Encana’s share price has fallen significantly in recent years and it has no controlling shareholder, factors that could potentially make it attractive to a buyer.Jim Urquhart/Reuters
Encana Corp.’s decision to move its headquarters to the United States opens the door for a foreign buyer to acquire the company without offering pledges around employment or investment to win the federal government’s approval.
The Calgary-based oil and gas company said last week that it plans to move its head office to the U.S. in a bid to access more capital from U.S. indexed investment funds that hold shares based on companies’ positions in various stock indexes.
Encana’s share price has fallen significantly in recent years – dropping close to 70 per cent from mid-2018 to now – and it has no controlling shareholder, factors that could potentially make it attractive to a buyer.
As a side effect of its planned move to the U.S., if the company did attract a foreign buyer, lawyers say it would not face a review under the Investment Canada Act (ICA), which requires proof that deals for companies worth more than about $1-billion represent a “net benefit” to Canada. It is ultimately the federal minister of Innovation, Science and Economic Development (ISED) who must grant approval under the ICA.
“To satisfy the minister of ISED that the deal is a net benefit, the investor typically has to give significant undertakings regarding how they plan to operate the Canadian business on a go-forward basis,” said Chris Hersh, chair of the competition and foreign investment group at Cassels Brock & Blackwell LLP in Toronto.
He said such undertakings typically last between three to five years and can include commitments to maintain Canadian jobs, keep certain management-type roles in Canada, and invest in research and development or capital spending. They can also include pledges related to the community in which the company operates or agreements with Indigenous groups.
“Once the Investment Canada Act no longer applies to a transaction, the government certainly loses the ability to get those net benefit undertakings,” Mr. Hersh said.
Encana said it plans to make Delaware its legal home, but will list Denver as its primary place of business. The changes will be put to a shareholder vote and also require approvals from the stock exchanges (it is listed on both the Toronto and New York stock exchanges) and a Canadian court. The company hopes to make the move in early 2020.
“Assuming Encana gets shareholder approval and becomes a U.S. company, it would presumably still have Canadian subsidiaries for its operations in Canada,” said Stuart Olley, a Calgary-based lawyer who leads the natural-resources group for Gowling WLG International Ltd.
For the purposes of the ICA, he said, any deal to acquire the company would be considered an indirect acquisition of a Canadian company and the “transaction would cease to be reviewable,” as long as the potential buyer was from a country that is a member of the World Trade Organization (WTO).
“Once Encana redomiciles into the U.S. and, assuming an acquisition by a WTO investor, the government would lose the ability to extract those commitments,” Mr. Olley said. He added that the government has rarely tried to enforce such commitments legally, but that they do hold a certain amount of “moral suasion."
A foreign transaction could still be reviewed on the grounds of national security or for concerns about reducing competition in Canada. It would also have to win approval from the Committee on Foreign Investment in the United States (known as CFIUS), but the U.S. review is focused on national security.
Subrata Bhattacharjee, a partner in the competition group at Borden Ladner Gervais LLP in Toronto, agreed that Encana’s move to the U.S. would mean a potential foreign buyer would not have to make promises to maintain Canadian jobs or investment. But none of the lawyers The Globe and Mail spoke with said that was likely to have been a motivating factor for Encana.
“I think the seeds for a decision to make this move were planted quite some time ago and really had to do with access to capital,” Mr. Bhattacharjee said. “I find it difficult to believe industrial policy considerations [such as net benefit commitments] would have informed this decision."
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