T-1176-80
Dow Jones & Company Inc. (Plaintiff)
v.
Attorney General of Canada (Defendant)
Trial Division, Grant D.J.—Toronto, April 16 and
June 10, 1980.
Crown — Foreign Investment Review Act — Motion by way
of stated case — American company, which owned all of the
issued and voting shares of a Canadian business enterprise,
merged into another American company — Whether or not the
Act affects further changes of foreign control of Canadian
businesses which had been acquired prior to the time the Act
came into force — Whether acquisition of control by a foreign
corporation from another foreign corporation which controls
the Canadian business enterprise is an acquisition of control
within subs. 3(3) of the Foreign Investment Review Act
Foreign Investment Review Act, S.C. 1973-74, c. 46, as
amended by S.C. 1976-77, c. 52, ss. 2(1),(2), 3(1),(3)(a),(d),
5(1), 8 — Federal Court Act, R.S.C. 1970 (2nd Supp.), c. 10, s.
17(3)(b) — Statute of Westminster, 1931, 22 Geo. V, c. 4
(U.K.) IR.S.C. 1970, Appendix II, No. 26].
This is a motion by way of special case stated for opinion of
the Court. Irwin-Dorsey Limited is a Canadian corporation and
a Canadian business enterprise within the meaning of the
Foreign Investment Review Act. All of its issued and voting
shares belonged to Irwin-U.S., an American company which
subsequently merged into RDI, Inc., another American com
pany, in September 1975. Irwin-Dorsey became a wholly-
owned subsidiary of RDI, Inc., and Irwin-U.S. ceased to exist
as a corporate entity. The sections of the Act which are
applicable to this merger came into force on April 9, 1974. The
questions raised are whether or not the Act affects further
changes of foreign control of Canadian businesses which had
been acquired prior to the time that the Act came into force;
and whether or not acquisition of control by a foreign corpora
tion from another foreign corporation which controls the
Canadian business enterprise is an acquisition of control within
subsection 3(3) of the Act.
Held, the transactions did constitute an acquisition of control
of a Canadian business enterprise by a non-eligible person to
which the Foreign Investment Review Act applies. The Act
does not affect acquisitions of control of Canadian business
enterprises which had been fully accomplished by non-eligible
persons before the Act came into force unless and until that
business is resold to another non-eligible person. It is the
acquisition of control that is intended to be regulated by the
provision of the Act and not the establishment of the business.
On each occasion that a foreign or different control is sought
by a non-eligible person such notice must be given again to the
Agency so that it may consider whether or not such acquisition
of control by those persons is likely to be of significant benefit
to Canada. The business which is the subject of the legislation
is one carried on in Canada and it follows that the control
thereof must be exercised within this country no matter where
the foreign corporation acquiring it has its situs. It is only the
acquisition of control of the business carried on in Canada
which is subject to the review provided by section 8 of the Act.
As a result of the merger, Irwin-Dorsey became a subsidiary of
RDI, Inc. By virtue thereof an acquisition of control had been
acquired.
Croft v. Dunphy [1933] A.C. (P.C.) 156, referred to.
MOTION.
COUNSEL:
G. J. Smith, Q.C. for plaintiff.
J. A. Scollin, Q.C. and J. P. Malette for
defendant.
SOLICITORS:
Weir & Foulds, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for order ren
dered in English by
GRANT D.J.: This is a motion by way of special
case stated for opinion of the Court pursuant to
paragraph 17(3)(b) of the Federal Court Act,
R.S.C. 1970 (2nd Supp.), c. 10, and Rule 475 of
the Rules of the Federal Court of Canada. The
relevant facts have been agreed upon and are set
out in minutes dated January 31, 1980 and signed
by the solicitors for the Deputy Attorney General
of Canada and for Dow Jones. They are as follows:
The parties are in agreement as to the following facts:
1. Dow Jones & Company Inc. (hereinafter referred to as
"Dow Jones") is a corporation incorporated in 1949 pursuant
to the laws of the State of Delaware, one of the United States
of America. Dow Jones is a "non-eligible person" within the
meaning of the Foreign Investment Review Act, S.C. 1973-74,
Chapter 46.
2. Richard D. Irwin Inc. (hereinafter referred to as "Irwin-
U.S.") was a corporation incorporated in 1967 pursuant to the
laws of the State of Delaware, one - of the United States of
America.
3. Irwin-Dorsey Limited (hereinafter referred to as "Irwin-Dor-
sey") is a corporation incorporated in 1967 pursuant to the laws
of Canada and has its head office and principal place of
business in the Town of Georgetown in the Province of Ontario.
