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
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
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
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
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