Canada: Foreign direct investment regulations
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Overview of regime
Applicable legislation and relevant authorities
The Investment Canada Act (ICA) is the singular governing statute for foreign direct investment in Canada, providing for the review of qualifying investments for (1) their ‘net benefit’ to Canada and (2) potential injury to national security. The ICA is supplemented by the Investment Canada Regulations (SOR/85-611) and the National Security Review of Investments Regulations (SOR/2009-271).
The filing requirements established by the ICA apply to every acquisition of control of a Canadian business, and to the establishment of a new Canadian business, by a non-Canadian. Non-controlling investments in respect of an entity with operations in Canada may be notified voluntarily. Additionally, every investment (including non-controlling investments) in, or establishment of, a Canadian entity that meets an enumerated condition can be subject to a national security review.
The Investment Review Division (IRD) of the federal government’s Department of Innovation, Science and Economic Development is responsible for the administration of the ICA for all investments, except those in respect of Canada’s cultural heritage or national identity, which are administered by the Department of Canadian Heritage (Cultural Sector Investment Review Division (CSIRD)).
An investment may be subject to notification to, or review by, the IRD, the CSIRD, or both, depending on the activities of the Canadian business. These agencies make a recommendation to the relevant minister or ministers (the Minister of Innovation, Science and Industry – the Industry Minister – in the case of the IRD, and the Minister of Canadian Heritage, in the case of the CSIRD), who decides whether the investment is ‘likely to be of net benefit to Canada’.
The national security provisions of the ICA are administered by the IRD, which reports to the Industry Minister (who is required to consult with Public Safety Canada and can consult with other enumerated departments and agencies). Where the Industry Minister has national security concerns following consultation with Public Safety Canada and any other enumerated departments and agencies, a final determination must be made by the Governor in Council (the federal Cabinet).
Scope of regime, including types of transactions and investors covered
Application of ICA only to non-Canadian investors
The ICA applies only to investments proposed or implemented by non-Canadians, which designation is based on the person or entity that ultimately controls the investor. If the investor is ultimately controlled by a Canadian, the ICA does not apply. A ‘Canadian’ means (1) a Canadian citizen or permanent resident, (2) the Canadian government (including agencies and provincial or local governments), or (3) a Canadian-controlled entity (based on the nationality of the ultimate controller, as opposed to the direct parent).
Regarding investments by a non-Canadian, the ICA provides for two types of review: (1) a ‘net benefit’ to Canada review and (2) a national security review.
Net benefit review
Under the net benefit regime, acquisitions of control of a Canadian business may be subject either to a review and approval requirement (reviewable transactions) or to a notification requirement (which can be filed up to 30 calendar days post-closing) (notifiable transactions), depending on whether the applicable financial threshold is met:
- Acquisition of control (ICA, Section 28): control is acquired when a non-Canadian acquires more than 50 per cent of the voting shares of a corporation or more than a 50 per cent interest in the profits and assets on dissolution of a non-corporate entity. The acquisition of between one-third and a majority of a corporation’s voting shares is presumed to constitute an acquisition of control unless the investor can rebut that presumption. The acquisition of less than a majority of the interest in a non-corporate entity or less than one-third of the voting shares of a corporation is deemed not to constitute an acquisition of control. The acquisition of all or substantially all of the assets of a Canadian business also constitutes an acquisition of control. Despite these control rules, the responsible Minister can decide that control is actually being acquired if (1) the Canadian business is a cultural business, (2) the non-Canadian investor is a state-owned enterprise (SOE), or (3) the transaction could raise national security concerns.
- Canadian business (ICA, Section 3): a ‘Canadian business’ is one that is carried on in Canada that has (1) a place of business in Canada, (2) individuals in Canada that are employed in connection with the business, and (3) assets in Canada used to carry on the business. A ‘business’ means any undertaking capable of generating profit and being carried on in anticipation of profit (typically excluding exploration stage companies).