4. Irwin-Dorsey is a "Canadian business enterprise" within the
meaning of the Foreign Investment Review Act. At all material
times prior to the merger hereinafter referred to all of the
issued and outstanding voting shares of Irwin-Dorsey were
owned and controlled by Irwin U.S.
5. RDI, Inc. is a corporation which was incorporated pursuant
to the laws of the State of Delaware, one of the United States
of America, as a wholly-owned subsidiary of Dow Jones for the
purpose of inter alia participating in the merger hereinafter
described. None of the purposes of the said incorporation was
an attempt to evade the provisions of the Foreign Investment
Review Act.
6. Subsequently, Dow Jones caused Irwin U.S. to be merged, in
accordance with the laws of the State of Delaware, into RDI,
Inc. One of the consequences of such merger was that all the
property of Irwin U.S., including the shares of Irwin-Dorsey,
became the property of RDI, Inc. This merger came into effect
on September 30, 1975 at which time RDI, Inc. changed its
name to Richard D. Irwin, Inc. and Irwin U.S. ceased to exist
as a corporate entity.
7. The merger referred to in paragraph 6 hereof was a stage in
a transaction the object of which was for the shareholders of
Irwin U.S. to exchange their shares for shares of Dow Jones
and for the business conducted by Irwin U.S. to become the
business of a wholly owned subsidiary company of Dow Jones.
Such an exchange was effected through a merger of Irwin U.S.
into RDI, Inc., the newly formed subsidiary of Dow Jones, in
order that the exchange might be accommodated on a tax-free
basis for the shareholders of Irwin U.S. under the Federal
Income Tax Laws of the United States of America. In such
merger the Irwin U.S. shareholders received Dow Jones shares
in exchange for their Irwin U.S. shares. Were it not for the
desire to effect a tax-free exchange for the Irwin U.S. share
holders, such merger would not have been necessary and would
not have occurred. This was not an acquisition by Dow Jones of
the shares of the subsidiaries of Irwin U.S. nor of any other
assets of Irwin U.S. The organizational structure of the busi
ness which had been conducted by Irwin U.S. was not affected
by the merger. However, one consequence of such merger was
that Irwin-Dorsey, a wholly-owned subsidiary of Irwin U.S.
until the merger occurred, became a wholly-owned subsidiary
of RDI, Inc. Accordingly, at all times prior and subsequent to
the merger, Irwin-Dorsey was a wholly-owned subsidiary of a
United States corporation conducting a business in the United
States in the name of Richard D. Irwin Inc.
8. Prior to the merger referred to in paragraphs 6 and 7 hereof,
Mr. Irwin held 28% of the outstanding shares of Irwin U.S. and
Mrs. Irwin held 23% of its outstanding shares. Since Mr. and
Mrs. Irwin voted in concert, their shares constituted control of
Irwin U.S. Both Mr. and Mrs. Irwin were at all material times
"non-eligible persons" within the meaning of the Foreign
Investment Review Act. Dow Jones first acquired significant
shares in Irwin U.S. in 1965. Between 1965 and December 31,
1970, the percentage of the outstanding shares of Irwin U.S.
held by Dow Jones increased to approximately 19.39%. Be
tween December 31, 1970 and September 30, 1975, the effec
tive date on which Irwin U.S. was merged into RDI, Inc., the
percentage of the outstanding shares of Irwin U.S. held by Dow
Jones increased from 19.39% to 21.59%. Subsequent to the
merger, neither Mr. nor Mrs. Irwin held any shares in RDI,
Inc. (which remained a wholly-owned subsidiary of Dow Jones)
but rather held shares in the capital of Dow Jones which they
had received in exchange for their shares in Irwin U.S.
Based on the foregoing facts the parties hereby jointly apply to
this Honourable Court pursuant to paragraph 17(3)(b) of the
Federal Court Act, R.S.C. 1970, 2nd Supp. c. 10, and Rule 475
of the General Rules and Orders of the Federal Court of
Canada, to determine the following question:
Did the transactions referred to herein constitute the acquisi
tion of control of a "Canadian business enterprise" by a
"non-eligible person" to which the Foreign Investment
Review Act applies?
If the answer be in the affirmative, the parties agree that the
costs of this application be awarded to the Party of the Second
Part.
If the answer be in the negative, the parties agree that the costs
of this application be awarded to the Party of the First Part.
Sections of the Foreign Investment Review Act,
S.C. 1973-74, c. 46, as amended by S.C. 1976-77,
c. 52, s. 128(2), item 9 which are helpful in the
determination of the answer to the question sub
mitted are:
An Act to provide for the review and assessment of acquisitions
of control of Canadian business enterprises by certain per
sons and of the establishment of new businesses in Canada by
certain persons.
