On February 12, the Canadian Government launched a 30 day public consultation on proposed amendments to the Investment Canada Act’s National Security Review of Investments Regulations (National Security Regulations). Pursuant to these amendments, foreign investors who plan to acquire non-controlling stakes in Canadian businesses would be able to pre-clear such investments on national security grounds by voluntarily making a notification filing before closing.
Big upside – pre-closing comfort
Currently, a foreign investor who is not acquiring control of a Canadian business (i.e., a minority investor) is unable to obtain formal pre-closing comfort from the Canadian Government that its investment will not be challenged as “injurious” to Canada’s national security. In fact, under the current rules, the Government has 45 calendar days after such an investment has closed to conduct an initial national security assessment, following which it may take further steps including ordering a national security review and seeking a remedy. The federal Cabinet can order any measures it considers advisable to protect national security under the Investment Canada Act, including requiring a divestiture and imposing conditions on the investment. Such an order can have significant and devastating consequences for the value of the investment.
In contrast to investors who are not acquiring control of a Canadian business, foreign investors who are acquiring control of a Canadian business or who are establishing a new Canadian business are required to file a notification or an application for review (for acquisitions reaching certain monetary thresholds). Those mandatory filings trigger a 45 day timeline for national security review. Although notifications can legally be made up to 30 days post closing, investors can choose to file pre-closing to flush out any national security concerns and obtain regulatory certainty before closing. During the 45 day period following filing, the Government can issue a national security review order or a notice of potential national security review. If the Government does not take any action during this period, it loses the ability to later challenge the investment. As a result, if investors make their required filings 45 days or more prior to closing and receive no notice of actual or potential concern from the Canadian Government, they can be confident that no challenge on national security grounds will occur. The proposed changes to the National Security Regulations would put foreign investors who are not required to make a filing (i.e., non-controlling investors) on the same footing by giving them the option to file a notification before closing to initiate the 45 day initial screening period.
There have been numerous calls over the past decade for the Government to increase regulatory certainty for minority investors by permitting voluntary filings that trigger the national security review process pre-closing. Moreover, the proposed amendment would be in line with voluntary filing options in the foreign investment review regimes of Canada’s major allies, including the US, the UK and Australia.
Finally, the proposed amendment would not only apply to acquisitions of non-controlling interests by non-Canadian investors but also to certain other investments that do not require filings under the Investment Canada Act. These include acquisitions of entities that do not have all the required elements of a “Canadian business” but do have some part of their operations in Canada and any of a place of operations in Canada, employees or independent contractors in Canada, or assets in Canada used in carrying on Canadian operations.
Downside – long tail risk for foreign minority investors who do not voluntarily notify
Currently, when making a non-controlling investment, foreign investors may only find out up to 45 days after closing whether the Canadian Government has national security concerns about their investment. Under the proposed amendments to the National Security Regulations, if the foreign minority investor does not take advantage of the new voluntary filing option – perhaps because it has not accurately assessed the national security risk related to its proposed investment, its investment would be subject to possible national security review for a period of up to five years after closing. This gives the Government “more time to detect, assess and act on these investments”.
This five year period may serve as a significant incentive for foreign minority investors to file pre-closing to avoid this long tail risk. Indeed, the Government believes that voluntary pre-closing filings by non-Canadian investors are likely to increase the total number of ICA filings by 20% or 200 filings per year. This represents a significant number of additional national security screenings by the Government, although the Government anticipates that there may only be two additional formal national security reviews per year.
In choosing a five year period, the Government appears to have taken the middle way. The US’s voluntary regime allows the Government unlimited time to take action where no filing is made while Australia and the UK provide for 10 years and five years, respectively.
The key implications of the proposed changes are:
- Non-Canadian investors making non-controlling investments in Canadian businesses should discuss with their advisors at an early stage whether their proposed investment is likely to raise national security concerns.
- Such investors will need to consider whether to make a pre-closing filing to address the risk of a post closing challenge or take the risk of remedial action by the Government for up to five years after closing.
- Canadian businesses may benefit from the greater regulatory certainty for foreign investors considering making a minority investment. However, where there is national security risk and a foreign minority investor does not avail itself of the voluntary filing option, the Canadian business could face the prospect of its investor being forced to dispose of its interest up to five years after the investment has closed.
 Note some minority interests may be considered to be controlling interests. For example, the acquisition of one-third or more of the voting shares of a corporation is presumed to be an acquisition of control, although such presumption can be rebutted. Such acquisitions of control of Canadian businesses are subject to mandatory filing requirements. This article uses the term “minority” interests interchangeably with non-controlling interests.
 The three elements of a Canadian business are: a place of business in Canada, employees or independent contractors in Canada and assets in Canada used in carrying on the business.
 See https://www.gazette.gc.ca/rp-pr/p1/2022/2022-02-12/html/reg2-eng.html.