The applicable review threshold depends on (1) the transaction structure (i.e., direct acquisition of a Canadian business versus indirect acquisition via the acquisition of a foreign parent), (2) the identity of the investor (e.g., whether it is an SOE), (3) the nationality of the ultimate controller of the investor or the target, and (4) the nature of the target business (much lower thresholds apply to acquisitions of cultural businesses). A national security review can be ordered regardless of whether any applicable threshold is met, and irrespective of whether control is acquired.
|Type of acquisition
|Application threshold (2022)
|Direct acquisition of control of non-cultural Canadian business by non-Canadian agreement investor
|C$1.711 billion enterprise value
|Threshold is subject to annual adjustment. Applies to acquisitions by non-SOE investors if investor and/or target is a ‘trade agreement investor’ (i.e., ultimately controlled from a country that has a free trade agreement with Canada
|Direct acquisition of control of non-cultural Canadian business by non-Canadian World Trade Organization (WTO) investor
|C$1.141 billion enterprise value
|Threshold is subject to annual adjustment. Applies to acquisitions by non-SOE investors if investor and/or target is ultimately controlled from a country that is a member of the WTO but is not a ‘trade agreement investor’
|Direct acquisition of control of non-cultural Canadian business by non-Canadian SOE investor
|C$454 million in book value of assets
|Threshold is subject to annual adjustment. Applies if investor is a SOE and investor and/or target is a ‘WTO investor’
|Indirect acquisition of control of non-cultural Canadian business where neither investor nor target is a ‘WTO investor’
|C$50 million in book value of assets
|Applies if neither investor nor target is a ‘WTO investor’, unless target’s assets in Canada exceed 50% of total assets, then a C$5 million book value of assets threshold applies
|Direct acquisition of control of non-cultural Canadian business where neither investor nor target is a ‘WTO investor’
|C$5 million in book value of assets
|Applies if neither investor nor target is a ‘WTO investor’ (rare, as nearly all countries are WTO members)
Subject to limited exemptions, a non-Canadian cannot complete a reviewable transaction until the responsible minister (or ministers) has determined that the investment is likely to be of net benefit to Canada. If a direct acquisition of control of a Canadian business is implemented before clearance is obtained, the minister can seek a court order, which may require the investor to divest control of the Canadian business, dispose of any voting interests or assets acquired, or pay a penalty of up to C$10,000 for each day that the investor is in contravention of the ICA.
Net benefit review – notifiable transactions
If an acquisition of control of a non-cultural Canadian business does not meet the applicable review threshold, it is a notifiable transaction, and the investor must file a notification prior to, or within 30 calendar days of, the transaction being closed or a new Canadian business being established, pursuant to Section 12 of the ICA. The notification form requires information about the investor, its directors and highest-paid officers, any foreign state ownership interest or other control rights (e.g., board members) in the investor, the investor’s ultimate controller and the nature of the Canadian business. In most cases, the investor elects to file the notification post-closing, although where national security considerations are at play, parties may elect to file the notification pre-closing.
As of 2 August 2022, certain non-controlling investments in Canadian businesses may be notified voluntarily, either before or after closing, pursuant to amendments to the National Security Review of Investments Regulations. As described further below, the ICA’s national security provisions apply to investments other than reviewable transactions and notifiable transactions, specifically to the acquisition (in whole or part) or establishment of an entity carrying on a portion of its operations in Canada, provided the entity has at least one of (1) a place of operation in Canada, (2) an individual in Canada employed or self-employed in connection with those operations, or (3) assets in Canada used to carry out the entity’s operations (non-controlling investments). For non-controlling investments, non-Canadian investors may use the voluntary filing mechanism to obtain regulatory certainty with respect to a potential national security review for a transaction that does not require a filing under the ICA. Where such transactions are voluntarily notified, the government has up to 45 days from a certified notification to initiate a national security process. Where such transactions are not voluntarily notified, the government may initiate a national security process up to five years after the transaction is implemented. The notification form requires similar information as for notifiable transactions, as well as information enabling the government to determine whether the transaction is a non-controlling investment.
Net benefit review – acquisitions of control of cultural businesses
Different thresholds apply to acquisitions of control of cultural businesses.
