While this column has examined the impact on the satellite industry of the Committee on Foreign Investment in the United States (CFIUS) regime, the April decision by Canadian Industry Minister Jim Prentice to block the $1.3 billion acquisition of Canadian space systems manufacturer MacDonald, Dettwiler & Associates Ltd. (MDA) by U.S. space equipment and munitions manufacturer Alliant Techsystems Inc. (ATK) highlights that the impact of restrictive foreign investment regulation is not just a U.S. issue.
While hastening to affirm that “Canada remains open for business,” Prentice stated that the acquisition of MDA would not benefit Canada and expressed particular concern that MDA’s Radarsat-2 synthetic aperture radar satellite — launched shortly before the proposed deal was announced — not leave Canadian control. The satellite, developed and built with nearly half-a-billion Canadian dollars in subsidies from the Canadian Space Agency — emerged as a political flashpoint for the deal’s critics.
It would be a stretch to call Canada a hotbed of nationalist protectionism, as the ATK-MDA deal marks the first time an Industry minister has exercised his authority to block a transaction since Canada’s foreign investment rules were revised in 1985. Moreover, it follows a series of transactions that have seen Canadian technology companies sold to non-Canadian investors. So, without militarizing the U.S.-Canadian border, it is worth taking a look at foreign investment restrictions outside the Unites States that are having an impact on the satellite industry.
The CFIUS regulatory scheme, in which transacting parties voluntarily report pending transactions that might be considered to have national security implications on foreign investment grounds and await approval of the transaction, is by no means the model for other countries’ foreign investment review. Fewer than 1 percent of notified transactions have been blocked or withdrawn from consideration. That, combined with the potential rescission remedy if a transaction subsequently is found to be in violation, has led to a diligent notification and reporting process.
Most other countries’ foreign investment review systems, by contrast, are mandatory above specified transaction size thresholds or if effective control of the acquired company is obtained in the transaction. Among 10 countries recently reviewed by the U.S. Government Accountability Office, Canada, France, Germany, Japan, the United Kingdom, China, India and Russia had formal foreign investment review systems with procedures and review time frames established. The review systems focused on defense industry infrastructure and other industries deemed to have national security implications such as aerospace, telecommunications and energy. Two other countries, the Netherlands and the United Arab Emirates (UAE), did not have formal review processes. However, the Netherlands restricted entry into certain strategic sectors such as public utilities, while the UAE restricted the extent of foreign ownership in all sectors.
Foreign investment review, however codified in a regulatory structure, tends to be characterized by a “we know it when we see it” mentality that provides predictability about what kind of transaction may raise red flags and for which the transacting companies must prepare. For example, the congressional and public uproar in the post-Sept. 11 environment over the proposed 2006 transaction to transfer management control of several U.S. ports to DP World, a UAE state-owned company, led DP World to withdraw from the deal. That uproar should have been better anticipated and prepared for by the parties. We may assume that satellite and space technology — unless of the most off-the-rack, commoditized kind — generally will be treated as sensitive for foreign investment review purposes.
MDA is one of Canada’s leading companies in a relatively small but high quality set of national entrants that feel that the Canadian space sector has been neglected by its government. MDA is a source of pride to a country that faces a continuous challenge from U.S. companies seeking to acquire Canadian enterprise generally and technology sector in particular. It is hard to know whether greater sensitivity to, and preparation for, the political issues would have made a difference to the ATK-MDA outcome.
The result underscores how critical it is for companies to prepare for situations when a proposed acquisition or investment may trigger rules that call for review, control and potential restriction of foreign investment. The political issues likely to affect a given transaction must be prepared for early and seriously and not treated as an afterthought to be dealt with by second-tier advisors when the first-tier dealmakers have wrapped up the principal terms.