Canada: Foreign Investment Review
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The current majority Liberal government headed by prime minister Justin Trudeau, which was elected in 2015, appears to view foreign investment more favourably than the predecessor Conservative government of former prime minister Stephen Harper. In furtherance of this openness to foreign investment, a new federal body, the Invest in Canada Hub, is to be created to coordinate Canada’s investment promotion activities, and the number of trade commissioners will be increased in markets that are considered strategic to Canada. Additionally, the government’s Fall Economic Statement, which was tabled on 1 November 2016, announced that the monetary threshold above which direct investments in Canadian businesses are required to be pre-approved under the Investment Canada Act (the Act) is expected to be raised to C$1 billion in 2017, two years earlier than the planned date in 2019. Also, in December 2016, the government published informational guidelines respecting the administration of the national security review provisions of the Act.
While Canada’s Conservative Party was in power, the foreign investment approval process under the Act periodically presented considerable challenges to foreign investors. In 2008, the first formal rejection of a transaction (outside the cultural industries arena) under the Act occurred with respect 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. Further, an effort by the London Stock Exchange in 2011 to merge with TMX, operator of the Toronto Stock Exchange, attracted the Industry Minister’s attention (and a difficult clearance process was anticipated); however, the ultimate failure of that transaction was not attributable to the approval regime. The acquisitions in 2012 by CNOOC (China) of Nexen and by Petronas (Malaysia) 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. More recently in 2013, Orascom Telecom withdrew its offer to acquire Wind Mobile, a Canadian cellular business – the reasons for the withdrawal were not publicised, but national security concerns may have been raised during the review process under the Act. Further, the proposed acquisition of Allstream, a division of MTS Telecom Services, by Accelero Capital Holdings Inc was blocked based on national security concerns. Most recently, Lenovo reportedly did not proceed with respect to a possible bid for BlackBerry, reportedly because the Canadian government had expressed similar security concerns with its proposed ownership of the communications company.
While the vast majority of investments by non-Canadians in Canadian businesses are not reviewable under the Act’s ‘net benefit to Canada’ test, and while almost all of those larger investments that require pre-approval secure the requisite approval in a reasonably timely fashion, albeit subject to various negotiated undertakings in many cases, some transactions have encountered uncertainty under the Act, such as those involving certain types of cultural businesses, Canadian ‘champions’ as targets, SOE purchasers and national security concerns. Despite the fact that the new Liberal government appears more favourably disposed to foreign investors, prospective investors are still well advised to take the approval process seriously and, in that regard, to engage capable legal and other counsel early in the deal process.
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 Innovation, Science and Economic Development (formerly Industry Canada). 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 Minister of Innovation, Science and Economic Development, in the case of transactions not involving cultural businesses, and by the Minister of Canadian Heritage (the cultural minister), in the case of transactions involving cultural businesses. Both ministers may be involved in the review process if the transaction involves both cultural and non-cultural businesses. The federal governor in council (GIC) (essentially, 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, pre-merger 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 if the GIC determines that the review of a specific investment would be in the public interest. The industry 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 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 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 half 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 non-Canadian acquirer through the ownership of voting shares.
In the case of 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, the threshold for the review of a direct acquisition of control of a Canadian business (other than a Canadian business that is engaged in a cultural business) by a ‘WTO investor’4 (other than a WTO investor that is an SOE) will be C$800 million of transaction value (although expected to be increased to C$1 billion in 2017 and thereafter further increased annually based on changes to Canada’s GDP). Transaction value is determined using an ‘enterprise value’ test that is meant to reflect the actual value of the Canadian business as a going concern.5 An indirect acquisition (eg, an acquisition of a foreign corporation that controls a Canadian corporation carrying on the Canadian business) is not subject to the approval requirement (unless the Canadian business carries out a cultural business6 and the threshold for indirect transactions, discussed below, is met).
Where the Canadian business does not involve a cultural business, and the acquirer is an SOE and a WTO investor (or the Canadian business is controlled by a WTO investor):
- a direct acquisition of a Canadian business requires approval 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$379 million (2017 threshold, adjusted annually based on changes to Canada’s GDP); and
- an indirect acquisition is not subject to the approval requirement.
Where the Canadian business involves a cultural business or the acquirer is not a WTO investor (and the Canadian business is not at such time controlled by a WTO investor):
- a direct acquisition of the Canadian business requires approval if the aggregate book value of the assets of the target 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$5 million; and
- an indirect acquisition is subject to the approval requirement 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$50 million (provided that, if the aggregate book value of the assets exceeds C$5 million and represents 50 per cent or more of the book value of all assets of all entities being acquired in connection with the transaction, the transaction will require approval even if the asset value is less than C$50 million).
The Comprehensive Economic Trade Agreement between Canada and the European Union provides for a C$1.5 billion enterprise value review threshold that, when in force, will be available to investors who are nationals of the European Union or entities controlled by nationals of the European Union. This higher review threshold will also apply to all countries with which Canada has a free trade agreement, including Mexico and the United States. However, the review threshold for acquisitions of control by SOEs and for acquisitions of control of cultural businesses will remain unchanged.
National security review
As noted above, a foreign investment, whether implemented or proposed by a non-Canadian, may be reviewed where the industry 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. Applications for review in respect of indirect reviewable transactions may also be filed 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 possible issues are resolved prior to closing.
Net benefit to Canada review
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 or she 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’. Also, an application for review in respect of an indirect reviewable transaction may be filed up to 30 days following closing.
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 as long a period as the investor and the minister may agree. If the investor does not receive notice of the minister’s decision within this further 30-day or longer period, the investment will be deemed to have been approved.
If the minister, within the initial 45-day period or the further period, informs the investor that he or she 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 or her 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 200 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?
Among other things, notifications 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.
In general, information obtained by the minister, the 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 that 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 (the 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 expenditure that it will take 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, although the December 2016 Guidelines on the National Security Review of Investment provide useful guidance.
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 or she 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 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 are administered largely in secret, there is limited information in terms of national security reviews and the 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 a number of 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 abandoned. Also, the Accelero/MTS transaction was blocked based on national security concerns. Additionally, on 9 July 2015, the GIC issued an order under the national security provisions of the Act requiring, among other things, that O-Net Communications Holdings Limited, a company listed on the Hong Kong Stock Exchange, divest itself of its investment in ITF Technologies Inc, a company based in Montreal, Quebec, that provides specialty fibre components and modules. O-Net had acquired ITF in a public action arising from the bankruptcy of ITF’s owner. In response, O-Net has filed an application for judicial review in Federal Court challenging that order. Other transactions may have been abandoned at the planning stage, given concerns about the possible impact of a national security review.
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 or her 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 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 to enforce undertakings taken to date, 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 abandoned 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 industry 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’ for these purposes:
• 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 (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.
- 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.
- The method to be used for determining the ‘enterprise value’ of a transaction varies depending on whether the target entity is private or publicly listed and whether the transaction involves the acquisition of the assets of or the voting interests in an entity.
- For these purposes, ‘cultural business’ is a Canadian business that carries on any of the activities specified in footnote 3 or radio communication in which the transmissions are intended for direct reception by the public, any radio, television and cable television broadcasting undertakings, or any satellite programming and broadcast network services.