Monday, April 16, 2018

Canada should take a U.S. approach to the Aecon takeover bid − and reject it




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Image result for Anita Anand is a professor of law and the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto

Anita Anand is a professor of law and the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto
The federal government is currently considering whether to prevent a Chinese state-owned firm from acquiring Aecon Group Ltd., a major player in Canada’s construction industry. Under the Investment Canada Act, the federal government has the authority to review such acquisitions if there are reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security. Admittedly, this wide discretion should be used sparingly. But this transaction is one that should be rejected.
Aecon is a 140-year old construction company with projects focused on the infrastructure, energy and mining sectors. It ranks as one of Canada’s largest construction companies with revenue last year of $2.8-billion and a market capitalization of $1.1-billion. It has the construction of the CN Tower, the Vancouver Sky Train and Ontario’s Highway 407 to its name. Today, it holds contracts relating to highly sensitive projects, including refurbishing Ontario’s nuclear power stations and construction in Canadian military facilities. It is active also in the Canadian telecommunication sector, delivering “communications infrastructure to residential, commercial, institutional and industrial customers.”
The proposed acquirer, China Communications Construction Co., one of the world’s largest infrastructure companies, is 63-per-cent state-owned and has agreed to pay Aecon shareholders a significant premium under the transaction. Yet, CCCC’s close links with the Chinese government have led commentators in Canada and the United States to highlight the risk that it poses in passing sensitive information and technology to Beijing. Note that, until recently, the World Bank barred CCCC from bidding on development projects due to corrupt activity.
So what are the advantages of the deal, especially given that it has been approved by the Aecon board and its shareholders? The merger could enhance Aecon’s competitiveness in international bids. Some even argue the transaction is important for Canada-China relations, including a trade deal whereby Canada could gain access to China’s trading markets. But this thinking is based on possibility, not fact.
Aecon believes the proposed takeover is meritorious and, while willing to comply with the federal review process, appears to see no national security risk. Aecon chief executive John Beck, who has an interest in seeing the transaction proceed, has stated that the company is not involved in sensitive military installations and is not the owner of intellectual property or sensitive proprietary technology relating to nuclear energy.
Yet, Aecon’s project portfolio reveals a diverse array of contracts that do indeed engage national security concerns. For example, Aecon works on projects involving the construction of military housing and training facilities and has been active in the construction and maintenance of telecommunications infrastructure in Canada. It also plays a key role in the refurbishment of Ontario’s Bruce and Darlington nuclear power plants.
While Aecon may not own any nuclear-based intellectual property, it likely has access to design, operations, security and other sensitive information about the nuclear power facilities that supply almost half of Ontario’s electrical power. This is not information that should be in the hands of a foreign government, particularly if Canada’s relationship with that government were to sour.
The question arises: Why should we risk allowing a Canadian company with such expertise and knowledge to be purchased by a foreign state-owned enterprise that could be a strategic economic adversary at some point in the future? Indeed, what are the benefits for Canadians given the serious potential risks involved in this takeover? Do they outweigh national security concerns?
A useful approach to balancing the need to preserve national security interests while encouraging foreign investment can be seen in the United States. The Committee on Foreign Investment in the United States (CFIUS) is charged with deciding whether takeovers of U.S. corporations by foreign entities pose a threat to national security. If CFIUS is not satisfied that a transaction is in the country’s national security interests, it can recommend that the President veto the transaction.
CFIUS has scrutinized the proposed takeover bid of American semiconductor and telecommunications company Qualcomm by a Singapore-based company, Broadcom, both of which are seeking to develop 5G telecommunications infrastructure. CFIUS issued a letter warning about the negative security implications if Qualcomm were acquired by Broadcom since the latter’s relations with the Chinese government are significant. A successful takeover of Qualcomm could result in Chinese access to sensitive information on 5G infrastructure development and its civilian and military uses.
While the Canadian review process is becoming more developed with time, it does not have CFIUS’s history. In evaluating whether the Aecon takeover is injurious to national security, the federal government must ask: Why should a foreign state-owned firm be permitted to acquire a Canadian company with a portfolio of contracts that engage in sensitive business operations and technologies such as nuclear power infrastructure, telecommunications networks and military facility construction? The benefits to Aecon and its shareholders pale in comparison to the risks confronting our national security interests if this deal occurs.