The Minister of Innovation, Science and Industry, the Honourable François-Philippe Champagne, announced Wednesday significant proposed amendments to the Investment Canada Act (ICA). In doing so, he sent a strong signal that Canada is doubling down in its efforts to tackle what it perceives as threats to Canada’s national security and economic security interests presented by foreign investments in certain business sectors.
The proposals include:
- Mandatory pre-closing filings where the Canadian target is in a prescribed business sector.
- The vast majority of Investment Canada filings are notifications which can be filed as late as 30 days after closing. Currently, both controlling and non-controlling investors may choose to file pre-closing to obtain comfort that their acquisitions will not be challenged on national security grounds post closing.
- The proposed change means that, for Canadian target businesses carrying on certain as-yet-unspecified business activities, both investors acquiring control and non-controlling investors that meet certain criteria (e.g., the ability to exercise certain rights and powers relating to the Canadian entity) will have no choice but to file pre-closing and not close until certain time periods have expired. The Government appears to be concerned that some investors who choose to file post closing (or not file at all), even in the face of a possible post closing challenge, might still realize the benefits of such an investment and threaten national security by gaining early access to sensitive information, technology or intellectual property. In addition, if a remedial order is issued by the federal cabinet, the divestiture requirement is seen as disruptive and difficult, not only for the foreign investor but also for the Canadian business.
- New penalties for non-compliance with filing obligations in prescribed business sectors: Where a foreign investor does not make the required filing, a court may impose a penalty equal to the greater of CA$500,000 or a prescribed amount. Currently, a court can only make an order if a foreign investor has not responded appropriately to a Minister’s demand for compliance. We are not aware of any penalty ever being imposed under the ICA’s current remedies provision.
- New ministerial powers: The proposed amendments give the Minister a number of additional powers that may make the process more efficient, effective and flexible:
- The Minister, rather than Cabinet, would be able to make the decision to extend national security review. This will presumably make such decisions somewhat faster.
- The Minister is also empowered to impose interim conditions during the national security review process. Such conditions could include preventing the foreign investor from gaining access to certain sensitive information or IP while the review process is ongoing.
- The Minister will have authority to accept commitments from the foreign investor (undertakings) to mitigate national security risk. Such mitigation might include divestiture of a risky line of business. Currently, mitigation can occur only once the proposed investment has been reviewed by the federal cabinet, which may then authorize an investment subject to terms and conditions or undertakings.
- New provisions on protection of sensitive information in judicial review proceedings relating to national security decisions.
Critical minerals, sensitive technology and personal information
While the business activities to which mandatory preclosing notifications apply have not yet been prescribed, it is telling that the Minister, in his press conference announcing the proposed amendments, focused on three areas of national security concern in investments: critical minerals, sensitive technologies (e.g., semi-conductors) and personal information. Those same three areas were identified as raising higher national security risks almost two years ago when the Government’s national security guidance was updated. More recently, critical minerals were in the news following Cabinet’s decision in early November to order three Chinese companies to divest minority interests in critical mineral companies.
The proposed amendments telegraph to foreign investors that the Canadian government is ramping up its scrutiny of investments in certain business sectors and empowering the Minister to address some national security risks expeditiously and in a more flexible manner. Canada is also signalling to its allies that it is taking its national security obligations seriously; for example, the proposals also include an amendment to allow Canada to share case-specific information with its counterparts to address common national security concerns.
The proposed amendments do not sweep away the welcome mat for foreign investors in Canada. Indeed, the Minister indicated that he is confident that foreign capital will continue to be drawn here by the country’s many positive attributes (including talent, renewable energy, critical minerals and access to markets). That said, foreign investors buying sensitive businesses in Canada – however they are ultimately defined – will need to consider the Investment Canada filing process in relation to transaction risk and timing. Whether the new mandatory pre-closing requirement will lead to a flood of new national security reviews is not clear. Many foreign investors already make pre-closing filings to obtain comfort that the Government will not challenge an investment after closing. As a result, only time will tell if the mandatory pre-closing filing requirement relating to targets engaged in certain business activities brings to light more than a small number of additional transactions that pose serious national security concerns. Most foreign investments in Canada are likely to continue to sail through the Investment Canada process without Government intervention.
For more information on this topic, please reach out to the author, Sandy Walker.