2. (1) This Act is enacted by the Parliament of Canada in
recognition by Parliament that the extent to which control of
Canadian industry, trade and commerce has become acquired
by persons other than Canadians and the effect thereof on the
ability of Canadians to maintain effective control over their
economic environment is a matter of national concern, and that
it is therefore expedient to establish a means by which meas
ures may be taken under the authority of Parliament to ensure
that, in so far as is practicable after the enactment of this Act,
control of Canadian business enterprises may be acquired by
persons other than Canadians, and new businesses may be
established in Canada by persons, other than Canadians, who
are not already carrying on business in Canada or whose new
businesses in Canada would be unrelated to the businesses
already being carried on by them in Canada, only if it has been
assessed that the acquisition of control of those enterprises or
the establishment of those new businesses, as the case may be,
by those persons is or is likely to be of significant benefit to
Canada, having regard to all of the factors to be taken into
account under this Act for that purpose.
3. (1) In this Act,
"actual investment" has the meaning given that expression in
paragraph 8(3)(b);
"Agency" means the Foreign Investment Review Agency estab
lished by subsection 7(1);
"business" includes any undertaking or enterprise carried on in
anticipation of profit;
"Canadian branch business" means a business carried on in
Canada by a corporation incorporated elsewhere than in
Canada that maintains one or more establishments in
Canada to which employees of the corporation employed in
connection with the business ordinarily report for work;
"Canadian business" means a business carried on in Canada by
(a) an individual who is either a Canadian citizen or a person
ordinarily resident in Canada,
(b) a corporation incorporated in Canada that maintains one
or more establishments in Canada to which employees of the
corporation employed in connection with the business ordi
narily report for work, or
(c) any number of individuals or corporations or combination
of individuals and corporations, if any one or more of those
comprising that number or combination are either individu
als described in paragraph (a) or corporations described in
paragraph (b) who, either alone or jointly or in concert with
one or more other individuals or corporations so described,
control or are in a position to control the conduct of business;
"Canadian business enterprise" means a business that is either
a Canadian business or a Canadian branch business;
"non-eligible person" means
(a) an individual who is neither a Canadian citizen nor a
permanent resident within the meaning of the Immigration
Act, 1976 and includes
(i) a Canadian citizen who is not ordinarily resident in
Canada and who is a member of a class of persons
prescribed by regulation for the purposes of this definition,
and
(ii) a permanent resident who has been ordinarily resident
in Canada for more than one year after the time at which
he first became eligible to apply for Canadian citizenship,
(b) the government of a country other than Canada or of a
political subdivision of a country other than Canada, or an
agency of such a government, or
(c) a corporation incorporated in Canada or elsewhere that is
controlled in any manner that results in control in fact,
whether directly through the ownership of shares or indirect
ly through a trust, a contract, the ownership of shares of any
other corporation or otherwise, by a person described in
paragraph (a) or (b) or by a group of persons any member of
which is a person described in paragraph (a) or (b);
(3) For the purposes of this Act,
(a) control of a Canadian business enterprise may only be
acquired,
(i) in the case of a Canadian business enterprise that is a
Canadian business carried on by a corporation either alone
or jointly or in concert with one or more other persons,
(A) by the acquisition of shares of the corporation to
which are attached voting rights ordinarily exercisable
at meetings of shareholders of the corporation, or
(B) by the acquisition of all or substantially all of the
property used in carrying on the business in Canada,
and
(ii) in the case of any other Canadian business enterprise,
by the acquisition of all or substantially all of the property
used in carrying on the business in Canada;
(d) the acquisition by any person or group of persons of
shares of a corporation to which are attached more than 50%
of the voting rights ordinarily exercisable at meetings of
shareholders of the corporation, whether or not the shares of
the corporation are publicly traded, shall, unless the person
or group of persons acquiring the shares had, at the time of
the acquisition, control in fact of the corporation, be deemed
to constitute the acquisition of control of any business carried
on by the corporation other than any such business carried
on, for a purpose not related to the provisions of this Act, by
it jointly or in concert with one or more other persons;
Mr. Smith for Dow Jones submits that the Act
does not affect further changes of foreign control
of Canadian businesses which had been acquired
prior to the time that the Act came into force. In
other words one seeking acquisition of control of a
Canadian business which had been transferred to
non-eligible persons, within the meaning of such
Act prior to such date was not obliged to give
notice in writing to the Agency of such proposed
acquisition pursuant to the provisions of section 8
of the Act.
He takes the position that full effect can be
given to the purposes of the Act and the intention
of Parliament expressed therein by applying its
provisions only to those cases where foreign control
of Canadian business has been first acquired sub
sequent to the date that such Act came into force.
