Canada: Foreign Investment Review
Canada’s foreign investment review regime has been the subject of considerable attention over the past three years. Much of this attention was in connection with BHP Billiton’s abandoned bid for Potash Corporation of Saskatchewan and the failed effort by the London Stock Exchange to merge with the TMX. However, interest surged in 2012 in the context of the application by CNOOC, a Chinese state-owned enterprise (SOE), to acquire Nexen, a large second-tier Canadian oil and gas producer with an interest in Canada’s oil sands, and the almost contemporaneous application by Petronas, a Malaysian SOE, to acquire Progress Energy, a Canadian natural gas producer. While both transactions were ultimately approved, new and more onerous policy guidance was issued by the Canadian government with respect to proposed acquisitions by foreign SOEs. Hence, while Canada very much remains open for business (in the 27-year history of the legislation, to our knowledge, outside the cultural business arena there has been only one formal rejection of a transaction and only four withdrawals attributable to the legislation), prospective investors, especially foreign SOEs, would be well advised to take the review process under the legislation seriously and, in that regard, to engage capable counsel early in the deal process.
The ensuing discussion provides a practical summary of the regime.
What is the relevant legislation and who administers it?
While there are a number of federal and provincial statutes that are sector-specific and that limit foreign investment, 1 the Investment Canada Act (the Act) is the only statute of general application in Canada that provides for the review and approval of foreign investments.
For investments (other than investments in cultural businesses) the Act is administered by the Investment Review Division (IRD) of the federal Department of Industry. Investments in cultural businesses are administered by Cultural Sector Investment Review (CSIR) within the federal Department of Canadian Heritage. Where a transaction involves both non-cultural and cultural businesses, both the IRD and the CSIR may be involved. The IRD is solely responsible for the administration of the national security provisions of the Act.
Decisions to approve or disallow investments are made by the industry minister, in the case of transactions not involving cultural businesses, and by the minister of Canadian heritage and official languages (the cultural minister), in the case of transactions involving cultural businesses. Both ministers may be involved in the review of transactions involving both cultural and non-cultural businesses. The federal Governor in Council (GIC) (which is in essence the federal Cabinet) is the ultimate decision-maker with respect to investments considered potentially injurious to national security.
What kinds of investments are caught?
The Act generally applies to the establishment of new Canadian businesses and to the acquisition of control of existing Canadian businesses by non-Canadians. 2 In most cases non-Canadian investors are only required to file a notification. However, in some cases, the approval of the investment, based on a ‘net benefit to Canada’ test, is required. The Act also provides for the review of foreign investments that may be injurious to national security.
Establishment of new Canadian business
With the potential exception of new cultural businesses 3 and national security reviews, the establishment of a new Canadian business by a non-Canadian is merely notifiable and not subject to approval. Establishment of a new Canadian business in the cultural sector may require approval where the GIC determines the review of the investment to be in the public interest.
Acquisition of control of Canadian business
Subject to a limited number of expressed exceptions, acquisitions of control of Canadian businesses (whether or not already foreign-controlled) by non-Canadians, whether direct or indirect, are at a minimum subject to notification under the Act. In addition, direct and certain indirect acquisitions of control by non-Canadians of Canadian businesses that exceed specified monetary thresholds, are ‘reviewable’, meaning that they require the approval of the industry minister or the cultural minister (collectively the minister) or both, based on a ‘net benefit to Canada’ test.
National security review
The GIC may review a proposed or implemented investment by a non-Canadian where the Industry Minister has reasonable grounds to believe that such an investment could be injurious to national security. The national security review provisions apply to a broader range of transactions than those covered by the notice and review provisions of the Act.
What are the review thresholds?
Net benefit to Canada review
In the case of corporations, an ‘acquisition of control’ is deemed to have occurred when more than 50 per cent of the voting shares of a corporation have been acquired by a person. In addition, an ‘acquisition of control’ of a corporation will be presumed to have occurred when one-third or more of the voting shares of a corporation have been acquired by a person, although this presumption may be rebutted by establishing that, upon the acquisition, the corporation is not controlled in fact by the acquirer through the ownership of voting shares.
