10/22/2012 12:05 EDT | Updated 12/22/2012 05:12 EST

Petronas-Progress Deal: Stephen Harper Offers No Explanation For Rejection, Promises Clarity Soon

OTTAWA - Prime Minister Stephen Harper is promising to issue new guidelines on foreign takeovers amid growing unease over the government's surprise rejection of a Malaysian state-owned oil company's bid for a Canadian resource firm.

The prime minister said Monday that new guidelines will be issued "soon" and that most applications would be accepted.

The statement comes as markets roiled over the Friday night rejection of the $6-billion takeover offer of natural gas producer Progress Energy Resources by Malaysia's Petronas, and what the decision might portend for the $15.1-billion proposal by a Chinese state-owned company to acquire Nexen Energy.

Progress (TSX:PRQ) shares fell hard at market opening and were still down about nine per cent at close Monday. Nexen shares also fell, almost five per cent, on speculation Ottawa may also play hard ball against China National Offshore Oil Co.

Reports say the government waited until the last minute, just before the midnight deadline, to announce the decision because it wanted a second 30-day extension on its review, but Petronas refused permission.

"We do not have a time scheduled, but soon the government will create a new framework for these investments," Harper told reporters in French at a news conference. "Within that framework that will come out soon, we will be able to welcome the overwhelming majority of investments."

He was less clear in English, saying that Ottawa "will give greater clarity on our policy framework when we take a couple of decisions that are before us at the present time."

Progress and Petronas said Monday they're meeting with Industry Canada officials to "better understand" what the government's requirements are with respect to the deal.

Industry Minister Christian Paradis said the government was "not satisfied" that the acquisition would bring a "net benefit" to Canada, but said Petronas has 27 days to come back with a better offer.

The minister would offer no other explanation, but trade lawyer Lawrence Herman of Cassels Brock in Toronto said he believes Petronas failed to convince Ottawa it would operate under market principles and not as arm of the Malaysian government.

"This is a very significant decision. It draws a line in the sand and says to any state-owned investor, 'If you want to come into Canada, we expected (you) to operate in accordance to free market principles in terms of corporate governance, decision-making and commercial operations,' " he said.

The proposed Nexen purchase by CNOOC may be different, he added, because among other aspects, CNOOC is traded on the New York Stock Exchange.

The federal government has pledged to clarify how it applies the "net benefit" test in the Investment Canada Act before, particularly after its controversial decision to block a foreign takeover of Potash Corp. in 2010. But after the furor died down, it did not follow through.

Canadians have every reason to be skeptical of the latest promise, said NDP natural resources critic Peter Julian.

"They simply have no credibility," he said. "That is why public confidence is eroding ... and it's fair to say potential investors are losing confidence too."

Liberal interim leader Bob Rae agreed the government's actions send a "terrible signal to the world as to how we do business as a country.

"We’ll see what happens now with respect to this investment and also with the Nexen investment (but) we’ve been asking since 2010 and the government has committed since 2010 that they would bring forth clearly set out criteria."

Herman said the lack of clarity about how Ottawa judges whether an acquisition is in Canada's interest, particularly when it involves state-owned enterprises, could be dampening investments Ottawa says are needed to grow the economy. He said the government needs to come to grips with the reality that they will be facing many more applications from state-owned enterprises.

"If you are courting China and other parts of Asia, you've got to expect a lot of these will come through state-owned enterprises," he said.

After years of rubber-stamping applications, Canada has now turned down three applications in four years — proposals to acquire Potash Corp., MacDonald, Dettwiler and Associates, and now Progress Energy, although the latter can still be salvaged.

On the surface at least, that is antithetical to repeated pleas to foreign investors to help develop Canada's bountiful mineral riches. In the fall, Natural Resources Minister Joe Oliver said Canada needed an “immense amount of capital” to develop resources and get them to global markets.

But on Monday, Oliver said he did not believe the Petronas decision would discourage investors.

"I think everybody understands we have legislation in place. Canada is open for business and we have approved a great number of investments," he said.

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