A ‘cultural business’ is a Canadian business that (1) publishes, distributes or sells books, magazines, periodicals or newspapers, (2) produces, distributes, sells or exhibits films, video recordings or music, or (3) is a radio, television, cable or satellite broadcaster or a broadcast network. The Department of Canadian Heritage considers products outside the definition of ‘cultural business’ – but closely related or analogous to them – to be captured by the definition. Notable examples are video games and audio books.
Acquisitions of control of Canadian cultural businesses are subject to review – irrespective of the SOE status of the investor or whether the investor or target is a ‘trade agreement investor’ or ‘World Trade Organization investor’ – when the applicable threshold is met:
- Direct acquisition of a Canadian cultural business: C$5 million book value of assets.
- Indirect acquisition of a Canadian cultural business: C$50 million book value of assets. (However, if the value of the target’s assets in Canada exceeds 50 per cent of the total asset value, then the C$5 million book value of assets threshold applies.)
When an indirect acquisition of a cultural business is reviewable, the investor can close at its own risk before applying for (within 30 days of closing) or receiving approval.
The Governor in Council can order the review of an otherwise notifiable transaction involving a cultural business within 21 days of receiving the investor’s notification.
National security review
The ICA’s national security provisions (ICA, Part IV.1) apply to a broader set of investments than the net benefit provisions, including minority investments and acquisitions of entities that do not constitute a ‘Canadian business’ (i.e., non-controlling investments), thus allowing for a national security review of investments that are neither reviewable transactions nor notifiable transactions.
The ICA does not define a number of important terms, including ‘national security’ or what would be ‘injurious’ to national security, giving the government significant discretion and creating uncertainty for foreign investors. To provide some guidance, the government has issued ‘Guidelines on the National Security Review of Investments’.
A national security review can be initiated if the government has ‘reasonable grounds to believe’ that the investment could be injurious to national security. All investments involving Canadian businesses are screened against this threshold, and a small number are subject to intervention annually. The risk of intervention depends principally on the nature of the target business and the identity of the investor (including the potential for influence by a foreign state).
Following a national security review, the government may conclude that the investment is not injurious to national security; it may approve it conditionally (e.g., subject to undertakings or a divestiture), or it may effectively prohibit the transaction by requiring that the investor does not acquire control of the Canadian business or divests itself of the Canadian business in its entirety.
When a remedy is ordered or the transaction is blocked pursuant to the ICA, the sanctions can have an extraterritorial effect for cross-border transactions.
Review process – procedure and substantive assessment
Outline of notification and review process
The notification and review process differs between net benefit review and national security review.
Procedure for net benefit review
With limited exceptions, reviewable transactions cannot close until the responsible minister has (or is deemed to have) issued approval under the ICA.
The review process is triggered upon the filing of an ‘application for review’ by the investor, which has two main components:
- background information that is required by the application form (i.e., information about the investor, the investor’s ultimate controller and the Canadian business); and
- a detailed post-merger plan for the Canadian business (i.e., in respect of Canadian employment, Canadian involvement in the management and direction of the business, maintaining an ongoing presence in Canada, capital expenditures, research and development expenditures and charitable contributions), which is compared with historic benchmarks of the performance of the Canadian business and forecasts, such as board-approved business plans, for the Canadian business.
If the reviewable transaction wholly or partially relates to a cultural business, the investor’s application has the same main components.
Investors commonly make a courtesy call to the IRD or CSIRD (or both) prior to announcing a transaction, especially in high-profile transactions. However, except to discuss specific legal interpretation issues, it is unusual to engage in pre-filing dialogue or substantive discussion.
Procedure for mandatory and voluntary net benefit notification
If the investment is a notifiable transaction, the investor must file a notification either before or within 30 days of closing, which includes background information about the investor, foreign state ownership interests in the investor, the investor’s ultimate controller and the Canadian business.
If the notification is made voluntarily (i.e., relates to a non-controlling investment), the investor may elect to file a notification either before or after closing, which includes similar background information as for a notifiable transaction.
Timing for net benefit review
In respect of reviewable transactions, the Minister has 45 calendar days from receipt of a complete application to decide whether the proposed acquisition is likely to be of net benefit to Canada. This period may be, and typically is, unilaterally extended for 30 calendar days by the minister. After 75 calendar days (i.e., the initial 45 days plus the 30-day extension), the review may be further extended with the consent of the investor.