For an acquisition of assets, an ‘acquisition of control’ is considered to occur when all or substantially all of the assets used in carrying on a Canadian business are acquired.
Other rules for the acquisition of control apply in the case of acquisitions of interests in partnerships, trusts, etc.
In general, 4 where the Canadian business does not involve a cultural business and where the acquirer is a ‘WTO investor’, 5or the target corporation in a share purchase transaction is, immediately prior to the transaction, controlled by a ‘WTO investor’:
direct acquisitions of a Canadian business require approval only if the aggregate book value of the assets of the entity carrying on the Canadian business and all other entities in Canada, control of which is being directly or indirectly acquired in the transaction, is equal to or greater than C$344 million (2013 threshold); and
indirect acquisitions (for example, acquisition of a foreign corporation that controls a Canadian corporation carrying on the Canadian business) are not subject to the approval requirement.
Analogous rules apply in the case of asset purchase transactions. The review threshold is revised annually based on changes to domestic GDP.
As a result of amendments to the Act in 2009, the threshold for review of acquisitions by WTO investors is to be raised after new regulations come into force. More specifically, the review threshold for acquisitions by WTO investors (other than WTO investors that are SOEs) of Canadian businesses not engaged in a cultural business will be increased to C$600 million, and thereafter to C$800 million and C$1 billion. Additionally, the method for determining value (except for acquisitions by SOEs) will be changed from a ‘book value’ to an ‘enterprise value’ test. Industry Canada has been actively engaged in drafting the regulations. However, the recent developments with respect to SOEs may result in further delays to their implementation.
National security review
As noted above, a foreign investment, whether implemented or proposed, by a non-Canadian may be reviewed where the minister has reasonable grounds to believe that such an investment could be injurious to national security.
What is the timetable and process for notifications and reviews?
Investments that are merely subject to notification may be notified up to 30 days post-closing. However, where the investment involves a cultural business or where national security issues could arise, filing on an earlier basis may be prudent to ensure any issues are resolved prior to closing.
Net benefit review
A transaction that is reviewable for net benefit to Canada may not proceed until approval has been received or is deemed to have been received. There are limited exceptions to this general rule. For example, a transaction may be implemented where the minister sends a notice to the investor that he is satisfied that a delay in implementing the investment would result in ‘undue hardship to the non-Canadian or would jeopardize the operations of the Canadian business that is the subject of the investment’.
After receiving an application for review in respect of an investment, the minister has 45 days to review it and decide whether to approve the investment on the basis that it is likely to be of ‘net benefit to Canada’. If no notice is sent by the Minister to the investor within the 45-day period, the investment will be deemed to have been approved.
The minister may extend the initial 45-day review period by 30 days, or such longer period as the investor and the minister may agree. If the investor does not receive notice of the minister’s decision within such further 30-day (or longer) period, the investment will be deemed to have been approved.
If the minister within such 45-day period, or such further period, informs the investor that he will not allow the acquisition because it will not be of ‘net benefit to Canada’, the investor has the right to make further representations and to submit undertakings within a further 30-day period, or such longer period as the investor and the minister agree. On the expiration of such further 30-day or longer period, the minister must inform the investor of his decision within a reasonable time period.
National security review
Where a transaction is subject to a ‘net benefit’ review, the minister has 45 days after the application for review is certified as complete to initiate a national security review. Where a transaction is subject only to notification, the minister has 45 days after certification of the notification to initiate a national security review. Where a transaction is neither reviewable nor subject to notification, the minister has 45 days after implementation of the transaction to initiate a national security review. The national security review process can take up to 130 days, or longer if the foreign investor agrees to an extension. Where a national security review is invoked, the deadlines for the Minister to make a ‘net benefit’ determination are postponed.
In the case of acquisitions by SOEs, the updated policy guidance indicates that provision will be made for the extension of timelines, where necessary, for national security reviews.
What information is required in a filing?
Notifications are not burdensome to complete. Among other things, they require information respecting the investor, the Canadian business being acquired and, importantly, whether the investment falls within the categories of business activities that comprise cultural businesses.
