Canada: Industry Canada Issues Long-Awaited Revised Draft Investment Canada Regulations

On June 1, 2012, Industry Canada published long-awaited draft amendments to the Investment Canada Regulations. This is the Canadian government's second attempt to implement amendments to the Investment Canada Act passed in March 2009, which raised the review threshold for WTO investors and introduced a new metric threshold for valuing Canadian businesses based on "enterprise value". The amendments also introduce additional notification disclosure requirements that, if implemented, will significantly increase the burden on foreign investors for what has historically been an otherwise straight-forward, administrative post-closing filing.

The switch to "enterprise value" was ostensibly designed to better capture the value of a business as a going concern. However, as discussed in our previous post on May 28, devising a workable definition of "enterprise value" proved more difficult than anticipated when the legislation was amended in 2009. In response, the new draft Regulations establish a more rigorous methodology for calculating enterprise value, addressing some of the concerns raised by the Canadian Bar Association in response to the 2009 amendments. The recommendations that were adopted include:

  • valuing unlisted securities based on a good faith determination of their market value as opposed to the value of listed securities because the economic rights attached to unlisted securities may not be the same as those attached to listed securities;
  • using "total acquisition value" instead of book value of assets for acquisitions of private companies and asset acquisitions so investments are given equal treatment regardless of the way they are structured;
  • defining "trading period" with reference to the implementation of the investment to provide investors more certainty in assessing whether or not their investments are reviewable; and
  • specifying a source for currency conversions.

The new proposed Regulations further emphasize the different thresholds applicable to WTO and non-WTO investors. While the review threshold for acquisitions by WTO investors will gradually be increased to $1 billion CAD, the threshold for acquisitions by non-WTO investors and acquisitions of cultural businesses will continue to be based on the book value of assets, the threshold for which will be indexed annually, to account for inflation.

Moreover, as compared to book value, which is a known and objective quantity, "enterprise value" based on a good faith determination of value is inherently subjective and introduces considerable uncertainty into the review threshold analysis.

The government has also proposed changes to the notification disclosure requirements, which are significantly more burdensome than the existing framework, and as a result, seem inconsistent with the mandate of narrowing the scope of the ICA. They include the disclosure of:

  • the identity of the investor's directors, five highest-paid officers or any security holders with a 10% or greater stake in the investor's company;
  • date of birth of the individuals mentioned above;
  • the nature and extent of ownership of a foreign state;
  • the purchase agreement or a description of the terms and conditions of the transaction;
  • source of funding for the investment; and
  • the business activities carried on by the Canadian business, including the North American Industry Classification System (NAICS) codes of the products or services offered.

It is clear that the Canadian government, in drafting the notification disclosure requirements, borrowed from the disclosure obligations found in the Committee on Foreign Investments in the United States (CFIUS) review process. While the proposed Canadian notification requirements are by no means as comprehensive as those required under CFIUS, CFIUS applies only to investments that have potential implications for national security, and the United States does not otherwise have any notification requirements for foreign investments in general. The Canadian government has introduced more rigorous notification requirements, but has not put any limitation on the types of transactions that will be subject to this more onerous obligation.

Therefore, while these amendments seek to clarify "enterprise value", in the same breath, they also increase the potential administrative and compliance costs for the majority of transactions that are below the review thresholds, and do not raise any concerns for Canada. If implemented, these disclosure requirements could in fact have the perverse effect of being bad for business in Canada. 

There is no clear timeline as to when the regulations will come into force.

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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