Until April 18, 2020, the Canadian Government had not indicated any changes to its foreign investment review policy due to the COVID-19 crisis. This was in stark contrast to a number of jurisdictions around the world (Australia, India, the EU and some of its Member States such as France) where governments have been announcing heightened scrutiny of foreign investments over the course of the last month because of concerns about foreign ownership of critical infrastructure and opportunistic takeovers of domestic businesses.
On April 18, 2020, the Canadian Minister of Innovation, Science and Industry issued a Policy Statement on Foreign Investment Review and COVID-19 (the “Statement”) signalling that the Canadian Government is concerned about “opportunistic investment behaviour” arising from “sudden declines in valuations” of Canadian businesses and new risks to Canada’s economy and national security.
The Statement notes that “foreign direct investment is essential in ensuring that Canadian businesses are able to invest in innovation and to compete in the global economy” but at the same time, warns that Canada will begin to subject certain foreign investments to increased scrutiny under the Investment Canada Act (the “ICA”). The key elements of the Statement are:
- Majority or minority investments in Canadian businesses of any size that (i) relate to public health or (ii) are involved in the supply of critical goods and services to Canadians or to the Government will be subject to an enhanced level of review. The types of businesses caught under (i) and (ii) are not specifically identified.
- Canadian businesses that relate to public health are likely engaged in the manufacturing or distribution of medical supplies (e.g., ventilators, sterilizing equipment, personal protective equipment such as masks and gowns, drugs and other medications), or the transportation and warehousing of such products and the provision of medical- and public health-related services such as suppliers to hospitals and vaccine developers.
- The supply of “critical goods and services” to Canadians and the Canadian Government likely includes the production, processing and distribution of food products, digital infrastructure, transportation and communications. We expect that the scope of “critical goods and services” will evolve at the Government’s discretion depending on perceived threats to Canada’s national security or economy.
- Majority or minority investments in Canadian businesses of any size by state-owned enterprises (or private investors closely tied to or subject to direction from foreign governments), will be scrutinized closely. This scrutiny is not limited to sectors related to the pandemic. The stated concern is that such investors may be motivated by non-commercial imperatives that could harm Canada’s economic or national security interests.
- Private sector investors who are closely tied to or subject to direction from foreign governments likely refers to investors from countries where business and the government are closely intertwined.
- Such investments may be subject to additional information requests and extensions of timelines for review as permitted under the ICA.
The Statement indicates that the Government’s heightened scrutiny of foreign investment will last “until the economy recovers from the effects of the COVID-19 pandemic”. The reference to the ʺeffectsʺ of the pandemic suggests that this policy will continue to be applied after the public health crisis subsides and the economy has recovered, which may be years away.
Background and Analysis
The ICA regulates foreign investment into Canada. This includes both acquisitions of control of Canadian businesses, whether currently foreign owned or not (e.g., Canadian–owned companies and Canadian subsidiaries of foreign companies), by foreign investors and the establishment of new businesses in Canada by foreign investors. Acquisitions of control are subject either to notification (a short, pro forma filing) or review by the Minister on the basis of “net benefit to Canada”. Only very large transactions are subject to the latter review process and as a result, few transactions meet those thresholds. In the Government’s fiscal year ended March 31, 2019, there were only nine applications for review.
The ICA also has a national security review process, similar in some respects to the Committee on Foreign Investment in the US (CFIUS) process. The ICA’s process applies to foreign investments of any size, including acquisitions of minority interests. The national security review process has not affected the vast majority of transactions to date. For example, there were only seven national security review orders in the Government’s fiscal year ended March 31, 2019; this compares to 962 ICA filings (notification or applications for review) in that same year. Despite the low number of formal national security reviews, however, they have become a material and growing planning consideration in cross-border M&A – even before the pandemic.
In the Statement, the Minister did not announce any intention to amend the ICA nor were lower review thresholds established (as in Australia, for example). As a result, the Minister’s jurisdiction to review and challenge foreign investments can occur only under the “net benefit to Canada” review and/or national security review processes.
Net benefit to Canada review
Investments to acquire control of existing Canadian businesses that exceed the relevant thresholds must be approved by the responsible Minister before closing. The test for “net benefit to Canada” review is whether the investment is likely to benefit, among other things, Canada’s innovation, productivity, technological development, competitiveness, employment and the participations of Canadians in senior management.
National security review
Under the national security review provisions, the Canadian Government has the ability to review acquisitions or the establishment of new Canadian businesses of any size, whether or not control is acquired. The test for review is whether the investment is “injurious” to Canada’s national security. If it determines that the investment is a threat to Canadian’s national security, the Government may block or impose terms and conditions on an investment, or order a divestiture of a completed investment. Most of the reviews referred to in the Statement would likely fall under the national security review process.
The ICA does not define ʺnational securityʺ. However, the Minister issued Guidelines on the National Security Review of Investments which contain a list of the national security risk factors and these provide visibility into the potential scope of a national security review. The cited factors include:
- The potential effects of the investment on Canada’s defence capabilities and interests;
- The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
- Involvement in the research, manufacture or sale of goods/technology identified in Section 35 of the Defence Production Act;
- The potential impact of the investment on the security of Canada’s critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government;
- The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada [underlining added];
- The potential of the investment to enable foreign surveillance or espionage;
- The potential of the investment to hinder current or future intelligence or law enforcement operations;
- The potential impact of the investment on Canada’s international interests, including foreign relationships; and,
- The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.
It is noteworthy that this list of risk factors includes “the supply of critical goods and services to Canadians” and “the supply of goods and services to the Government of Canada”. This category of risk has raised concerns for the Government previously and was regarded three years ago as one of the three most common concerns about foreign investments. The list does not, however, specifically single out businesses relating to public health as raising national security concerns. Nevertheless, the Government’s 2009 National Strategy for Critical Infrastructure and Action Plan for Critical Infrastructure includes a number of these sectors in its list of “critical infrastructure” (as distinct from “critical goods and services”) and also includes energy, water, safety, utilities and finance, which suggests that the scope of national security review could go well beyond health-related goods and services.
What should foreign investors do?
A clear message in the Statement is that foreign investors need to be considering the foreign investment review regime early in the planning process taking into account both the investor side risks (the threat) as well as risks relating to the target Canadian business (the vulnerability).
The Statement recommends making a notification at least 45 days before closing to obtain regulatory certainty. The 45 day period is significant as the submission of a filing under the ICA (a notification or a “net benefit to Canada” review application) triggers a 45 day statutory timeframe within which the Canadian Government can initiate a national security review by sending either a notice of a possible national security review or a notice of a formal national security review. If the 45 day statutory period runs without the Government issuing such a notice, then the investor has the comfort of knowing that the investment will not be challenged on national security grounds. For a minority investment for which no filing is triggered, investors have no ability to obtain definitive pre-clearance from the Government. Nevertheless, if there is concern that national security review is a risk, consultations with the Government prior to closing can provide some comfort to investors regarding the likelihood of a challenge.
Dentons’ Competition and Foreign Investment Review group has extensive experience with the Investment Canada Act, including reviews based on national security and “net benefit to Canada” for both private sector and state-owned companies. If you have any questions, please contact Sandy Walker, Adam Goodman, Barry Zalmanowitz or Simon Kupi.