Applications for review
Applications for review are much more substantial than notifications. As with notifications, they require information respecting the investor and the Canadian business being acquired. However, they also require submission of plans for the Canadian business, together with a comparison of such plans with the current operations of the Canadian business and having regard to the net benefit factors. It is common for undertakings to be proposed in connection with the application for review in order to establish net benefit to Canada. Having regard to the updated SOE guidance, specific concerns with respect to SOE investments must be addressed in the context of such investment proposals. These concerns include the potential for foreign government influence that may be inconsistent with Canadian national industrial and economic objectives and the potential adverse effects on the efficiency, productivity and competitiveness of the Canadian business, which may have negative effects on the Canadian economy in the longer term.
In general, information obtained by the minister, the IRD or the CSIR, with respect to an investor or the Canadian business in connection with the administration or enforcement of the Act, is privileged and no one may knowingly communicate such information or allow it to be communicated. The Act provides for limited exceptions to this general rule but the practice of the government has been (with few exceptions) not to disclose information without the investor’s consent.
What are the substantive tests for clearance?
There are two potential types of substantive assessment depending on whether the transaction is subject to a net benefit review or a national security review or both.
Net benefit to Canada
Where an investment is subject to a net benefit review, the relevant minister must be satisfied that such investment is likely to be of ‘net benefit to Canada’. The Act sets out the following factors which are to be taken into account, where relevant, in assessing net benefit to Canada:
the effect of the investment on the level and nature of economic activity in Canada;
the degree and significance of participation by Canadians in the Canadian business and in any industry or industries in Canada;
the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
the effect of the investment on competition within any industry or industries in Canada;
the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and
the contribution of the investment to Canada’s ability to compete in world markets.
In respect of acquisitions of Canadian businesses by foreign SOEs, in late 2012 the Canadian government issued updated guidance in relation to how such acquisitions are to be assessed under the ‘net benefit to Canada’ test (Revised SOE Guidelines). The Revised SOE Guidelines provide that, in addition to the section 20 factors, the foreign SOE investor must satisfy the minister of the investment’s:
freedom from political influence;
adherence to Canadian laws, standards and practices that promote sound corporate governance and transparency; and
positive contributions to the productivity and industrial efficiency of the Canadian business.
National security review
An investment may be subjected to a ‘national security’ review if the industry minister ‘has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security’. The term ‘national security’ is not defined by the Act or the regulations thereunder and there has been no formal guidance issued in relation to what constitutes an investment that could be injurious to national security.
What are the powers of the authorities to prohibit or otherwise interfere with a transaction?
Net benefit to Canada
In the context of a ‘net benefit’ review, the relevant minister has the authority to:
reject a proposed investment if he is of the opinion that it is not likely to be of net benefit to Canada;
approve the proposed investment without any undertakings; or
approve the proposed investment subject to undertakings.
Undertakings are legally binding commitments entered into by the foreign investor. Undertakings are usually negotiated with the staff at the IRD and traditionally last for three to five years, although some last longer (up to an indefinite period of time). In the context of a net benefit review, undertakings have often been given by the foreign investor and accepted by the minister in respect of employment levels in Canada, Canadian participation in management, investment to be made in the Canadian business and location of head offices or other important facilities.
National security review
In the context of a national security review, the GIC ‘may take any measures in respect of the investment that the GIC considers advisable to protect national security’, including:
prohibiting the implementation of the investment by the non-Canadian;
authorising the investment on condition that the non-Canadian give undertakings or implement the investment on specified terms and conditions; or
requiring divestiture by the non-Canadian of control of the Canadian business or of their investment in the entity.
Given that the national security provisions have only been in force since March 2009, there is limited experience in terms of national security reviews and remedies taken by the industry minister or the GIC in the context of such reviews. Recently disclosed documents indicate that the national security provisions were invoked in 2009 by the industry minister to delay the implementation of the acquisition of Forsys Metals by George Forrest International, pending further notice (namely, pending a national security review). The transaction was subsequently abandoned, presumably before the GIC made a final decision with respect to the national security issue.
What remedies are available to the minister?