On expiry of the applicable review period, the minister must render a decision or is otherwise deemed to be satisfied that the proposed acquisition is likely to be of net benefit to Canada.
If, at the end of the review period, the minister is not satisfied that the investment is likely to be of net benefit to Canada, the investor has the right to make further representations and submit additional undertakings within 30 calendar days. The minister then must, within a reasonable amount of time, either confirm the original conclusion or advise the applicant that the proposed acquisition is approved.
Procedure and timing for national security review
There is no notification or application procedure for the national security regime. All investments by a non-Canadian involving a Canadian business or investment in a Canadian entity (whether or not the investment is reviewable or notifiable) are potentially subject to national security review, triggered by the IRD issuing a national security intervention.
The Industry Minister (or the Governor in Council) can initiate the national security process at any time from when he or she becomes aware of an investment until 45 calendar days after (1) receipt of a complete application for review (in respect of a reviewable transaction), (2) receipt of a complete notification (in respect of a notifiable transaction), or (3) receipt of a complete voluntary notification (when the investment is a non-controlling investment). With respect to non-controlling investments not voluntarily notified, the Industry Minister can initiate the national security process up to five years after closing of the transaction.
If the Governor in Council does not order a national security review within these limitation periods, the Industry Minister can issue a notice granting an additional 45 days to assess the investment, after which time either the national security process concludes or the Governor in Council orders a national security review. Effectively, the government has 90 calendar days to decide whether to launch a national security review.
When a national security review is ordered, the investor receives a statement of the government’s concerns and is given an opportunity to make representations as to why the transaction will not be injurious to national security.
A national security review can take up to 200 calendar days (or longer if the minister and investor agree to an extension) from the date on which the application or notification is filed. If a national security review is ordered in respect of a reviewable transaction, the net benefit review is suspended pending the outcome of that review. In such cases, the process may be extended (with the investor’s consent) for an additional 30 calendar days (i.e., 230 calendar days in total), so that the net benefit review can be completed following the successful conclusion of the national security review.
In the case of a notifiable transaction or a non-controlling investment, an investor can eliminate the risk of a post-closing review by filing its notice pre-closing and conditioning closing on a national security review not being ordered.
Substantive assessment process and main evaluation criteria
Transactions that are subject to review and approval under the net benefit regime follow a well-defined, substantive assessment process. Transactions that are subject to intervention on national security grounds are evaluated under different criteria.
Net benefit review
The Industry Minister is responsible for reviewing the acquisition of non-cultural businesses and the Minister of Canadian Heritage is responsible for reviewing the acquisition of businesses that engage in activities defined as relating to cultural heritage or national identity. If the target carries on both a non-cultural and a cultural business, and the respective monetary thresholds are both exceeded, review and approval by both ministers is required.
Reviewable transactions are assessed against a ‘net benefit to Canada’ standard. The following six statutory factors (ICA, Section 20) must be taken into account by the reviewing minister where relevant:
- effect on the level and nature of economic activity in Canada, including employment, resource processing, the utilisation of parts, components and services produced in Canada and exports from Canada;
- degree and significance of participation by Canadians in the Canadian business;
- effect on productivity, industrial efficiency, technological development and product innovation and variety;
- effect on competition;
- compatibility with industrial, economic and cultural policies; and
- contribution to Canada’s ability to compete in world markets.
The minister consults with other government stakeholders, including federal agencies and provincial governments, in determining whether a transaction is of net benefit to Canada. In most cases, an investor is required to provide binding undertakings to ensure the benefit that will accrue to Canada.
National security review
National security reviews focus on the nature and physical location of the target business and the investor (including the potential for them to be influenced by foreign states). The review can be opaque and the government does not typically provide detailed reasoning for its decisions. However, transparency has improved in recent years through the publication of annual reports summarising national security activity on an aggregated basis and, as of November 2022, the government publishes limited details concerning the outcome of transactions and names of transacting parties that result in national security enforcement action.
