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.