Thursday, November 22, 2012

On precedence

There's not much doubt that Canada's debates over the FNOOC/Nexen takeover bid and FIPPA investor privilege treaty with China have become intertwined. But it's worth noting that some observers seem to be misreading how the two will relate to each other - and we should be wary of confusion on both fronts.

Let's take for example Michael Den Tandt:
There are legitimate questions, as I have noted before, about both the detail of the FIPA, and the CNOOC-Nexen deal. The Harper government should have addressed these up front. Instead, it has played catch up. Its likeliest way forward now is to approve the takeover, but with stringent conditions. Bloomberg News reported Tuesday that CNOOC has accepted a requirement that the acquired company have 50 per cent Canadian representation on its board and in management.

If true, that is fascinating: Article 7 of the Canada-China FIPA says that “a contracting party may not require that an enterprise of that Party ... appoint individuals of any particular nationality to senior management positions.” The agreement allows that a majority of a board of directors be “of a particular nationality or resident of the territory of the Contracting Party,” but only if that does not “materially impair the ability of the investor to exercise control over its investment.”

For CNOOC to accept a 50-50 board and executive-suite split, therefore, would denote appreciable flexibility in the interpretation of the FIPA, to Canada’s benefit — perhaps driven by knowledge on both sides that the deal has become a hot potato.
Apparently, Den Tandt assumes that CNOOC's agreement to accept restrictions on its board and management will supersede the terms of the FIPPA. But there's another possibility as well: that CNOOC is perfectly willing to publicly accept a restriction which won't actually be effective.

After all, FIPPA contains no exception for restrictions on board and management entered into by agreement - only for ones already in place by the time the FIPPA enters into force. And so CNOOC may well be happy to go along with the Cons' desire to draw out the approval process, push to have the FIPPA approved first, then avoid any public commitment through the operation of a treaty which supersedes its promise.

Of course, there's a separate issue that a one-time restriction will do nothing to affect the interpretation of the FIPPA once it's put in place. And as Don Davies has noted, any ability to further monitor CNOOC's operations will be lost as soon as a one-time takeover is approved.

But while it's bad enough that we're being told yet again to accept one-time assurances in exchange for long-term fetters on public policy, there's a real risk we we'll end up getting neither.

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