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Vol. 137, No. 40 — October 4, 2003 Regulations Amending the Export Development Canada Exercise of Certain Powers RegulationsStatutory Authority Export Development Act Sponsoring Departments Department of Foreign Affairs and International Trade and Department of Finance REGULATORY IMPACT Description The Regulation amends the Export Development Canada Exercise of Certain Powers Regulations (the "Regulations") which were made in 1994 in connection with amendments to the Export Development Act (the "Act"). The amendments to the Act expanded the powers of Export Development Canada ("EDC") to provide, inter alia, insurance and financing to Canadian exporters. The Regulations were enacted in order to guide EDC's use of these broadened powers, including its power to acquire equity interests. They define an equity interest as "an ownership interest in an entity." Equity interests are generally acquired through investment in an entity, for example through the purchase of corporate shares. Currently, the Regulations permit EDC to acquire equity interests if the value of the equity investments to be made (together with the value of any equity that EDC already holds in the entity) does not exceed the lesser of: (i) 25 percent of the total equity in the entity at the time of EDC's acquisition, or (ii) $10 million. EDC may make equity investments above these limits, but the Regulations then require the approval of the Governor in Council, on the recommendation of the Minister for International Trade and the Minister of Finance. During a legislative review of the Act in 1999, Canadian exporters complained that certain aspects of the Regulations were impeding EDC's ability to make equity investments in support of Canadian exporters. In response to these views, the Government supported the proposal for amendments to the EDC equity Regulations to remove the $10-million ceiling for foreign project investment and also supported the recommendation to calculate the 25-percent limit on a fully diluted basis. 1. Foreign Projects Canadian companies that are bidding to supply a foreign project may be required to invest in the special-purpose company that has been created to carry out the project. Such investment generally takes the form of a purchase of shares ("project equity") in the special-purpose company created for the project. EDC can assist Canadian exporters in this situation by providing the investment funds from EDC's own capital base. If Canadian exporters are unable to invest in project equity, their bids may be disqualified despite excellent products and competitive pricing. EDC's ability to provide project equity in these situations can also attract additional financing from other sources and leverage further Canadian supply of goods and services. Large foreign projects commonly require hundreds of millions of dollars of equity and debt to finance their cost. Many Canadian companies, with their engineering, infrastructure and resource development abilities, are ideally suited to participate in such projects. However, the current $10-million limit renders EDC's equity support almost negligible relative to the capital requirements of these projects. In cases where multiple Canadian exporters would like to participate in a project, EDC's investment capacity is spread even more thinly. These limitations have prompted Canadian exporters to recommend that EDC's ability to provide foreign project equity financing be strengthened. The amendment addresses this recommendation by removing the $10-million limit for EDC's direct equity investments in foreign projects. 2. "Fully Diluted" Calculation Exporters also indicated that the 25-percent limitation on EDC's equity investment is unduly constraining, since this percentage is calculated on the basis of the target entity's total equity prior to EDC's investment, and does not take into account the diluting effect of EDC's investment, or investment by co-investors who often invest simultaneously with EDC. The amendment addresses this problem by stipulating that the 25-percent limit should be calculated on a fully diluted basis, immediately following completion of the investment. That is, the total equity in the project after the equity investment is made is the basis on which the 25-percent limit will be calculated. This is the meaning of the phrase "fully diluted." 