On May 25, 2012, the Minister of Industry announced significant changes to the Canadian federal government's review and enforcement process under the Investment Canada Act (the ICA). These changes include:
- Proposed amendments to the Investment Canada Regulations (the Regulations) that will change, over a four-year period, the financial threshold for review under the ICA from C$330-million in asset value to C$1-billion in enterprise value;
- Issuance of Mediation Guidelines that make formal mediation procedures available under the ICA as an alternative means of voluntarily resolving disputes when the Minister believes a non-Canadian investor has failed to comply with an undertaking given in connection with an investment; and
- Publication of an annual report by Industry Canada on the administration of the ICA.
This announcement follows the government's introduction last month of proposed amendments to the ICA that would, among other things, allow the responsible Minister to release reasons for provisional decisions made under the "net benefit" test for reviewable transactions. (See our Blakes Bulletin: Amendments to Investment Canada Act Designed to Boost Transparency and Compliance). Collectively, these changes reflect a shift towards greater transparency and more effective enforcement under the ICA.
New Financial Threshold for Review
The proposed amendments to the Regulations are necessary to bring into force amendments to the ICA that were passed in 2009, which would raise the financial threshold for review. (See our Blakes Bulletin: Significant Amendments to Canada's Competition Act and Investment Canada Act Now in Force). Once the Regulations are in force, the investment review threshold will immediately change from C$330-million in asset value to C$600-million in enterprise value for two years, then to C$800-million in enterprise value for two years, then to C$1-billion in enterprise value, and subsequently the threshold will be indexed to changes in Canada's GDP. The current asset-based financial thresholds will still apply for investments in cultural businesses and for investments by investors from non-WTO member countries. There is no minimum financial threshold for reviews of transactions that raise national security concerns.
The current C$330-million threshold is based on the value of the acquired assets according to the target's financial statements or book value. According to the government, the new basis for the financial threshold – enterprise value – will better reflect the value of a business as a going concern particularly with respect to service and knowledge-based industries. Depending on how enterprise value will be calculated under the new regulations, certain classes of transactions that would not have been reviewable under the old, numerically lower financial threshold may be reviewable under the new, numerically higher threshold. For example, IT and service firms (which tend to have lower asset values but higher enterprise values) may more easily trigger thresholds based on enterprise value than thresholds based on asset value. The methodology for calculating enterprise value will be set out in draft regulations, which will be pre-published in the Canada Gazette, Part I, for a 30-day public consultation period to provide stakeholders with an opportunity to provide comments before the new financial threshold is actually implemented. (A method for calculating enterprise value was first laid out in draft regulations pre-published in 2009 but did not come into force.) It is anticipated that the new financial threshold will be implemented in the near future after the publication of the draft regulations and public consultation period.
New Mediation Guidelines
The Minister has issued Mediation Guidelines which establish an alternative to litigation where the Minister believes that an investor has failed to comply with an undertaking in connection with an approved investment. The publication of the Mediation Guidelines follows the December 2011 settlement of the case, United States Steel Corporation v. Canada (Attorney General). (See our Blakes Bulletin: Foreign Investment in Canada: Lessons from the U.S. Steel Case.)
The existing steps that can be taken by the Minister where he believes that a non-Canadian investor has failed to comply with an undertaking in connection with an approved investment include: a) engage in discussions with the investor to resolve concerns related to implementation of the undertakings; b) accept new undertakings; or c) issue a demand letter requiring the investor to comply or justify non-compliance and, if the investor fails to comply, initiate court proceedings. The Mediation Guidelines provide a new option if both the Minister and the investor agree to exercise it: voluntary mediation. In particular, an investor and the Minister may enter into a mediation agreement, which would include provisions dealing with, for example, the appointment of a mediator, confidentiality, the duration and termination of the mediation process, and cost sharing. The introduction of this mediation process increases the available alternatives for resolution, thereby potentially cutting down on the time and costs associated with resolving such disputes. The Mediation Guidelines also preserve the Minister's ability to accept new undertakings proposed by the foreign investor outside of the formal mediation process.
Publication of Annual Report
On May 25, 2012, Industry Canada published its first annual report on the administration of the ICA since 1992-1993 and announced that it will be reporting annually in the future. (The report relates only to investments in non-cultural Canadian businesses, as responsibility for the review of foreign investment proposals in cultural businesses resides with the Minister of Canadian Heritage.) The report, which covers the 2009-2010 fiscal year (which is from April 1, 2009 to March 31, 2010), provides an overview of:
- The ICA and its administration, including the process followed by the Minister and departmental officials in the conduct of its reviews and the monitoring and enforcement of investments reviewed under the ICA;
- Significant policy developments, including, for example, the amendments to the ICA that were passed in 2009 (see our Blakes Bulletin: Significant Amendments to Canada's Competition Act and Investment Canada Act Now in Force);
- Investment activity subject to the ICA in the 2009-2010 period, as well as the preceding decade, including details regarding, for example, the number of applications for review received under the ICA during that period (23), the number of notifications received under the ICA during that period (414), country of origin information; and
- Enforcement proceedings in the 2009-2010 period, namely the case brought by the Minister against U.S. Steel.
Significantly, the report acknowledges the need to protect confidential information about specific investments. The report does not address individual transactions; rather, it presents information on a generic and aggregated basis, with the only exception being the public enforcement proceedings initiated against U.S. Steel. The report explains that where it is not possible to report on certain data for the 2009-2010 year alone without potentially compromising confidentiality, the report aggregates information over a five-year period. Similarly, to protect the identity of investors, the report's general practice is not to report on data involving fewer than four observations if doing so could compromise the protection of confidential investor information. Provided that the annual reports continue to closely protect confidential investor information, investors are likely to welcome the additional background information and transparency provided by these reports.
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