Canada: Foreign Investment Review
Canada’s foreign investment review regime under the Investment Canada Act (the Act) continues to generate controversy and present challenges in relation to a select number of transactions each year. The first formal rejection of a transaction (outside the cultural arena) under the Act occurred in 2008 in relation to a bid by US-based Alliant Techsystems Inc to acquire MacDonald Dettwiler Associates Ltd, a Canadian aerospace company. In 2010, a preliminary rejection under the Act resulted in BHP Billiton abandoning its bid for Potash Corporation of Saskatchewan. The effort by the London Stock Exchange to merge with TMX, operator of the Toronto Stock Exchange in 2011 attracted the foreign investment regime’s attention (and a difficult clearance process was anticipated), although the ultimate failure of that transaction was not attributable to the regime. The acquisitions in 2012 by CNOOC of Nexen and by Petronas of Progress Energy served as catalysts for changes to the way foreign state-owned enterprises (SOEs) are treated under the Act, although both such transactions eventually received clearance.
In 2013, Orascom Telecom withdrew its offer to acquire Wind Mobile, a Canadian cellular business. While the reasons for the decision to withdraw were not publicised, national security concerns may have been raised during the review process under the Act. The industry minister subsequently approved the sale of Wind Mobile in 2014 to AAL Acquisitions Corporation, an investment consortium reportedly including WIND Mobile founder Tony Lacavera, private equity firm West Face Capital and California-based hedge fund Tennenbaum Capital Partners.
Also in 2013, the proposed acquisition of Allstream, a division of MTS Telecom Services, by Accelero Capital Holdings Inc was blocked based on national security concerns, and Lenovo reportedly did not proceed with respect to a possible bid for Blackberry because the Canadian government had expressed similar security concerns with its proposed ownership of that communications company.
In summary, while the vast majority of investments by non-Canadians in Canadian businesses are not reviewable under the ‘net benefit to Canada’ test, and while almost all of those that are reviewable secure the requisite clearance in a reasonably timely fashion, albeit subject to various negotiated undertakings in certain cases, transactions continuing to encounter uncertainty under the Act include those involving certain types of cultural businesses, Canadian ‘champions’ as targets, SOE purchasers or national security concerns. Hence, prospective investors are well advised to take the review process under the legislation seriously and, in that regard, to engage capable counsel early in the deal process. Public and government relations experts may, on the advice of counsel, also need to be engaged.
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 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 the 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 minister of industry (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) ie, 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 businesses3 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. The minister may initiate a national security review in respect of the establishment of a new Canadian business.
Acquisition of control of Canadian business
Subject to a few 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. Direct and certain indirect acquisitions of control by non-Canadians of Canadian businesses that exceed specified monetary thresholds are ‘reviewable’, meaning 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 net benefit review provisions of the Act.
What are the review thresholds?
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. An ‘acquisition of control’ of a corporation will also 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 in fact controlled 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 and so on.
In general,4 where the Canadian business does not involve a cultural business and where the acquirer is a ‘WTO investor’,5 or 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$369 million (2015 threshold); and
- indirect acquisitions (eg, an 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 the domestic GDP.
As a result of amendments to the Act in 2009, the threshold for the review of acquisitions by WTO investors (other than WTO investors that are SOEs) 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 set at C$600 million, increased over a four-year period to C$800 million and to C$1 billion, and thereafter further increased annually based on changes to Canada’s GDP. Additionally, the method for determining value (except in respect of investments by SOEs) will be changed from a ‘book value’ to an ‘enterprise value’ test. The latter test is meant to better reflect the value of a business as a going concern and the increasing importance of service and knowledge-based industries in which much of the value of a business may reside in intangible assets that are typically not recognised on a balance sheet.
The Comprehensive Economic Trade Agreement between Canada and the European Union will provide for the review threshold to be increased to C$1.5 billion. The increased threshold is to be made available to investors who are nationals of the European Union or entities controlled by nationals of the European Union, although the government of Canada has stated that its other free trade agreement partners will benefit as a result of most favoured nation commitments in those free trade agreements. The review threshold for acquisitions of control by SOEs and for acquisitions of control of cultural businesses will remain unchanged. It remains to be seen whether the government will apply the C$1.5 billion review threshold to investors from any WTO member country, regardless of whether or not Canada has a country specific free trade agreement with that country.
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 to Canadareview
A transaction that is reviewable 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 jeopardise 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.
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.
What information is required in a filing?
Notifications are not burdensome to complete. Among other things, they require information on 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. There is also a new practice that requires the investor to complete a questionnaire regarding whether it is controlled or influenced by any foreign state or SOE.
In general, information obtained by the minister, IRD or 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. As a consequence of recent amendments to the Act, the minister may make public disclosure in various additional circumstances pertaining to notices issued by the minister under the Act. However, it remains unclear how often and in what circumstances the minister will make such disclosure.
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 SOEs, the Canadian government issued guidelines in 2007 (and updated in 2012 in the context of the CNOOC–Nexen and Petronas–Progress Energy transactions) in relation to how such acquisitions are to be assessed under the ‘net benefit to Canada’ test (SOE Guidelines). The SOE Guidelines provide that in its assessment of net benefit to Canada in relation to an SOE acquisition, the government will evaluate, among other things:
- whether the SOE adheres to Canadian standards of corporate governance (eg, commitment to transparency and disclosure, independent members of the board, independent audit committees and equitable treatment of shareholders);
- the extent to which the SOE is owned, controlled or influenced by a foreign state; and
- whether the Canadian business will continue to operate on a commercial basis post-acquisition, including with regard to:
- where it will export;
- where it will process;
- the participation of Canadians in its operations in Canada and elsewhere;
- the impact of the investment on productivity and industrial efficiency in Canada;
- its support of ongoing innovation, research and development in Canada; and
- the level of capital expenditures that it will make to maintain the Canadian business in a globally competitive position.
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 for 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 IRD and traditionally last for three to five years, although some last for longer periods 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 of control of the Canadian business or of the non-Canadian 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. To date, national security issues have played, or appear to have played, a part in the rejection or abandonment of at least three transactions. Documents disclosed by Wikileaks suggest that the national security provisions were invoked by the industry minister in 2009 to prohibit the implementation of the acquisition of Forsys Metals by George Forrest International, pending further notice (ie, 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. As noted in the introduction, national security issues may have played a role in the Wind Mobile/Orascom Telecom transaction that was recently abandoned. Also, the Accelero/MTS transaction was blocked based on national security concerns.
What remedies are available to the minister?
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 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.
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 underkings, 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 two interveners, was ultimately settled on the basis of US Steel providing enhanced undertakings.
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. For example, 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 commissioner of competition may still become involved in reviewing 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 engaged in the following activities 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 roducts;
• 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 (eg, in relation to book publishing and distribution, as well as publishing, distribution and sale of periodicals, and the production, distribution, sale or exhibition of film or video products). In some instances, these policies prohibit the establishment or acquisition of such cultural businesses by foreign investors. Note however that the policies do not necessarily reflect the government’s current enforcement practices.
- 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, above.) If the value of the assets of the Canadian business exceed 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.