U.S. Steel accused of breaking its promises to maintain jobs when it bought Hamilton-based Stelco Inc. in 2007, is ratcheting up its legal fight with Ottawa, filing an appeal after a judge tossed out the company's challenge of the Investment Canada Act.
Pittsburgh-based U.S. Steel is challenging a June 14 Federal Court ruling that upheld the powers of the federal government to go after foreign companies accused of failing to live up to promises made in order to win government approval for a takeover of a Canadian firm.
The case is being watched closely. Since the legislation's birth in 1984, Ottawa has never before taken a company to court under these provisions of the Investment Canada Act, which allow it to extract promises to ensure a major investment produces a "net benefit" for Canada.
A U.S. Steel spokeswoman said the company would not be commenting on the appeal, and its lawyers did not return calls or e-mails. In a brief e-mailed statement, Industry Canada said it was "disappointed" with the decision to appeal.
When stumbling Stelco, the last of Canada's major steel makers, was finally sold to U.S. Steel in 2007, some fretted about the "hollowing out" of Canadian industry. But workers at Stelco's Hamilton plant seemed relieved, hopeful that their jobs were more secure and their pensions were funded.
At least they felt that way until U.S. Steel laid off or retired 2,400 workers and scaled back production at its two former Stelco plants in Ontario. (The company also locked out workers at one of its plants for several months.)
Battered by the global economic crisis, U.S. Steel appeared to ignore a deal it had made with the federal government, as a condition of approval for the Stelco takeover, to maintain employment and boost production at the plants.
According to Ottawa, a deal is a deal. Last summer, federal Industry Minister Tony Clement made the unprecedented step of taking the steel giant to court under the provisions of the Investment Canada Act, accusing it of breaking its promises.
That case has yet to be heard in court. In a ruling earlier this month, a Federal Court judge tossed out U.S. Steel's argument that some of the Investment Canada Act's provisions were unconstitutional.
The company's lawyers argued that the fines it faced - what it called a "King Kong" charge of up to $10,000 a day, or $14-million and rising - amounted to a criminal penalty, meaning the firm should be entitled to the protections for accused criminals under the Charter of Rights and Freedoms and not have to spell out its defence up front, as it is required under the Investment Canada Act.
U.S. Steel is also planning to ask for a stay of proceedings in the main case while its appeal of the defeat of its constitutional objections is heard, according to a letter the company sent to the United Steelworkers, which represents workers at the steel plants and is an intervenor in the case.
Because of the various preliminary legal skirmishes, the firm has yet to even present a detailed defence in the central case against it, almost a year after the court battle began.
The spiralling legal fight, and the initial Federal Court ruling upholding the Investment Canada Act, should prompt foreign companies shopping for acquisitions in Canada to take what are know as "undertakings" - their promises to Ottawa - more seriously, lawyers say.
"For the longest time, it was always an afterthought," said Brian Facey of Blake Cassels & Graydon LLP in Toronto, who has helped major foreign investors navigate the Investment Canada Act. "It was a condition put in the various merger agreements that, you know, you would have to get the various approvals. But people didn't focus that much on Investment Canada. … You knew you'd get through it."
And it is not just the U.S. Steel decision that is getting attention. In 2008, the government refused to approve U.S.-based Alliant Techsystems Inc.'s plans to buy satellite firm MacDonald Dettwiler and Associates Ltd., apparently on national security grounds, although it did not state its reasons.
Since then, Ottawa has amended the Investment Canada Act to include new rules that explicitly allow it to reject transactions to protect national security, and new guidelines for controversial purchases by "state-owned enterprises," such as China's massive government-controlled energy companies shopping for oil sands assets.
Mr. Facey said foreign buyers, and Canadian vendors, are now seeking special covenants in merger agreements that spell out what effect the likely undertakings would have on their deal. This means that the commitments expected from Ottawa are now affecting the bottom-line pricing in deals, he said.
He said foreign buyers need to think carefully before committing to certain levels of employment and the like, in case, as happened in the last two years, the economy goes dramatically sour: "The main point for foreign investors is you bear the risk of any unforeseen developments, because the government can really hold you to it."
Rob Champagne, a lawyer for United Steelworkers Canada on the case, said the union's intervenor status - still being challenged by U.S. Steel - is restricted to the question of what punishment the company should face if it is found to have broken its promises.
The union has asked for millions in damages in the form of lost pay and benefits for laid-off workers. And both the union and another intervenor, junior Canadian steel maker Lakeside Steel, have called for U.S. Steel to be forced to sell its Canadian assets, which Lakeside says it would be happy to take over.
Lawyer Chris Hersh of Cassels Brock & Blackwell LLP in Toronto said no one expects the U.S. Steel case to become the new normal, with a federal government seeking to put up barriers to foreign investment.
While he didn't think the case would dampen investors' interest in Canada, he said foreign investors will be more likely to think twice about the effects of undertakings on their ability to close plants or move production from one plant to another. In many cases, he said, federal officials have been open to renegotiating pledges if circumstances change.
But if those talks break down, or the sides can't agree - as is the case with U.S. Steel - the signal is clear, he said: "The undertakings have teeth. The government is serious."
With a report from Greg Keenan