Canada: Important Considerations for the Acquisition of Cultural Businesses

Last Updated: September 10 2010
Article by Shanon Grauer

Most Read Contributor in Canada, September 2018

The Investment Canada Act (ICA) regulates foreign investment in Canada and applies, among other things, to transactions involving the establishment or acquisition of control by foreign investors of cultural businesses in Canada. Cultural businesses are defined in Schedule IV of the Regulations to the ICA as Canadian businesses that carry on any of the following activities:

  1. publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form;
  2. production, distribution, sale or exhibition of film or video recordings;
  3. production, distribution, sale or exhibition of audio or video music recordings; and
  4. publication, distribution or sale of music in print or machine-readable form.

Canadian Heritage is responsible for regulation of investments in all of these areas.

Under the ICA, an additional cultural business relates to broadcasting and telecommunication. However, Industry Canada is responsible for review of those foreign investments as well as the Canadian Radio-television and Telecommunications Commission under the Broadcasting Act.

It is possible, even in a commercial acquisition, that there are cultural elements of a business that will need to be considered, such that a review may be a possibility. Canadian Heritage has a number of policies, some written and many unwritten, in respect of approaches to such acquisitions. It is wise to assess the nature of assets in a Canadian business that is to be acquired to ensure that either there are no assets comprising cultural businesses of the type noted above, or, if there are, that appropriate compliance with the ICA occurs. The ICA requires review if the asset value of the Canadian business is above $5,000,000 in the case of a direct acquisition, or $50,000,000 in the case of an indirect acquisition (namely, a foreign investor acquires a Canadian cultural business as a result of having acquired its parent company outside of Canada). However, the $50,000,000 threshold applies only where the Canadian business being acquired is less than 50 per cent of the global assets being acquired and is acquired by a foreign corporation. If it exceeds 50 per cent or if the Canadian business or is held by a non-corporate entity, then the $5,000,000 threshold still applies. There is a process under the ICA for formal notification to be filed with Canadian Heritage, who will make a decision as to whether a review application is subsequently required. If so, Canadian Heritage and the Minister, under the ICA, will be reviewing the investment for compliance with the Net Benefit Test set out in Section 20 of the ICA and the compatibility of the investment with cultural policies.

The following are very brief descriptions of the written policies:

  1. Book Publishing and Distribution. The current policy sets out several conditions for foreign investment in the Canadian book publishing, distribution and retail sectors, including that direct acquisition of an existing Canadian-controlled business by a non-Canadian will not be permitted. Also, the government may consider an exception if the business is in clear financial distress and if Canadians have had full and fair opportunity to purchase it.
  2. Film Distribution. Among other things, the film distribution policy prohibits takeovers of Canadian-owned and -controlled distribution businesses. Investments to establish new distribution businesses in Canada would only be allowed for importation and distribution activities related to proprietary products (i.e., the importer owns the worldwide rights or is a major investor).
  3. Periodical Publishing Sector Policy. This policy regulates publication, distribution and sale of periodicals, and includes an assessment that Net Benefit must contain undertakings by foreign investors that result in a majority of original content for the Canadian market in each issue of each periodical title occurring.

Recently, there have been three developments in respect of investment in the cultural sectors. One was the approval in the second quarter of 2010, by the Minister of Canadian Heritage, of an application by Amazon (book distributors) to establish a physical presence in Canada in the form of a fulfillment centre. The investment was found to be of Net Benefit to Canada as substantial undertakings were provided by Amazon. Apart from this investment, there has been no other establishment in the Canadian market of a major foreign-owned bookseller since the introduction of the Book Policy. While some argue that the approval of Amazon's business flies in the face of the Book Policy, others argue that it is consistent with the Guidelines of Net Benefit undertakings and recognizes the evolution of Amazon's presence. (In 2002, Amazon.ca was launched through a website, and the Director of Investments at Canadian Heritage determined then that the activities of Amazon.com and Amazon.ca were not subject to the notification provisions of the ICA because Amazon had neither a place of business nor employees in Canada.) Still others wonder if the Book Policy is, in fact, dead.

Secondly, also in the second quarter of 2010, an investment by several persons related to Carl Icahn to acquire Lions Gate Entertainment Corp. of Vancouver, BC was reviewed and approved by Canadian Heritage. The proposed takeover of Lions Gate stock was the subject of June 2010 hearings before the House of Commons Standing Committee on Canadian Heritage and the Heritage Committee, respectively. Lions Gate urged the Heritage Committee to reject the Icahn application as not being of net benefit to Canada. However, on June 9, 2010, the Minister of Heritage approved the transaction based on commitments given by Icahn in relation to Canadian cultural activities. On its face, and without access to those commitments, there appears to be a departure from the film distribution policy of Canadian Heritage. (To see our related article discussing the British Columbia Securities Commission decision regarding the cease trading of the Lions Gate shareholders' rights plan, click here.)

Close on the heels of those decisions, Canadian Heritage released a discussion paper on July 20, 2010 entitled "Investing in the Future of Canadian Books." The government has set out the history of cultural businesses with particular emphasis on the Book Policy and is asking for public consultation up to September 18, 2010 to obtain appropriate feedback on possible proposed changes to the Book Policy. Among the options set out by Canadian Heritage are the following:

  1. maintain the Book Policy in its current form;
  2. remove restrictions in one, two or all three book sectors (i.e., publishing, distribution and retail);
  3. maintain restrictions concerning acquisitions of book industry businesses, but remove restrictions concerning new entry;
  4. maintain restrictions concerning new entry, but remove restrictions concerning acquisitions of book sector businesses;
  5. revise the Policy for one, two, or all three book sectors to allow foreign ownership and control of book businesses subject to specific circumstances and Net Benefit undertakings;
  6. amend the Policy to clarify its lack of application to specific types of businesses (e.g., ancillary book retail businesses and non-Canadian based online retailers); and
  7. modernize the proposed undertakings while maintaining current restrictions linked to foreign control.

These are very interesting times in the cultural sector in Canada, as revision of the Book Policy might result in a review and relaxation of other restrictions (e.g., in the Film Policy); permitting the acquisition of a Canadian film production and distribution business by a non-Canadian would signal possible movement in the Film Policy as well. In 2006, the Government of Canada released a paper entitled "Advantage Canada: Building a Stronger Economy for Canadians," in which the Government stated it would work to increase foreign investment in Canada by reviewing its foreign-investment framework, including the Investment Canada Act. That was followed by the creation of the Competition Policy Review Panel in 2007, which reviewed the Investment Canada Act and focused on the Net Benefit Test. However, during the panel's consultation and research process, the importance of protecting and nurturing Canadian culture became clear, and the panel concluded that new technology and increased international exposure has created new opportunities for Canadian cultural businesses in global markets and that Canada's cultural framework will need to be updated to reflect this.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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