Canada: Foreign Investment Review And National Security

Liberalization of review thresholds for private sector investors

Since 2015, the Canadian Government has raised the threshold for "net benefit to Canada" reviews from CA$600 million in the target's enterprise value to CA$1.568 billion for investors from trade agreement countries, such as the US, Europe, Singapore, South Korea and Japan, and to CA$1.045 billion for investors from World Trade Organization countries. A reviewable transaction requires approval of the Minister of Innovation, Science and Economic Development (ISED), or the Minister of Canadian Heritage (in the case of cultural businesses), on the basis that it will lead to "net benefit" in relation to factors such as the level of Canadian employment, participation of Canadians in senior management, head office location, and level of capital expenditures in Canada. 

The trends towards liberalization of foreign investment into Canada is partially undercut by two factors. First, investments by foreign state-owned enterprises (SOE), entities that are controlled or influenced by a foreign government, continue to be reviewable at relatively low thresholds—CA$416 million in book value of the target assets. SOE investments have not been subject to significant restrictions since the 2012 policy statements by the previous government (and not repealed by the current government) that banned SOE acquisitions of control in the Canadian oil sands absent exceptional circumstances. Nevertheless, as discussed below, the second factor undercutting the trend towards liberalization of foreign investment—and likely a bigger obstacle to SOE investment—is Canada's national security review process. Any investment, regardless of size or whether control is acquired, may be challenged if it could harm Canada's national security. 

National security review

Given rapidly-increasing global tensions among Canada's major trading partners, and a rising focus on cybersecurity threats, we can expect the Canadian Government to diligently review potential threats arising from the establishment of a new Canadian business or an acquisition, especially in sectors such as telecommunications, defence, or other critical infrastructure or technologies. These efforts may align with, but will not necessarily mirror, the ramping up of enforcement under The Committee on Foreign Investment in the United States (CFIUS) national security review regime in the US. 

The Canadian Government's rejection in 2018 of the proposed CA$1.5 billion acquisition by Chinese SOE, CCCC International Holding Ltd. (CCCI), of Aecon, a Canadian construction company, on unspecified national security grounds, may continue to reverberate in 2019. Aecon is a significant player in the construction of infrastructure, including telecommunications networks, transportation, electricity grids and military facilities, as well as the refurbishment of nuclear power plants. The government's decision to prohibit the transaction after more than three months of deliberation, will certainly affect the willingness of Chinese SOEs to bid on critical infrastructure assets, as well as other sensitive sectors. This rejection, coupled with challenges to the Chinese/Canadian relationship in late 2018 and early 2019, arising from Canada's arrest of a Chinese corporate executive in response to a US government extradition request, may serve to chill Chinese investment in Canada in 2019, whether by SOEs or by private sector investors.

Although the government issued guidance on national security risk factors in December 2016 (see Dentons' client alert here), there is continued investor uncertainty about the magnitude of the risk presented by the national security review regime. For example, it was certainly not a foregone conclusion that the CCCI/Aecon deal would be scuppered for national security reasons. As a result, it is likely that the government's offer in its National Security Guidelines to consult with investors prior to prospective investments—even small transactions or those involving non-controlling interests—will increasingly be accepted by foreign investors given that the consequences of a post-closing review (e.g., divestiture at fire sale prices) can be devastating.

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