Canadian Government Blocks CCCC Acquisition of Aecon, Citing National Security Concerns

On May 24, 2018, fol­low­ing an exten­sive for­eign invest­ment review, the Cana­di­an gov­ern­ment blocked the sale of promi­nent con­struc­tion firm Aecon Group to Chi­na Com­mu­ni­ca­tions Con­struc­tion Com­pa­ny Inter­na­tion­al (CCCCI) on nation­al secu­ri­ty grounds. Con­trol of crit­i­cal infra­struc­ture projects and an over­all threat to Cana­di­an sov­er­eign­ty were the pri­ma­ry con­cerns cit­ed by the Trudeau gov­ern­ment for their deci­sion. The Chi­nese Com­mu­nist Par­ty holds a 63% stake in CCCC (the par­ent enti­ty of CCCCI) and also main­tains a Par­ty unit with­in its cor­po­ra­tion hier­ar­chy).  The company’s cor­po­rate struc­ture and gov­er­nance were like­ly fac­tors in the deci­sion.

In Decem­ber 2017, Aecon share­hold­ers over­whelm­ing­ly approved the $1.5 bil­lion takeover of the com­pa­ny by CCCCI, which was offered at a 42% pre­mi­um to Aecon’s share val­ue at the time.  Although the deal was ini­tial­ly sup­posed to under­go only a stan­dard invest­ment review, pres­sure from Canada’s Con­ser­v­a­tive oppo­si­tion par­ty, the intel­li­gence com­mu­ni­ty, and some of the country’s most promi­nent con­struc­tion firms and think tanks raised con­cern about the deal’s poten­tial­ly adverse impli­ca­tions on nation­al secu­ri­ty and domes­tic indus­try, forc­ing the Trudeau admin­is­tra­tion to con­duct a more nuanced nation­al secu­ri­ty review of the deal.

Aecon is involved in sev­er­al sen­si­tive projects inte­gral to Canada’s nation­al secu­ri­ty, includ­ing: nuclear facil­i­ties; the ongo­ing con­struc­tion of the $10.7 bil­lion “Site C” hydro­elec­tric dam in British Colum­bia; and a “once-in-a-gen­er­a­tion” replace­ment of fiber optic and wire­less net­works.

West­ern reg­u­la­to­ry regimes in the Unit­ed States, Aus­tralia, Europe, and now, Cana­da have become increas­ing­ly con­cerned about the impli­ca­tions of exces­sive Chi­nese eco­nom­ic and finan­cial lever­age in strate­gic sec­tors.  Notably, Ottawa cit­ed Aus­tralia as a case study for its deci­sion and its strug­gle to man­age Chi­nese influ­ence amidst an influx of Chi­nese invest­ment into crit­i­cal infra­struc­ture projects, such as the State Grid Cor­po­ra­tion of China’s attempt­ed acqui­si­tion of an Aus­tralian pow­er grid.

The deci­sion has come as a sur­prise to the Chi­nese, and even to the Cana­di­an oppo­si­tion groups who lob­bied for the deal’s rejec­tion.  Ini­tial­ly, ana­lysts spec­u­lat­ed that the acqui­si­tion would sim­ply be amend­ed with caveats to pro­tect some of Aecon’s exist­ing crit­i­cal infra­struc­ture projects (poten­tial­ly forc­ing divest­ment from key assets). Now, the deci­sion is being viewed as a marked shift from the Trudeau’s Admin­is­tra­tions tra­di­tion­al­ly open Chi­na pol­i­cy, which has thus far involved the aggres­sive pur­suit of increased trade and invest­ment.

In response to the deci­sion, the Chi­nese for­eign min­istry has threat­ened reprisals to “safe­guard our [Chi­nese] law­ful inter­ests.” The Aecon deal is the fifth over­all deal — and third Chi­nese deal in 10 years — to be blocked by the Cana­di­an gov­ern­ment. Fol­low­ing Chi­na Nation­al Off­shore Oil Corporation’s acqui­si­tion of Cana­di­an ener­gy firm, Nex­en, Ottawa took steps to height­en its nation­al secu­ri­ty review mech­a­nisms.

The Aecon deal is now being viewed as a “test case” that could inform how the gov­ern­ment enforces the nation­al secu­ri­ty review process in response to sim­i­lar invest­ment deals in the future.