Canada's mining community is on edge after two years of decisions by the Canadian federal government turning away minority investments from Asia in Canadian miners. The trend was confirmed in the recent determination of Solaris Resources Inc. to abandon it prospective $130 million minority investment by Zijin Ming Group due to the failure to secure required approval under theInvestment Canada Act ("ICA"). Canadian miners have been looking for alternative investment structures to secure much needed capital investment to build new mines and refining capacity to produce the materials needed to power electric vehicles and reduce global dependence on fossil fuels. Chinese companies have emerged as an alternative source of potential investment for advancing exploration projects and constructing mines, notably in South America and Africa, where financing from "Western" major mining companies, investors and governments may not be available. The Canadian federal government's apparent refusal to permit a minority investment into Solaris appears to close the door on these investments, even where none of the operating assets are in Canada. Faced with this regulatory environment, Canadian incorporated mining companies with global, non-Canadian projects need to consider whether maintaining their status as Canadian companies is feasible in view of the long-term financing prospects for their projects.
In this bulletin, we explore how Canadian mining and exploration companies can pursue their mine and refinery development strategies so they can secure foreign direct investment without being subjected to a prolonged review or a rejection under the ICA.
Background on the ICA
The ICA is a federal law of general application that allows the Canadian federal government to block or conditionally approve investments by non-Canadians in Canadian businesses. Historically, the ICA applied only to takeovers of very large Canadian businesses, but with the adoption of a national security regime in 2009, the authority of the Canadian government to review, block or remedy investments became much broader.
After a set of amendments to the ICA passed earlier this year, the Canadian government's power over foreign investment increased. In addition to being able to impose interim mitigation measures while a review is ongoing, the government will soon require that investors making investments in certain types of business submit filings before closing and wait for a review period to expire before those investments can close. We anticipate the list of sectors will include mining for "critical minerals".
Aside from investments in the technology sector, Canada's mining sector has seen a significant increase in the volume and impact of ICA reviews. In November 2022, the government announced that it ordered divestitures following three, small, minority investments in Canadian lithium miners, two of which had no mining projects in Canada. Other investments in pre-construction copper and graphite businesses were abandoned following lengthy ICA review periods.
National security reviews are also taking longer and have more uncertain outcomes. Miners should anticipate that a review can take between seven and nine months to complete, which is longer than the 200-day maximum period provided for in the ICA. "Voluntary" extensions are often sought as the several government agencies must coordinate and staffing levels have not appeared to have kept pace with workload.
Redomiciliation as an Alternative Strategy
Canadian miners whose concessions and operations are located outside of Canada's borders can pursue a redomiciliation strategy that, if implemented properly, prevents the application of the ICA. The ICA provides that the Canadian government can issue a national security order where the Canadian business has an entity with: 1) a place of operations in Canada, 2) individuals in Canada employed or self employed in connection with the business and 3) assets in Canada used in carrying on operations. Accordingly, to sever the application of the ICA, Canadian miners need to take steps to ensure they do not have an entity in Canada that has a place of business, employees or assets in Canada.
Canadian businesses considering this strategy should assess whether it is feasible to redomicile their businesses to another jurisdiction both from an operations but also from a tax perspective. Since redomiciliation typically involves a fundamental change to the company structure, a shareholder vote is often required, meaning the redomiciliation cannot occur instantaneously. Different jurisdictions may provide for different corporate rights and obligations, making it necessary for both management and the shareholders to properly understand such changes. There is also an added consideration of where the business will redomicile, as the new jurisdiction may also have restrictions on foreign investment that could impact any plans to pursue a strategy of seeking investment from China or elsewhere.
Public companies have added disclosure obligations as well, which impact the materials they will need to provide to shareholders in respect of the aforementioned shareholder vote, and which further will be dictated not only by applicable securities laws but by the requirements of the exchange on which the company's securities are listed. This has the potential to increase the length of time required for any redomiciliation to occur, since exchange review may be required, and shareholder mailing requirements will need to be observed.
However, the strategy can be effective where the miner's assets are located offshore, and the management team is either based offshore or already operating out of a professional services firm. Moreover, being domiciled in Canada or having a place of operations in Canada is not a requirement to be listed on stock exchanges in Canada, including the TSX and the TSX Venture Exchange. Importantly, companies who are listed on stock exchanges in Canada, but who are domiciled and distributing securities from outside of Canada, will continue to be subject to securities requirements in Canada but may also be triggering requirements in their home jurisdiction as well. As such, careful consideration will need to be paid to securities laws on both sides of the jurisdictional dividing line.
Conclusion
We anticipate that more Canadian miners will be considering a redomiciliation strategy if they are pursuing foreign investment as they prioritize access to capital over the simplicity of maintaining Canadian residency. As with any investment strategy, it is not risk-free. Companies should consult expert ICA and securities counsel to discuss the benefits and risks of this approach.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2024