3. Restructurings and Other Instances Not Intended to Fall Under the Scope of the Regulations The Regulation also amends the Regulations by clarifying that there is no requirement for Governor in Council approval in situations where EDC acquires an equity interest other than through a transaction where EDC makes an intentional equity investment in order to assist a Canadian exporter or exporters. The amendment sets out a list of such situations in section 2: they include the payment of stock dividends, other in kind distributions, amalgamations or similar action, settlement of a debt or claim, or restructuring or other similar workout arrangements. In such cases, equity elements are usually among the last to be agreed and finalized, occurring sometimes only in the last weeks of negotiations; as a result, quick decisions are often required by the creditors involved. The text of the current Regulations could be interpreted to apply to such unintentional acquisitions, though this was neither foreseen nor intended when the Regulations were made in 1994. The amendment confirms this by stipulating that such unintentional acquisitions do not fall under the scope of the Regulations. Alternatives One alternative to these amendments would be the maintenance of the status quo. This alternative (i) ignores the demands being placed on Canadian exporters to arrange for significant equity investments in foreign projects by maintaining the current limitations on EDC's equity investments; (ii) does not take into account the diluting effect of EDC's investment, or investment by co-investors who participate with EDC in financing a project; (iii) would impede EDC's ability to participate fully in restructurings; and (iv) would perpetuate a textual ambiguity in the Regulations concerning the cases enumerated in section 2. Another alternative would be to repeal the Regulations entirely. This alternative would free EDC to invest and divest equity interests with less government oversight. However, given the breadth of powers granted to EDC under the 1993 amendments to its Act, and the limits of its capital base, it may be appropriate to continue to provide regulatory guidance to EDC concerning the use of these powers. Benefits and Costs The costs of the Regulations, if any, will be restricted to EDC and will not affect external parties. It is reasonable to assume that the amended Regulations will result in more equity investment being available for individual foreign project financings, which will benefit Canadian exporters and enhance Canadian competitiveness. Improving the availability and scope of EDC's equity investment powers will be especially useful to smaller exporters who lack resources to take and hold equity positions in foreign projects. Administrative efficiency will also be improved, since fewer transactions will have to be referred to the Governor in Council for approval. Timely decision-making will be facilitated, which may be critical to EDC's ability to participate fully in the benefits of a restructuring or settlement. Consultation The proposal to amend the Regulations by removing the $10 million limit for foreign project equity investments, and to calculate the investment percentage on a fully diluted basis for EDC's acquisition of all equity interests, arose in public consultations during the legislative review of the Export Development Act in 1999. In addition to the public hearings that were held in several Canadian cities during the review, a number of parties made written submissions to the reviewers: these included two businesses and one business organization who specifically recommended that EDC's equity investment powers be broadened (CAE Electronics, Newcourt Credit Group Inc., and the Aerospace Industries Association of Canada). This recommendation was given precise form by the Gowlings Report on the Review of the Export Development Act (July 1999) and subsequently endorsed in the Report of the Standing Committee on Foreign Affairs and International Trade: Exporting in the Canadian Interest: Reviewing the Export Development Act (December 1999), and in the Government Response to the Standing Committee on Foreign Affairs and International Trade: Reviewing the Export Development Act (May 2000). Each of these reports was given wide publicity: the Gowlings Report and the Government Response were announced by press releases and tabled by the Minister for International Trade in the House of Commons. The Standing Committee on Foreign Affairs and International Trade also heard and received written submissions from witnesses representing a wide range of views during its public hearings on the Review of the Export Development Act. No criticisms or opposition to the proposal to remove certain restrictions placed on EDC's equity powers in the manner proposed here were received during this period. The proposal to amend the Regulations so as to clarify that they do not apply to unintentional equity acquisitions was developed by EDC. To date, there has been no public consultation regarding this amendment. Compliance and Enforcement EDC is subject to the strict control and accountability rules of the Financial Administration Act. The key control and accountability instruments called for under that Act include (a) corporate plan, (b) capital budget, (c) operating budget, (d) borrowing plan, (e) annual report, and (f) special examination by the Auditor General of Canada. EDC is also subject to legislative review at regular intervals stipulated in the Act. EDC's equity investments are made in accordance with an Equity Plan that is subject to regular review and approval by its Board of Directors. The Board of Directors is also presented with a list of impaired loans and loans on credit watch at quarterly intervals. The Deputy Minister for International Trade and the Deputy Minister of