It’s hard to imagine a sorrier corporate saga than U.S. Steel’s disastrous foray into Canada.
I refer, of course, to the 2007 takeover of Stelco, just one of a spree of foreign takeovers that substantially contributed to a diminishment of Ontario’s profile on the world economic stage. (Think Falconbridge, Inco, Rio Algom.)
At the height of the foreign takeover mania, the federal government of the day offered repeated assurances that the Investment Canada Act provided all the protections necessary to ensure such transactions would be of “net benefit” to Canada.
In remaking Stelco into U.S. Steel Canada Inc., the Pittsburgh parent committed to a number of binding undertakings, 31 in all. Chief among them were production levels (an increase in annual steel production to at least 4.3 million tons a year) and employment (no fewer than 3,950 full-time employees).
Seven years later, in September, 2014, the Canadian operation was granted protection under the Companies’ Creditors Arrangement Act, which is still winding its way through the courts. So that pretty much tells you that events did not unfold as planned.
What happened in the intervening years — and what is expected to be ruled upon soon by Ontario Superior Court Justice Herman Wilton-Siegel — is a singular case of secrecy involving the previous federal government, the current federal government and the U.S. corporate parent. On the losing end: the public interest.
Critics say U.S. Steel never did live up to its binding commitments. Indisputably, layoffs commenced in 2008 and steel production was significantly reduced (less than half by one estimate). The federal government, at least then, did not turn a blind eye. Industry Minister Christian Paradis sued the mighty steel company in 2009 for non-compliance, additionally seeking a $10,000 penalty for each day of the breach.
Never before or since has the federal government sued for noncompliance under the Investment Canada Act. This was groundbreaking. A test case.
The American company’s position will not surprise you: the financial crisis of 2008 had drastically recalibrated demand projections. That, and preferential “Buy America” guidelines, disadvantaged Canadian-based operations. “U.S. Steel’s performance to date has been substantially consistent with the original expectations of the parties and it has met every specific performance objective for which it can be held accountable,” it stated in court filings. It could not be held accountable, it asserted, for factors beyond its control.
This is where the story grows curioser: while the federal government’s case appeared to be successfully winding its way through federal court — the Supreme Court denied the U.S. parent’s appeal motion in November, 2011 — Paradis announced a surprise out-of-court settlement in December of that year. The terms of that settlement were not disclosed beyond top-line promises to keep the Hamilton and Nanticoke plants operating to at least 2015 and to make a capital investment in operations of $50 million. (There was also the small consolation of $3 million to be invested in unnamed local community and educational initiatives.)
No details were forthcoming about either production or employment levels, two factors that were central to Investment Canada giving the green light to the takeover in the first place.
At the time, Paradis trumpeted the deal and the “positive benefits that in all likelihood would not have been obtained through the court process.”
Opposition MPs and union leaders complained that the lack of detail on the commitments was a glaring omission and that the short lease on operational life provided little comfort. In fewer than three years, U.S. Steel Canada was headed for bankruptcy protection.
This past week, in a Toronto courtroom, Justice Wilton-Siegel presided over a key element in the restructuring proceedings: whether an infusion of funds from the American parent to the Canadian operation should be characterized as a loan or an infusion of equity. His decision on the matter will have serious implications for pensioners, and will be the subject of a future column.
In the meantime, the Ontario Court of Appeal has ruled that the secret settlement deal, which the Trudeau government argued in November should be kept under wraps, is not protected from disclosure under the Investment Canada Act. That issue has now landed back in Wilton-Siegel’s lap. The legal community watches with keen interest. Jeffrey Kaufman at Kaufman Law, who had intervener status when at a previous firm, rejects the notion held by some that disclosing the agreement could chill future foreign investment. “I think the public and investors would want to know, well, what kind of deal can you make with the Government of Canada when things aren’t going well?”