In the CNOOC-Nexen decision, less strategy might be more – by Daniel Schwanen (Globe and Mail – September 14, 2012)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

The overwhelming reaction from experts to the friendly bid by China National Offshore Oil Corp. for Calgary-based Nexen Inc. has been to urge Canada to be “strategic” in its response to the deal. Indeed, we should be – but being strategic should not mean making policy on the fly.

In late 2007, the Canadian government issued guidelines regarding how it would apply its “net benefit” test, used to screen large acquisitions of Canadian entities by foreign-owned entities, when the latter are state-owned enterprises such as CNOOC. These guidelines require the government to consider whether the state-owned enterprise adheres to Canadian standards of good corporate governance and whether the acquired entity will be able to continue operating on a commercial basis.

More specifically, the guidelines mention commitments to transparency, the presence of independent Canadian directors on the board, and a Canadian stock-exchange listing for either the acquirer or the acquired entity as undertakings that may be required of the foreign investor. Presumably, concerns related to the degree of Chinese Communist Party control over CNOOC, or to allegations that firms connected with CNOOC might have engaged in insider trading ahead of the Nexen announcement, can be assessed under these headings.

Some experts believe we should try to go further in levelling the playing field between foreign state-owned enterprises and Canadian private firms. Some say Canada should hold out for guarantees of reciprocal treatment for Canadian firms in China. Others think there should be blanket restrictions on investment by state-owned enterprises in Canada because, beyond questions of foreign government control and transparency already addressed by Canada’s guidelines, such enterprises possess inherent tax and “deep pocket” advantages over private enterprises. Others believe Canada should react to the growth of international activities by foreign state-owned or state-sponsored enterprises by supporting its own stable of “national champions.”

These arguments are of dubious use, at least in the context of the proposed CNOOC acquisition of Nexen. Given China’s likely continued (if bumpy) transition toward a more market-oriented economy, Canada can better promote Chinese openness to Canadian firms, including in the oil and gas sector, by building on the new linkages that Chinese investment will create.

If Canada made its approval conditional on new access to China by Canadian firms, a negative reaction against Canadian investment would be more likely, because Canada has openly courted Chinese investment and the Chinese are reported to be following the letter and spirit of Canada’s rules regarding investment by state-owned enterprises.

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