The government’s national security guidelines, released in 2016 and updated in March 2021, contain a non-exhaustive list of factors that may raise national security concerns, including the potential impact of the investment on defence, intelligence, law enforcement, sensitive technology, controlled goods, critical infrastructure, the supply of critical goods and services, sensitive personal data, critical minerals and critical mineral supply chains, and government contracts in Canada. The government has also shown interest in telecommunications, transportation, aerospace, radar, energy, uranium, public health and safety, businesses that require security clearances and businesses that are proximate to government facilities.
In assessing whether an investment poses a national security risk, the government will consult with Public Safety Canada and Canada’s security and intelligence agencies, in addition to other government stakeholders.
Since the enactment of the national security review process in March 2009, formal reviews (pursuant to Section 25.3 of the ICA) have been ordered at least 52 times. Many more investments have been subject to extended initial screening (via issuance of a notice pursuant to Section 25.2 of the ICA, which extends the period during which the minister must decide whether to make a Section 25.3 order by 45 calendar days).
The outcomes of a full review are summarised in the following table:
|Outcome of national security review
|Investor directed not to implement transaction
|Investor ordered to divest control of the Canadian business
|Investment authorised with conditions to mitigate national security risks
|Investment authorised unconditionally
|Investor abandoned transaction prior to a final order being made
Involvement of third parties in ICA review
Except for other government departments and agencies or provincial governments that may be consulted, the ministers will not actively solicit comments from third parties. However, the government’s ‘Guidelines – Administrative Procedures’ provide that the relevant minister can receive and consider unsolicited representations, though the investor will be informed of the substance of those representations (without revealing the identity of the third party) and given an opportunity to respond.
In some complex or sensitive transactions, the investor may engage government relations or public relations experts to assist in achieving clearance. Establishing and implementing a government relations and public relations strategy early is advisable. These issues should be considered and managed carefully with the appropriate experts as part of the transaction planning process.
The relevant minister may impose very broad remedies, including outright prohibition of the investment (or de facto prohibition by requiring divestment of the target business) or undertakings, which are required in the vast majority of cases. Remedies are available only for reviewable transactions and under the national security regime.
Can investments be cleared subject to remedies?
Remedies under net benefit review
In most cases, remedies for reviewable transactions involve binding undertakings that the minister may take into account when determining whether the net benefit test is satisfied. Undertakings are required in the majority of reviewable transactions.
Although the undertakings that may be required to obtain approval are fact specific and the product of negotiation between the investor and the IRD or CSIRD (or both), they often include commitments to maintain jobs and facilities in Canada, keep the head office in Canada, involve certain numbers of Canadians in senior management positions and on the board of directors of the Canadian business, make specified levels of capital expenditures in Canada, and conduct research and development in Canada. The duration of undertakings varies but, in most cases, they apply for three to five years and often longer in respect of cultural businesses. Investors are typically expected to report on the status of the undertakings every 18 months (annually in some cases).
The government has also issued guidance in respect of SOE investors, requiring demonstration of a strong commitment to transparent and commercial operations. Therefore, the Minister will assess an SOE’s corporate governance and commercial orientation and, to ensure that the Canadian business is operated commercially after closing, may seek additional undertakings (e.g., the appointment of Canadian independent directors or maintaining a listing of the Canadian business on a Canadian stock exchange). These undertakings typically apply for as long as the SOE controls the Canadian business.
In one instance, the government has enforced compliance with net benefit undertakings in the courts. In 2009, the government sued US Steel for breaching its undertakings to maintain minimum levels of employment in connection with its acquisition of Stelco Inc after two manufacturing plants were shut down. Legal proceedings continued until 2011, when the parties announced a settlement based around new and enhanced undertakings under the ICA.
Remedies under national security review
Following a national security review, the government may conclude that the investment is not injurious to national security. An investment can also be approved conditionally, provided that the investor accepts undertakings or terms and conditions (including divestiture of part of the target business) to mitigate the national security concerns.
If the government’s concerns cannot be resolved, or the investor is not willing to agree to undertakings or terms and conditions, the government has jurisdiction to block the investment or, if the transaction has been completed, require a divestiture of control of the Canadian business or a divestiture of the entire investment.
