act case

December 2011 Author: Kevin Ackhurst

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The Canadian government and U.S. Steel have settled their long-running dispute that would have tested a key administrative guideline under the Investment Canada Act.1 The government had charged U.S. Steel with failing to fulfil certain of the undertakings it made to the minister of industry in connection with its 2007 acquisition of Canadian steel maker Stelco.  Had it lost the case, U.S. Steel could have faced penalties of up to $10,000 for each day it was found to be in violation of the Act.  Under the terms of the settlement, U.S. Steel has committed to produce steel in Canada until 2015, and make various capital expenditures and charitable contributions in its Canadian plants’ local communities.

Original undertakings

When a non-Canadian acquires control of a Canadian business that has assets in Canada above a prescribed threshold, the transaction is subject to review under the Investment Canada Act.  The transaction cannot proceed until the minister of industry (or the minister of Canadian heritage in certain cases) has concluded that the matter is likely to be of net benefit to Canada, the criteria for which are set out in the Act.  In making his determination, the minister is typically guided by commitments, known as undertakings, provided by the non-Canadian investor.  Among the 31 undertakings provided by U.S. Steel were commitments to maintain certain employment levels and production at the Stelco plants in Hamilton and Lake Erie/Nanticoke.

Alleged non-compliance

U.S. Steel closed these plants in the spring of 2009 amidst a steep decline in demand for steel due to the turmoil in the global economy.  Shortly thereafter, the minister of industry advised U.S. Steel that it was not in compliance with its undertakings and requested that it remedy the default and comply with the undertakings.  The company responded that the non-compliance was due to factors outside of its control, in particular the drop in demand for steel.  In doing so, U.S. Steel relied on a long-standing administrative guideline published by the minister that recognizes that “plans and undertakings are based to some extent on projected circumstances and the monitoring of an investor's performance will recognize this factor. Where inability to fulfil a commitment is clearly the result of factors beyond the control of the investor, the investor will not be held accountable.”

Legal proceedings and settlement

The minister initiated proceedings against U.S. Steel in July 2009, marking the first time enforcement proceedings had been brought under the Act.  The government sought an order requiring U.S. Steel to comply with its undertakings and pay a penalty of $10,000 for each day of non-compliance.  As an initial defence, U.S. Steel unsuccessfully challenged the constitutional validity of the penal provisions of the Act, losing at each turn before the Federal Court and Federal Court of Appeal.2 The Supreme Court of Canada recently declined to hear a further appeal.  It appears that around that time, U.S. Steel sought to negotiate a settlement with the government.

On December 12, 2011, the minister of industry announced that the parties had settled their dispute.  Among the terms of settlement disclosed by the minister, U.S. Steel agreed to:

  • Continue to produce steel in Canada until 2015;
  • Operate at both Lake Erie/Nanticoke and Hamilton plants until 2015;
  • Make at least $50 million in capital investments by December 2015 to maintain the Canadian facilities, over and above its original undertaking to invest $200 million by October 31, 2012; and
  • Contribute $3 million toward community and educational programs in Hamilton and Nanticoke, which it will begin to do immediately with $1 million to be contributed by early February 2012.

Implications

The government has consistently pointed to its case against U.S. Steel to demonstrate that foreign investors must take the commitments they make as part of the Investment Canada Act process seriously.  In that regard, the case can be seen as a victory for the government, as it underlines its resolve regarding such commitments while exacting additional undertakings from U.S. Steel that will come at a significant monetary cost and last for four years.3

However, by settling the case the government has also avoided a potentially difficult fight over the scope of the administrative guideline that excuses non-performance.  The continuing lack of case law in this area means calls for further guidance or amendments to the Act will no doubt continue as well. The House of Commons Standing Committee on Industry, Science and Technology had been examining issues raised by the U.S. Steel case during the last session of Parliament.  This settlement can be expected to be front and centre when the committee resumes its examination of the Act.  For now, investors are advised to ensure that all undertakings are drafted precisely to withstand potential judicial scrutiny and are clear regarding the timing and metric used to assess their performance.

Footnotes

1 R.S.C. 1985, c. 28.
2 United States Steel Corporation and U.S. Steel Canada Inc. v. The Attorney General of Canada, 2010 FC 642, aff’d 2011 FCA 176.
3 The Act was amended in 2009 to empower the minister to accept new undertakings from an investor if the minister believes that a non-Canadian has failed to comply with a written undertaking that was provided to the minister in respect of an already-approved and implemented transaction.

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