Crafting a better ‘smell test’
An editorial from the Winnipeg Free Press, published Oct. 3:
Prime Minister Stephen Harper and his government aim to respond about mid-November to the proposed Chinese takeover of Calgary-based Nexen, a large oil producer active in the Alberta oil sands. Mr. Harper has said he wants to produce a clear policy direction that could govern foreign takeovers of Canadian companies.
Clear policy direction has a nice ring to it, but there’s no way of knowing what the next takeover deal will look like. The Canadian public will hold the government responsible for blocking takeovers that offend Canadian values. The prime minister must be free to impose a smell test on future deals and to turn down large takeovers that smell bad in the nation’s nostrils.
Generally speaking, Canada should encourage the free flow of goods, services, capital and labour among the nations of the world, but Canada cannot achieve this alone by unilaterally relaxing its controls on foreign direct investment. It can perhaps distinguish which countries are market economies, which are command economies and which are evolving from one to the other. Companies that already live by the rules of the market should have wide latitude to invest in Canadian industry. Companies that operate by command of the sovereign should not expect to operate in Canada.
Companies that play on both tables -- sometimes agents of the state, sometimes not -- should expect close scrutiny when they seek to operate in Canada because this country needs to know what game they are playing. That need arises at the moment of an acquisition and will remain open as long as a hybrid company, part state-run, part market-driven, continues to be an important player in Canadian industry.
Nexen shareholders are eager to sell their shares to the Chinese National Offshore Oil Company (CNOOC) at $27.50 a share because no other buyer is offering such a high price. Significantly, no market-driven oil company is matching CNOOC’s bid -- not Shell, not Chevron, not Exxon, not Total.
It is idle to pretend this takeover bid is a purely market-driven exercise of investor judgment. It may be that in part, but it is also an exercise of Chinese state power. That does not make it inherently evil, but it does raise perfectly valid questions about the true identity of the purchaser and the intentions behind the purchase.
It also raises a question about the next Chinese takeovers. Mr. Harper should not tailor a clear policy direction to gratify Nexen shareholders and then find that his clear policy direction has made the whole Canadian oil production sector available for Chinese acquisition.
It raises a further question about opportunities for Canadian firms and those from other market economies to take over Chinese companies and to operate in China.
The Nexen takeover bid allows for a wider discussion about Chinese policy on foreign investment. During his China visit in September, Mr. Harper pressed Chinese premier Hu Jintao for improved Canadian investment access to China, but the investment treaty published last week contained no such provisions.
The current Canadian policy requires the government to examine takeovers to see if they provide a net benefit to Canada. This sounds on its face like a tidy, scientific system by which you list the costs on one side and the benefits on the other, total them up and find the balance. In fact, it contains a wide room for arbitrary action, because the departmental vetters of takeovers can find benefit or detriment where their political masters tell them to.
Owners and managers of Canadian companies might like a clear set of rules governing all foreign takeovers so they can accurately measure and evaluate their prospects. Clear rules are good.
The harsh political reality, however, is that the Canadian public will hold the government responsible for damage to the national industrial structure through foreign takeovers, whatever the rules may say.