Threshold now $1 billion

As a result of recent amendments, most direct acquisitions of control of a Canadian company now only require prior approval of the Minister of Innovation, Science and Economic Development under the Investment Canada Act if the enterprise value of the Canadian business exceeds $1 billion.  That is expected to reduce the number of transactions that will require a foreign investor to persuade the Minister that the deal is likely to be net benefit to Canada before it can be completed.

As outlined in an earlier post, under amendments to the Investment Canada Act first introduced in 2009 and finally put into effect in 2015, the net benefit review threshold for 2017 was to be $800 million, with a subsequent increase to $1 billion in 2019. However, in a move intended to increase the amount of foreign investment in Canada, the Trudeau government recently passed amendments, effective June 22, 2017, that accelerated the increase in the threshold by two years.

The new $1 billion threshold applies to the enterprise value of the Canadian business being directly acquired by:

  • a WTO investor that is not a state-owned enterprise; and
  • a non-WTO investor that is not a state-owned enterprise if the Canadian business was controlled by a WTO investor immediately prior to the acquisition.

The review thresholds have not been increased for WTO investors that are state-owned enterprises. Such an acquisition would be reviewable where the book value of the assets of the Canadian exceed $379 million. This figure adjusts annually based on inflation. As well, the direct acquisition of control of a Canadian business by investors from non-WTO members (except as above) and the acquisition by any non-Canadian (regardless of origin or state-owned status) of a Canadian business that is considered a "cultural business" as defined in the Act are subject to review where the book value of the target's assets exceed $5 million.

Under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), Canada committed to significantly increase the threshold for review to $1.5 billion for investors from members of the European Union in most industry sectors. Given most favoured nation clauses in other bilateral free trade agreements Canada has signed, several of Canada's other trading partners, including the United States, Mexico and South Korea, are poised to benefit from this provision as well. It is now expected that CETA will take effect in late September, 2017, at which time the threshold will increase for certain investors to $1.5 billion.

National security review in the spotlight

In addition to "net benefit" reviews, it is important to remember that all investments by non-Canadians in a Canadian business are reviewed to determine whether they could be injurious to Canada's national security, regardless of the enterprise value or book value of the target and the size of the interest being acquired (i.e., a minority interest could be reviewed).

The nature and extent of the national security review has been in the news lately given the Trudeau government's clearance of Hytera Communications Corp's proposed acquisition of Norsat International Inc. When critics suggested that the transaction would raise national security concerns, the government defended its position by saying that the transaction was reviewed under the Investment Canada Act. While true, this statement doesn't reflect the fact that there are two levels of review under the Act. First, there is an initial screen undertaken to assess whether there are reasonable grounds to believe that a transaction could be injurious to Canada's national security. The government has 45 days to make that determination.

After that initial review, the Minister has three options:

  • If the Minister has no concerns, the parties are free to conclude their transaction if it has not yet been completed.
  • If the Minister has reasonable grounds to believe that the transaction could be injurious to national security, the Investor will be notified that a review may be ordered pursuant to section 25.2(1) of the Act. If the transaction has not yet been completed, it cannot be completed until a final resolution has been reached.
  • If the Minister considers that the investment could be injurious to national security, a review will be undertaken pursuant to section 25.3(1) of the Act. Again, if the transaction has not yet been completed, it cannot be completed until a final resolution has been reached.

The second option provides the Minister with an additional 45 days to decide whether to order a full review under section 25.3(1). It would appear, based on the public disclosures made by Norsat, that following some 90 days of review, the Minister advised that no section 25.3(1) review would be ordered. Leaving aside the question of whether a full review was necessary, it is important for potential merger parties to understand the nature of the national security review process and the powers of the government to block, unwind, or impose conditions on transactions that raise national security concerns, further details of which can be found here.

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