How Cnooc’s bid was structured for foreign investment approval

Author: | Published: 20 Sep 2012
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Nexen investors hope China National Offshore Oil Corporation (Cnooc) does not suffer the fate as BHP Billiton, whose bid for Potash was blocked under the Investment Canada Act (ICA) in November 2010.

Cnooc’s arrangement agreement is thought to give it a good shot at approval.

The review of Cnooc’s bid for the oil and gas company under the net-benefit-to-Canada test commenced late last month. Industry Minister Christian Paradis said the transaction would be scrutinised very closely, according to the Financial Post.

State-owned enterprises (SOE) like Cnooc raise a red flag both in terms ICA review and public opinion. SOE China Minmetals Resources backing out of its bid for Noranda in 2004 at least in part because of ICA review.

“That was an example of a Chinese company not really prepared for how things played out in Canada,” said Anthony VanDuzer, a law professor at the University of Ottawa. “I think the Cnooc bid seems like they’ve done their homework.”

Cnooc had an advantage not available to Minmetals. In 2007 the ICA was amended to include investment guidelines for SOE.

These state that the Minister will examine the non-Canadian company’s corporate governance and reporting structure. Cnooc intends to list its common shares on the Toronto Stock Exchange (TSX). This will make it subject to public company corporate governance, audits, financial reporting and disclosure requirements.

Torys partner Omar Wakil said a TSX listing will strengthen the parties’ case for ICA approval because of Canadian disclosure and corporate governance obligations.

“Canada has a history of approving acquisitions by SOEs that are publicly traded and clearly operate on commercial bases, so I wouldn’t envision concerns to arise that haven’t been dealt with in other cases involving similarly situated Chinese entities,” Wakil said.

Cnooc’s press release on the agreement devotes an entire section to the transaction’s benefits to Canada. Its more notable provisions include: establishing a Cnooc headquarters in Calgary to manage Nexen’s global operations and Cnooc’s operations in the region: intending to retain Nexen management and employees; enhancing capital expenditures on Nexen’s assets; and, enhancing community and social commitments.

Industry Canada began its initial 45-day review period of the agreement on August 29. If the organisation does not reach an agreement within that period, an additional 30-day period would follow.

While Cnooc’s SOE-status complicates an approval, it is important to note the majority of Nexen’s assets are not actually in Canada.

“That’s one of the factors that make it very different from the Potash deal,” Wakil said. “That gives the transaction a very different feel.”

“An oil and gas deal like this is unlikely to be seen as strategically important, and I think there is a general recognition that a large amount of foreign investment is going to be needed to develop those projects,” added Wakil.

US approval

The ICA is not the only thing standing in the way of the agreement. Some of Nexen’s assets are located in the US portion of the Gulf of Mexico, and members of US Congress have publicly declared their opposition to the merger.

Cnooc filed for approval with the Committee on Foreign Investment Review in the US (Cfius) on September 5. Cfius has a review timetable similar to Industry Canada’s, but reversed; there is a 30-day initial review period and then a 45-day investigation period. If Cfius does not reach a decision by October 5, the parties may have cause for concern.

Stephen Paul Mahinka, a partner at Morgan Lewis & Bockius, said the Cfius review process lacks transparency and has been politicised.

“It is almost inevitable there will be efforts to bring pressure on Cfius with respect to its review on the transaction,” Mahinka said.

“As an outsider, I would say the right answer is Cnooc should be allowed to undertake the acquisition if you are looking at it strictly from a security perspective,” he added. “It doesn’t appear this could affect national security in the US.”

Cfius is not required to justify its decisions and does not have review guidelines like the ICA, which has itself been criticised for a lack of transparency.

Just last week, windfarm operator Ralls Corporation filed suit against Cfius on the grounds of insufficient transparency and authority to block and break-up transactions.

A small percentage of Nexen’s assets are located in the US. If CFIUS decides the acquisition is a national security concern, and Industry Canada allows the deal to go forward, it would be possible to spin-off US assets assuming the parties decide the deal is still of value.

See here for IFLR’s coverage of the Ralls case and what it signals for Cfius review

And here for tips on how to close China/US mergers