In a situation where the minister believes that a non-Canadian has, among other things:
failed to file an application for review;
implemented an investment contrary to the Act;
implemented an investment on terms and conditions that vary materially from those contained in its application for review; or
failed to divest control of a business where the investment has been disallowed or failed to comply with its undertakings,
the minister may send a demand requiring that the non-Canadian cease the contravention, remedy the default, show cause why there is no contravention or, in the case of undertakings, justify the non-compliance.
If the non-Canadian fails to adequately comply with a ministerial demand, the Minister may then make a court application for an order to enforce his demand. The court, in addition to any other order that it may consider appropriate in the circumstances, may impose a penalty not exceeding C$10,000 for each day that the non-Canadian remains in non-compliance. Failure to comply with a court order may also result in contempt proceedings.
In the only judicial action taken to date to enforce undertakings, the industry minister asked the court to order appropriate measures to remedy the alleged failure by US Steel to comply with certain undertakings that it had given in 2007 in connection with its acquisition of Stelco Inc regarding, among other matters, capital expenditures, research and development, and production. This action, which expanded to include interveners, was ultimately settled with US Steel providing new undertakings that were over and above US Steel’s original commitments.
Is there any right for third parties to be involved in the review process?
The practice of the minister is to consult with any province that is likely to be significantly affected by a proposed investment. While the provinces do not have a veto power under the Act, the views of a province can have a significant impact on the review process. In the case of BHP Billiton’s proposed 2010 acquisition of Potash Corporation of Saskatchewan, the province of Saskatchewan actively opposed the transaction. Ultimately, BHP Billiton withdrew its offer following receipt of a notice from the minister that he was, based on his review, unable to approve the investment without further representations from BHP Billiton regarding net benefit to Canada.
Additionally, because one of the factors that the minister must consider is the effect of the investment on competition within Canada, the minister also consults with the Commissioner of Competition. Accordingly, even though a proposed investment may not require a pre-merger notification under the Competition Act, the Competition Bureau may still become involved in the transaction.
Lastly, interested third parties such as unions, municipalities, competitors and customers may make submissions to the minister regarding a proposed investment. While not expressly contemplated in the Act, this information, to the extent that it may be considered relevant to the minister’s deliberations, is likely communicated to the minister by the IRD.
- Industries with such restrictions include telecommunications, broadcasting, air transport, financial services and uranium mining.
- ‘Non-Canadian’ is a defined term in the Act. For example, in the case of a corporation, a ‘non-Canadian’ is generally a corporation that is ultimately controlled through the ownership of voting shares (either through a majority voting interest or control in fact through the ownership of voting interests), by persons who are not Canadian citizens or permanent residents of Canada.
- Canadian businesses in the following areas are considered to be ‘cultural businesses’:
• the publication, distribution or sale of books, magazines, periodicals or newspapers in print or electronic form;
• the production, distribution, sale or exhibition of film or video products;
• the production, distribution, sale or exhibition of audio or video music recordings; and
• the publication, distribution or sale of music in print or electronic form.
- The Canadian government has published policies with respect to the acquisition of certain types of cultural businesses by foreign investors (for example, in relation to the publication, distribution of books, as well as magazines and periodicals, and the production, distribution, sale or exhibition of film or video products). In some instances, these policies prohibit establishments or acquisitions of such cultural businesses by foreign investors.
- If the Canadian business being acquired is engaged in a cultural business, or if the purchaser is not a WTO investor and the target is not controlled by a WTO investor, the asset value review threshold for direct acquisitions is C$5 million and for indirect acquisitions is C$50 million. (‘Cultural business’ for these purposes is defined somewhat more broadly than as set out in footnote 3.) If the value of the assets of the Canadian business exceeds 50 per cent of the value of all assets being acquired in the transaction, the transaction is effectively deemed to be a direct acquisition and, as such, the C$5 million threshold applies to the investment.
- The rules as to whether a person is a WTO investor for purposes of the ICA are complex. Very generally, ‘WTO investors’ are nationals, permanent residents and governments of WTO members, and entities ultimately controlled by them. ‘WTO members’ are the member countries of the World Trade Organization.