All issued and outstanding voting shares of Irwin-
Dorsey were owned and controlled by the Ameri-
can company Irwin-U.S. prior to the merger in
question and prior to the date that the Act was
passed, so that the merger which is the subject of
this motion involves the transfer of shares from
one "non-eligible person" to another "non-eligible
person" in the United States. The sections of the
Act which are applicable to this merger came into
force on April 9, 1974. The merger came into
effect on September 30, 1975.
Mr. Smith contends that his interpretation of
the Act is supported by words in subsection 2(1) of
the Act which sets out the, purposes thereof. He
refers to the words, "control of Canadian business
enterprises may be acquired by persons other than
Canadians and new businesses may be established
in Canada" and "that the acquisition of control of
those enterprises or the establishment of those new
businesses, as the case may be, by those persons is
or is likely to be of significant benefit to Canada,
." He also refers to subsection 5(1) of the Act
in support of his interpretation which reads:
5. (1) This Act applies in respect of any acquisition of
control of a Canadian business enterprise after the coming into
force of this Act, except
(a) a business enterprise carried on by a corporation that is
an agent of Her Majesty in right of Canada or a province or
that is named in Schedule D to the Financial Administration
Act;
(b) a business enterprise carried on by a corporation the
taxable income of which is exempt from tax under Part I of
the Income Tax Act by paragraph 149(1)(d) of that Act; and
(c) subject to subsection 31(3), a business enterprise.
I do not agree with such reasoning and do not
think that such conclusion can be drawn from the
reading of the whole Act. There can be no doubt
that the Act is not retroactive in that it does not
affect acquisitions of control of Canadian business
enterprises which had been fully accomplished by
non-eligible persons before the Act came into force
unless and until that business is resold to another
non-eligible person. It is the acquisition of control
that is intended to be regulated by the provision of
the Act and not the establishment of the business.
Where a person or a group of persons who are
non-eligible persons within the meaning of the Act
seek to gain control of a Canadian business they
must give notice thereof to the Foreign Investment
Review Agency as required by section 8 of the
Act. No distinction is made in the Act between an
acquisition by such persons of a Canadian owned
business and an acquisition from one who is a
non-eligible person but who obtained such control
before the Act was in force or from a non-eligible
person who obtained the required consent after the
Act came into force. As I read the Act, on each
occasion that a foreign or different control is
sought by a non-eligible person such notice must
be given again to such Agency so that it may
consider whether or not such acquisition of control
by those persons is likely to be of significant
benefit to Canada, having regard to all the factors
set forth in subsection 2(2) of the Act.
Counsel for Dow Jones submits that acquisition
of control by a foreign corporation from another
foreign corporation which controls the Canadian
business enterprise is not an acquisition of control
within subsection 3(3) of the Act and is therefore
not affected by the legislation. Such an interpreta
tion would thwart the purpose and intent of the
Act. The business which is the subject of the
legislation is one carried on in Canada and it
follows that the control thereof must be exercised
within this country no matter where the foreign
corporation acquiring it has its situs.
The Act does not regulate the merger of Irwin-
U.S. into RDI, Inc. It is only the acquisition of
control of the business carried on in Canada which
is subject to the review provided by section 8 of the
Act. It therefore does not seek to affect extra-ter
ritorial activities but is enforced only in relation to
the Canadian business. The provisions of the Act
were not applied extra-territorially although Par
liament has power to enact legislation which will
have such effect. Croft v. Dunphy [1933] A.C.
(P.C.) 156; Statute of Westminster, 1931, 22 Geo.
V, c. 4 (U.K.) [R.S.C. 1970, Appendix II, No.
26] .
Mr. Smith contends that the merger in question
did not amount to an acquisition of control and
relies on subsection 3(3) of the Act in support
thereof. However, it is acknowledged in paragraph
4 of the special case that immediately prior to the
merger all issued and outstanding voting shares of
Irwin-Dorsey were owned and controlled by Irwin-
U.S. In paragraph 6 of the stated case it is
acknowledged by the parties that the result of the
merger of Irwin-U.S. into RDI, Inc., was that all
of the property of Irwin-U.S., including the voting
shares of Irwin-Dorsey became the property of
RDI, Inc., and as well Irwin-U.S. thereafter sur
rendered its charter and ceased to exist as a corpo
rate entity. Irwin-Dorsey then became a subsidiary
of RDI, Inc. By virtue thereof an acquisition of
control had been acquired by a non-eligible corpo
ration within the United States in accordance with
paragraph 3(3)(d) of the Act.
I therefore answer the question submitted in the
stated case in the affirmative and find that the
transaction referred to herein did constitute an
acquisition of control of a Canadian business
enterprise by a non-eligible person to which the
Foreign Investment Review Act applies.
In accordance with the agreement of the parties
the Attorney General of Canada should recover his
costs of the motion from Dow Jones & Company
Inc.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.