Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Ottawa Veto of MDA/Alliant Deal Highlights Need for Trade/Export Controls Due Diligence

On April 10, 2008, the story in the Canadian news was that the Minister of Industry had indicated that he would not approve the sale of assets by between MacDonald Dettwiler and Associates (Canadian) to Alliant Techsystems Inc. (American).  The basis for the rejection of the sale was that the Minister is "not satisfied" that the proposed sale is "likely to be of net benefit to Canada."  Alliant has 30 days to provide sufficient information to the Minister.  But, the concerns over the initial decision has lawyers and pundits speculating over what this means for the future of business transactions in Canada.

First, it means that proposed business transactions can get complicated if the seller is considered to be an important Canadian business or if the assets to be sold may lose their "Canadian-made" label as a result of post-transaction plans for the buyer to remove the assets from Canada. 

Second, it means that specialized Canadian trade/export controls counsel should be consulted early in the transaction.  The due diligence process (normally crafted by corporate lawyers) should include an investigation into the trade and export controls issues that might limit the seller's ability to transfer the assets or the buyer's ability to use the assets after closing in the manner contemplated.  The MDA/Alliant transaction required Investment Canada Act approvals and the Minister of Industry did not give his approval.  Other transactions may require other forms of approval.

It is importnat to note that the Minister's formal blocking of the MDA/Alliant deal is extraordinary. In the 23-year history of the Investment Canada Act, the Minister of Industry has never blocked a foreign takeover because of a failure of the "net benefit" test.  Industry Canada has reviewed and approved 1,587 foreign takeovers, according to figures from Industry Canada. Another 11,214 foreign acquisitions required notification under the Act, but not a formal review.  The MDA/Alliant deal is the first time a deal has been blocked and the buyer was an American company.  There is reason for concern over whether this one action is the start of what will be seen as a trend.

Third, foreign counsel should understand that Canadian laws may be different.  Not only are the laws different, the process for approving a proposed transaction may be different.  It may take time to get the approvals necessary under Canadian law.  Now, there is the added complication that national pride or Canadian public opinion may be in a heightened state of sensitivity.  This intangible factor is important and, as Alliant has learned, may be unpredictable.

Finally, lessons to be taken from the MDA/Alliant transaction include:

- exports of sensitive technology to any country, even the United States, may add complications to a proposed transaction;

- if the target co received public funds to build its business, Canadian public interest may be raised as  restriction on the proposed transfer;

- the extra-territorial application of U.S. law can pose problems in cross-border transactions - in the MDA/Alliant transaction, the U.S. laws relating to provision of sensitive information caused a concern (but other transactions could be problematic due to the U.S ITARs, anything relating to Cuba (and Canada's application of the Foreign Extraterritorial Measures Act), the application of the Foreign Corrupt Practices Act and Canada's equivalent statute, etc.)

- Canada and the United States do not always agree and this can affect the plans of businesses - in the MDA/Alliant transaction the dispute over the Arctic played a factor;

- security can trump business transactions - in the MDA/Alliant deal, the phrase "national security interest" was raised by think tanks, consultants and politicians

Please contact specialize trade/export controls/investment Canada counsel at early stages of a proposed acquisition of a Canadian company or assets.  Lang Michener LLP has a large international trade group by Canadian standards with experience in these matters.  Please contact any of:

Cyndee Todgham Cherniak (416-307-4168)

Michael Flavell (613-232-7171)

Geoffrey Kubrick (613-232-7171)

Martin Masse (613-232-7171)

Manny Montengrino (613-232-7171)

Keith Cameron (613-232-7171)

John Reynolds (604- 691-6831)

Hon. Donald S. MacDonald, P.C., C.C. (416-307-4241)

Hon. Sergio Marchi (416-307-4178)604-691-6831

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