Finance are members of the Board of Directors. Martin Jensen, Deputy Director — Multilateral Policy, Export Financing Division, Department of Foreign Affairs and International Trade, 125 Sussex Drive, Room C5-287, Ottawa, Ontario K1A 0G2, (613) 992-8448 (Telephone), (613) 943-1100 (Facsimile), Martin.Jensen@dfait-maeci.gc.ca (Electronic mail). Notice is hereby given, pursuant to subsection 10(8) (see footnote a) of the Export Development Act (see footnote b) , that the Governor in Council, pursuant to subsections 10(6) (see footnote c) and (7) (see footnote d) of that Act, proposes to make the annexed Regulations Amending the Export Development Canada Exercise of Certain Powers Regulations. Interested persons may make representations with respect to the proposed Regulations within 60 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Martin Jensen, Deputy Director - Multilateral policy, Export Financing Division, Department of Foreign Affairs and International Trade, 125 Sussex Drive, Ottawa, Ontario K1A 0G2 (E-mail: martin.jensen@dfait-maeci.gc.ca). Persons making representations should identify any of those representations the disclosure of which should be refused under the Access to Information Act, in particular under sections 19 and 20 of that Act, and should indicate the reasons why and the period during which the representations should not be disclosed. They should also identify any representations for which there is consent to disclosure for the purposes of that Act. Ottawa, October 2, 2003
EILEEN BOYD
REGULATIONS AMENDING THE EXPORT DEVELOPMENT CANADA EXERCISE OF CERTAIN POWERS REGULATIONS AMENDMENTS 1. Section 2 of the Export Development Canada Exercise of Certain Powers Regulations (see footnote 1) is amended by adding the following in alphabetical order: "foreign project equity interest acquisition" means any arrangement entered into by the Corporation whereby the Corporation acquires an equity interest in an entity that has as its primary purpose the carrying out, directly or indirectly, of any construction, modification, construction and operation or modification and operation in relation to a physical work located outside Canada. (acquisition de titres de participation dans un projet à l'étranger) 2. Subsection 4(2) of the Regulations is replaced by the following: (2) Subject to subsections (4) and (5), an acquisition by the Corporation requires the approval of the Governor in Council, on the recommendation of the Minister and the Minister of Finance, if the value of the equity interest to be acquired by the Corporation together with the value of any equity interest already held by the Corporation in that entity exceeds (a) in the case of a foreign project equity interest acquisition, 25 per cent of the value of all equity interests in the entity at the time of acquisition by the Corporation; and (b) in all other cases, the lesser of
(ii) $10,000,000, or the equivalent of that amount in the currency of another country as calculated at the rate of exchange between the Canadian dollar and the other currency as quoted by the Bank of Canada at noon on the day immediately preceding the day on which the Corporation agrees to acquire the equity interest. (3) For the purposes of paragraph (2)(a) and subparagraph (2)(b)(i), the value of all equity interests in the entity at the time of acquisition by the Corporation (a) is to be calculated on a fully diluted basis and shall include the equity interest being acquired by the Corporation or by any other person and any equity interest that the Corporation or any other person is obligated to acquire; and (b) is to be determined in accordance with
(ii) any agreements between the entity and the Corporation that relate to the acquisition, and (iii) any agreements among persons who have acquired, are acquiring or are obligated to acquire an equity interest in the entity and any agreements between any of them and the entity that relate to the acquisition of their respective equity interests in the entity. (4) Subsection (2) does not apply to an acquisition resulting from a restructuring, reorganization or other similar workout arrangement involving an entity in which the Corporation already holds an equity interest or to which it is a creditor. (5) Subsection (2) does not apply where the equity interest is acquired by reason of (a) a dividend or other in-kind distribution; (b) the exchange or substitution, as a result of an amalgamation, merger or other similar action, of an equity interest already held by the Corporation for an equity interest in an entity that is the result of the action; or (c) the settlement, in whole or in part,
(ii) a debt or claim in respect of which the Corporation has made a payment pursuant to an arrangement that has the effect of providing any insurance, reinsurance, indemnity or guarantee. COMING INTO FORCE 3. These Regulations come into force on the day on which they are registered. [40-1-o] S.C. 1993, c. 26, s. 4(2) S.C. 2001, c. 33, s. 2 S.C. 1993, c. 26, s. 4(2) S.C. 1993, c. 26, s. 4(2) SOR/94-410; S.C. 2001, c. 33, s. 30 |
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