Canada: Report Sheds New Light On Canada's Foreign Investment Review

Last Updated: April 9 2019
Article by Sandy Walker

A government report issued at the end of February 2019 sheds new light on Canada's foreign investment review processes.

On February 28, 2019, the Investment Review Division of the federal department of Innovation, Science and Economic Development (ISED) released the Director of Investment's annual report (the Report) on the Investment Canada Act (the ICA) to the ISED Minister for the 2018 fiscal year (from April 1, 2017 to March 31, 2018). The Report offers greater detail than in the past on Canada's national security review of foreign investments, as well as an analysis of the source and targets of investments for which filings have been made in respect of acquisitions of control of Canadian businesses and investments to establish new Canadian businesses. Please note the Report does not cover foreign investments into Canada's cultural businesses. Here are the highlights:

Fewer Ministerial approvals required for investments into Canada

There were 751 ICA filings in 2017-18, only nine of which were reviews requiring Ministerial approval under the "net benefit to Canada" test. This represents a substantial decrease from the previous year, when there were 22 such reviews, and reflects the dramatic increase in review thresholds over the past several years. As reported in our February 21, 2019 article, 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. However, 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.

A "net benefit to Canada" review involves the Minister's consideration of a range of factors, including the level of Canadian employment, participation of Canadians in senior management, head office location, and level of capital expenditures in Canada. The average length of a "net benefit to Canada" review in 2017-2018 was 77 days from filing to Ministerial approval.

The Report confirms the continued predominance of investment from the US (based on ICA filing requirements relating to acquisitions of control or the establishment of new Canadian businesses), which accounted for 53 percent of total filings, with the European Union and China being in second and third places, respectively.

National security review

Although the thresholds for "net benefit to Canada" reviews have risen, national security reviews, which apply to a broader range of transactions (including minority investments, smaller transactions (including minority investments and smaller transactions), have been conducted for an even wider array of businesses, including an acquisition of a civil engineering and construction business, as noted below. While there are relatively few national security reviews, the Canadian government conducts a preliminary screening for each investment for which a filing is made (i.e., 751 filings in 2017-18). This initial screening is distinct from two more in-depth processes: a) a notice of possible review, which triggers a deeper consideration of whether Cabinet should order a national security review; and b) the national security review that follows a Cabinet order for such a review.

The national security review process is coordinated by ISED in consultation with Public Safety Canada, and Canada's national security agencies and other relevant government departments. In addition, the Canadian government consults with its allies when making the determination of whether an investment could harm national security. It is ultimately the federal Cabinet that determines how an investment raising national security concerns should be treated. The Cabinet has three principal options: prohibit the investment, authorize it subject to terms and conditions, or order the divestiture of the investor's interest in the Canadian business. The review process can be lengthy, up to 200 days or longer; for example, the average length of the review for the two cases subject to a Cabinet review order in 2017-18 was 209 days. One of these led to the blocking of a Chinese SOE's purchase of Aecon, a Canadian construction giant, in May 2018.

The Report is the first to reflect the new requirement for mandatory reporting on national security, and, as a result, is more informative in certain regards than past annual reports on the Investment Canada review process.

Its statistics reveal that there have been relatively few formal national security reviews in the five years before March 2018; only 15 national security reviews have been ordered by Cabinet since 2012-13. As shown in the table below, of those, two transactions were abandoned, four investments were blocked, divestitures were ordered in five, and four investments were authorized subject to conditions being ordered. For 2017-18, the government notes that it issued four notices of possible review. In one instance, the government did not issue an order for review. In the second, the transaction was withdrawn, and in the two other cases, a Cabinet order for a national security review was made with one transaction being blocked and the other being withdrawn.

National security reviews from April 2012 to March 2018

Outcome after a national security review order Number of investments affected
Withdrawal of transaction in response to government concerns 2
Cabinet order to block non-implemented investment 4
Cabinet order to divest completed investment 5
Cabinet authorization of investment subject to terms and conditions 4

The Report reiterates that the government focuses its national security consideration on the terms of the investment, the nature of the assets or business activities being established or acquired, and the parties, including possible third party (e.g., foreign government) influence.

The countries of origin of investments subject to Cabinet orders for national security review were, in descending order:

  • China (10)
  • Russia (2)
  • Egypt (1)
  • United Kingdom (1)
  • Cyprus (1).

Also of interest is the nature of the Canadian businesses that have been subject to national security review:

  • Pharmaceutical and medicine manufacturing
  • Civil engineering construction
  • Telecommunications, including telecom equipment manufacturing
  • Ship and boat building
  • Electrical equipment and manufacturing
  • Rail transportation
  • Computer and related services
  • Crude oil and natural gas.

The above list suggests that the government may be more concerned about risks arising from Canadian businesses engaged in infrastructure (e.g., civil engineering, telecom) and sensitive technology. The government in its 2016-17 annual report (though not in the Report) helpfully noted that the three most common reasons for governmental action on national security were:

  • The potential for transfer of sensitive dual-use technology or know-how outside of Canada;
  • The potential to negatively impact the supply of critical services to Canadians or the Canadian government; and
  • The potential to enable foreign surveillance or espionage.

The last factor (foreign surveillance) likely relates to risks arising from the proximity of the target facility to sensitive military or telecommunications facilities.

As noted above, the government has authorized transactions that might otherwise be injurious to national security subject to certain terms and conditions. Helpfully, the Report offers examples of mitigation measures that were imposed or considered, including requirements for:

  • Government approval of proposed business locations in order to avoid proximity to strategic assets;
  • Servicing and support for some or all business lines to be conducted in Canada;
  • Creation of approved corporate security protocols to safeguard information and access to a site;
  • A security-cleared compliance officer to ensure and report on compliance;
  • Third-party compliance audits on request;
  • Access to facilities for compliance inspection;
  • Employees with access to sensitive information to attest to compliance with approved security protocols;
  • Notices to existing customers of pending new ownership;
  • Notice to the Minister of new prospective employees, who would have access to sensitive information or technology as a part of their job description; and
  • The exclusion of sensitive business segments or assets from a transaction.

Given that national security reviews are relatively infrequent based on the total number of foreign investors each year, most foreign investments will not present deal-challenging risks. Nevertheless, given that the consequences of a review (for example, divestiture of a completed investment) can be draconian, foreign investors contemplating an acquisition or planning to establish a business in Canada, would be well-advised to consult foreign investment review counsel on the potential application of the national security review process. Dentons has advised numerous foreign investors on assessing national security risks under the Investment Canada Act, and navigating national security reviews.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

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