In the face of national security concerns, there have also been instances of investors abandoning their transactions prior to a final determination.
Timing for remedies discussions
There is no statutory process dictating when an investor can engage on potential remedies for either net benefit or national security reviews. Typically, parties wait to receive the government’s feedback on their application for review (and plans for the Canadian business) before initiating a discussion on net benefit undertakings, though in some cases an investor may submit proposed undertakings with its initial application. The appropriate strategy turns on the specific facts of each case.
The scope for appeal of an enforcement decision under the ICA
The process of obtaining a net benefit approval involves the iterative negotiation of binding undertakings, which generally results in a package that the minister determines is of net benefit to Canada. However, there is no statutory right of appeal where the relevant minister (or ministers) decides that an investment is not likely to be of net benefit to Canada. Such a decision effectively prohibits the transaction.
There is no right to appeal a national security review, other than via an application for judicial review (i.e., focused on alleged procedural unfairness or bias rather than the substantive grounds for the decision).
Insights from recent cases
Eight transactions were subject to net benefit review during 2021–2022 (the most recent data available), all of which were approved, most likely subject to undertakings (which are not made public). The average length of net benefit review in 2021–2022 by the IRD was 88 days, which is slightly higher than historic averages. The average length of net benefit review in 2019–2020 by the CSIRD (relating to cultural businesses) was 143 days (data for subsequent years is not yet available).
National security enforcement activity has increased in recent years; however, intervention remains rare. In 2021–2022, 1,255 applications for review and notifications were certified. These, in addition to investments not subject to a notification requirement, were screened for national security concerns. Only 12 extended national security reviews were ordered: seven required no further action under the ICA, four were abandoned by the investor and in one case the transaction remains under review at the time the annual report was published. The average length of review for the 12 transactions was 133 days from the date of certification of the notification or application for review, which is shorter than historic averages of 200 days or more.
Although enforcement activity remains relatively rare, recent cases highlight the importance of assessing potential risks under the net benefit and national security regimes early, and apportioning that risk in transaction documentation where possible. With respect to national security in particular, there is a trend towards achieving more regulatory certainty by (1) investors electing to file ICA notifications and allowing the 45-day window in which a national security process can be commenced to expire (which option is now also available for non-controlling investments), or (2) including a condition precedent allowing for the expiry of that 45-day waiting period, or satisfactory conclusion of the review process if initiated. With respect to net benefit review, although the likelihood of being required to offer binding undertakings has not changed materially in recent cases, the scale and scope of those undertakings has expanded over time.
Heightened enforcement risk for SOEs in the critical minerals sector
In October and November 2022, two announcements were made regarding the government’s approach to ICA enforcement in the critical minerals sector, which mark a significant and clear change in the government’s approach to national security in particular.
First, the government announced a new policy on foreign investments by state-owned enterprises in critical minerals businesses, which raises the risk of national security intervention going forward, particularly for investors from jurisdictions that the Canadian government has already indicated as being more sensitive, such as China and Russia. The policy is broad in a number of respects, as a result of which investors need to be very careful in considering its potential application. Most importantly, it applies not only to state-owned enterprises, but also to private investors considered to be ‘closely tied to, subject to influence from, or who could be compelled to comply with extrajudicial direction from foreign governments’, and it explicitly applies to investments of any value, whether direct or indirect, and to non-control investments.
Second, the broad manner in which the government appears poised to apply this policy is evidenced in the second announcement, concerning the required divestiture of three investments in Canadian lithium companies. All three investments appear to be minority investments of relatively low dollar value by Chinese firms without publicly obvious state ownership (meaning the government likely commenced a review on its own initiative since they pre-date the introduction of the voluntary notification mechanism). Significantly, one of the divestiture orders relates to a Canadian-headquartered company listed on the Toronto Stock Exchange that appears to have mining operations only outside Canada.
