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
Cnoocs arrangement agreement is thought to give it a
good shot at approval.
The review of Cnoocs 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 theyve done their
Cnooc had an advantage not available to Minmetals. In 2007 the
ICA was amended to include investment guidelines for
These state that the Minister will examine the non-Canadian
companys 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
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 wouldnt envision concerns to arise that
havent been dealt with in other cases involving similarly
situated Chinese entities, Wakil said.
Cnoocs press release on the agreement devotes an entire
section to the transactions benefits to Canada. Its more
notable provisions include: establishing a Cnooc headquarters
in Calgary to manage Nexens global operations and
Cnoocs operations in the region: intending to retain
Nexen management and employees; enhancing capital expenditures
on Nexens assets; and, enhancing community and social
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
While Cnoocs SOE-status complicates an approval, it is
important to note the majority of Nexens assets are not
actually in Canada.
Thats 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.
The ICA is not the only thing standing in the way of the
agreement. Some of Nexens assets are located in the US
portion of the Gulf of Mexico, and members of US Congress have
publicly declared their opposition to the
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 Canadas, 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
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 doesnt 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 Nexens 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 IFLRs coverage of the Ralls case
and what it signals for Cfius review
And here for tips on how to close China/US