In an effort to increase the transparency with which the ICA is administered, the government has indicated that, from now on, it will publish details on the outcome of national security reviews, including the names of transacting parties (previously, it published anonymised statistics once annually). The change in approach to enforcement in the critical minerals sector is also evidenced by the government’s decision earlier in 2022 not to take action in respect of a substantially similar investment by a Chinese firm in a Canadian-headquartered lithium company (which decision was criticised at the time). Moving forward, the government will be watching the critical minerals sector closely and will not hesitate to take strong action against investments it considers contrary to national security.
Introduction of voluntary notification mechanism
Amendments to the National Security Review of Investments Regulations came into force on 2 August 2022, introducing the option for investors to notify non-controlling investments to the government voluntarily. Non-controlling investments (i.e., those that do not constitute an acquisition of control, such as minority investments, or do not involve a ‘Canadian business’ within the meaning of the ICA) are not subject to mandatory notification or review, but remain subject to a potential national security review at the government’s discretion after closing.
The amendments enable investors to notify non-controlling investments, thereby allowing them to achieve regulatory certainty as to possible national security intervention. Where voluntarily notified, the government has up to 45 days from complete notification to initiate a national security process. Where an investor chooses not to notify voluntarily, the government now has up to five years from closing to make a national security intervention. A decision to file on a voluntary basis will depend on the specific transaction context, including the risk appetite of the investor, the nature of the target’s activities and investor’s ownership structure, the geopolitical climate, and negotiating dynamics between the transacting parties.
Key trends for 2023
More national security reviews
Over 70 per cent of all national security reviews ordered since 2009 have taken place in the past four fiscal years (37 of 52). This proliferation is expected to continue. Moreover, transactions subject to this intervention typically result in prohibition, where not completed, or divestiture (e.g., an order for the investor to divest its interest in the Canadian target, as occurred in November 2022 regarding minority investments by Sinomine Rare Metals Resources, Chengze Lithium and Zangge Mining in Power Metals, Lithium Chile and Ultra Lithium, respectively) or are abandoned by the investor in the face of government objections. In the past three fiscal years, over 60 per cent of national security reviews have resulted in transactions being blocked, unwound via divestiture or abandoned.
The Canadian government’s revised ‘Guidelines on the National Security Review of Investments’ also signal heightened enforcement activity, which:
- restated the covid-19 policy of subjecting investments by SOEs to ‘enhanced scrutiny’;
- expanded the non-exhaustive list of factors that the government will take into account when assessing investments on national security grounds, adding critical minerals and critical mineral supply chains and sensitive personal data to this list; and
- broadened or provided more detail about some of the existing national security factors.
The October 2022 policy statement on investments by SOEs (which includes private investors closely tied to, or subject to influence or direction by, foreign states) in Canada’s critical minerals sector signals particularly heightened enforcement activity in this area of the economy moving forward,which may be replicated in other industry sectors as geopolitical conditions evolve.
As well, in March 2022, the Canadian government released a policy statement in response to Russia’s invasion of Ukraine, indicating that (1) investments by direct or indirect Russian investors into Canada will be considered of net benefit to Canada only in exceptional circumstances, and (2) investments, regardless of value, with ties, direct or indirect, to an individual or entity associated with, controlled by or subject to influence by the Russian state, will support a finding that the investment could be injurious to Canada’s national security.
The number of national security reviews has been increasing as a result of covid-19 and the geopolitical climate, and this trend is expected to continue. Although the revised guidelines and policy statements on SOE investments in the critical minerals sector and investors with connections to Russia do not have the force of law, they provide more transparency on the government’s national security assessment criteria and generally align with the approaches taken in other jurisdictions on sectors of heightened sensitivity and treatment of SOE investors. As a result, a growing number of transaction agreements include an ICA closing condition, requiring the expiry of the jurisdictional period for a national security review to commence in order to be satisfied.
Fewer investments subject to net benefit approval
The number of transactions subject to a net benefit review and approval has been declining significantly since 2015, when statutory amendments introduced higher enterprise value thresholds. The number of net benefit reviews is expected to remain limited, given the high-value review thresholds applicable to the vast majority of non-Canadian investments. For the small proportion of investments that are subject to net benefit review, investors should generally expect to be required to submit a comprehensive package of undertakings to obtain approval.
Following the August 2022 introduction of the voluntary notification mechanism for non-controlling investments, there are no imminent legislative amendments to the ICA. In March 2021, the Canadian Parliament’s Standing Committee on Industry, Science and Technology reported on its study of the operation of the ICA and presented recommendations to Parliament, most notably recommending the subjection of SOE acquisitions to compulsory net benefit review and national security review, expansion of strategic sectors subject to enhanced national security scrutiny, including health, pharmaceuticals, agri-food and manufacturing, as well as several other measures designed to strengthen national security review.
These wholesale amendments would alter the enforcement landscape considerably, increasing the number of transactions subject to net benefit or national security review, and making it more difficult for certain types of investor to invest in companies that operate a Canadian business. Since re-election as a minority government in October 2021, the governing Liberal Party has indicated in a December 2021 statement of executive priorities that it will aim to review and modernise the ICA to strengthen the national security review process and better identify and mitigate economic security threats from foreign investment. However, this has not yet led to any specific reform proposals. Any comprehensive reform of the ICA is likely to require greater consensus among the leading federal political parties.
1 Jason Gudofsky, Debbie Salzberger and Michael Caldecott are partners at McCarthy Tétrault LLP.
2 An ‘entity’ is defined under Section 3 of the Investment Canada Act [ICA] as a corporation, partnership, trust or joint venture.
3 The thresholds are discussed in Section 14 of the ICA.
4 Under ICA, Section 3, ‘state-owned enterprises’ are defined as (1) the government of a foreign state, (2) an entity that is controlled or influenced, directly or indirectly, by a foreign government, or (3) an individual who is acting under the direction or influence of a foreign government.
5 With respect to the thresholds described below, the ICA regulations (1) set out the formulas for calculating the enterprise value of a Canadian business, and (2) stipulate that the book value of assets of a Canadian business be taken from the audited financial statements of the most recently completed fiscal year. Note that assets and operations outside Canada are not generally carved out from these assessments.
6 These exceptions are when (1) the reviewable transaction is the indirect acquisition of a cultural business or (2) the minister has sent a notice to the investor stating that a delay in closing the transaction would result in ‘undue hardship’ to the investor or would ‘jeopardize the operations of the Canadian business’, pursuant to Section 16 of the ICA.
7 See ICA, Sections 39 and 40.
8 See ICA, Section 15(b).
9 The government’s ‘Guidelines on the National Security Review of Investments’ assist investors in assessing the likelihood of national security intervention (see further in the section titled ‘Substantive assessment’, below). These guidelines can be accessed at https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81190.html.
10 See ICA, Sections 21 and 22. When a transaction is also subject to clearance under the Competition Act or the Canada Transportation Act, the minister generally will not grant ICA approval until the competition or transportation clearance, as appropriate, is received.
11 See ICA, Sections 25.1 to 25.3. Where an investment could raise national security concerns, the government’s guidelines encourage investors to contact the Investment Review Division early in the development of their projects to discuss the investment (i.e., before filing their application or notification). These discussions can assist investors in preparing for the launch of a formal national security review in due course.
12 If the minister determines that the investment is likely to be injurious to Canada’s national security, then the parallel net benefit review is terminated.
13 The government has interpreted ‘cultural policies’ to include promoting Canadian content, Canadian cultural participation (e.g., developing Canadian talent) and civic participation (e.g., supporting Canadian cultural initiatives). The government has also interpreted ‘cultural policies’ to include restrictions on the acquisition of Canadian-controlled cultural businesses by non-Canadian investors (namely, book publishing and distribution, periodical/magazine publishing, and film and video distribution).
14 See the ‘Remedies’ section, below, for further information about net benefit undertakings.
15 In the 2021–2022 reporting year, there was also one transaction that was still under review at the time of publication; hence this breakdown only features 51 investments.
16 These guidelines are accessible at https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk00064.html#p3.
18 Other recent examples include the order from December 2020 requiring Shandong Gold to divest the Canadian gold mining company TMAC Resources, and the prohibition in May 2018 of China Communications Construction Company’s proposed takeover of Aecon Group Inc, a Toronto-listed construction company.