The following are some frequently asked questions (FAQs) concerning the application, administration and enforcement of the Investment Canada Act. These FAQs and responses are of a general nature, and cannot be regarded as legal advice.
The Investment Canada Act (ICA) applies when a non-Canadian (i.e., an individual that is neither a Canadian citizen nor a permanent resident, or an entity that is not Canadian-controlled) establishes a new business in Canada, proposes to acquire control of a Canadian business directly or indirectly, or acquires an interest in a Canadian business and the acquisition could be injurious to national security.
Note that "Canadian business" is a defined term in the ICA. The Canadian business being acquired need not be Canadian-controlled in order for the ICA to apply to an acquisition of control of that business.
Investments where the book value of the assets of the Canadian business exceeds prescribed monetary thresholds, or those raising national security concerns are subject to government approval. All other acquisitions of control and establishments of new Canadian businesses are subject to a notification process only.
(a) Asset Threshold
In 2012, generally, a direct investment by a non-Canadian investor controlled by nationals of a World Trade Organization (WTO) member to acquire control of a Canadian business, or a sale of such a business when it is controlled by a WTO investor, is only reviewable on a pre-closing basis by the Minister of Industry if the book value of the assets of the Canadian business as at the end of its most recent fiscal year exceeds Cdn $330 million.
The case of a direct acquisition must be distinguished from that of an indirect acquisition, where the WTO investor acquires shares of a non-Canadian corporation, which in turns owns shares in a Canadian corporation representing the Canadian business. An indirect investment by a WTO investor, or a sale by a WTO investor, is not reviewable either on a pre-closing or a post-closing basis, except if the Canadian business is a "cultural business" (see question #6 below). However, direct and indirect transactions where there is no WTO-controlled investor or seller are reviewable if the book value of the assets of the Canadian business exceeds Cdn $5 million and Cdn $50 million, respectively. In an indirect acquisition, if the value of the worldwide assets of the Canadian business exceeds 50% of the value of all assets acquired, then the threshold is Cdn $5 million. These lower thresholds also apply to WTO investors when the Canadian business is a cultural business (see question #6 below).
(b) Acquisition of Control Threshold
An investment by a non-Canadian must involve an acquisition of control in order for the ICA to apply (except in cases involving national security; see question #15 below). An acquisition of less than one-third of the voting shares of a corporation, or less than a majority of the voting interests of a non-corporate entity, is deemed not to be an acquisition of control.
In 2012, the Government issued draft regulations amending those it had released for public comment in 2009. The draft regulations propose to change the review threshold from $330 million (based on book value of assets) to $600 million (based on enterprise value), a figure that will rise progressively to $1 billion over a four-year period. Under the higher threshold, some investments that would now be reviewable will no longer be subject to review. However, there will also be some investments that would not be subject to review under the current book value based threshold that will be captured by the new enterprise value threshold, as enterprise value is typically higher than book value.
The draft regulations propose that enterprise value for publicly-traded companies will be based on market capitalization (plus liabilities minus cash). Enterprise value for private companies and asset acquisitions will be based on purchase price (plus liabilities minus cash). The lower thresholds of Cdn $5 million and Cdn $50 million will continue to apply to acquisitions of cultural businesses and non-WTO investments (as described above in question #2(a) and below in question #6), and the calculation for such transactions will continue to be based on book value of assets.
It is unknown at this time when final regulations will be issued and whether or how the valuation methods proposed in the draft regulations will be adjusted. We understand that the government is aware of the need for a transitional mechanism in the final regulations to deal with pending transactions.
The ICA exempts several types of transactions, for example, an acquisition of control of a branch business, an acquisition of control in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the ICA, and a corporate reorganization following which the ultimate control of the Canadian business remains unchanged.
In addition, as mentioned above, an indirect transaction outside of the cultural area involving a WTO buyer or seller is not reviewable either on a pre-closing or a post-closing basis. Such a transaction must still be reported to the Investment Review Division (IRD) of Industry Canada, but it is not reviewed.
If an investment by a non-Canadian does not meet the review thresholds set out above, the investor must file a notification with the IRD. A notification must be filed at any time prior to the implementation of the investment or within 30 days after its implementation.
Investments to establish a "new Canadian business" also must be notified.
Review thresholds for investments involving a cultural business are $5 million for direct investments and $50 million for indirect investments. For an indirect acquisition of a cultural business, where the value of the worldwide assets of the Canadian business exceeds 50% of the value of all assets acquired, the review threshold is $5 million. Unlike non-cultural businesses, such indirect investments in the cultural sector are reviewable on a post-closing basis. If the assets of the cultural business fall below the thresholds for review, the Governor in Council (i.e., the federal Cabinet) may still order a review on a discretionary basis. Cultural investments are reviewed by the Department of Canadian Heritage.
"Cultural business" is defined in the ICA. A cultural business is a business that carries on any of the following:
(a) the publication, distribution or sale of books, magazines, periodicals or newspapers in print or in machine readable form (but excludes businesses involved only in the printing or typesetting of these items);
(b) the production, distribution, sale or exhibition of film or video recordings;
(c) the production, distribution, sale or exhibition of audio or video music recordings;
(d) the publication, distribution or sale of music which is in print or machine readable form; or
(e) any business activities involving radio communication intended for direct reception by the general public; any radio, television and cable television broadcasting undertakings; and any satellite programming and broadcast network services.
Notably, there are special policies which prevent or restrict investments in the film distribution, and book publishing and distribution sectors. However, the government appears to be gradually adopting a more flexible and pragmatic approach to enforcement of these policies. For example, in 2010, Amazon.com was permitted to establish a Canadian fulfillment centre and Apple Canada was granted approval to establish iBookstore Canada, in return for certain commitments to strengthen the Canadian book sector. Most recently, Target received approval to sell cultural products, including books, when it launches its stores in Canada.
Until 2009, the lower review thresholds which still apply to acquisitions of control of cultural businesses also applied to acquisitions of control of Canadian businesses involved in financial services, transportation services, and uranium production. These industries are no longer subject to these lower thresholds. In addition to specific sectoral review legislation, however, acquisitions in these sectors may be subject to national security review in the same way as all other sectors of the economy (see question #15 below).
With very limited exceptions, the direct acquisition of a Canadian business cannot be implemented until the Minister of Industry (or Minister of Canadian Heritage for cultural transactions) is satisfied that the investment is likely to be of net benefit to Canada. In a global transaction, it may be necessary on closing to "carve out" the Canadian portion until the transaction is approved by the Minister.
As mentioned above (see question #2), indirect transactions involving WTO investors or sellers are not reviewable, and even indirect cultural transactions may be implemented pending approval on a post-closing basis by the Minister of Canadian Heritage (see question #6).
Investors must file an application for review with the IRD prior to implementation of the investment, and allow sufficient time for review by the IRD and the Minister's office before closing. The Minister has up to 45 calendar days (which he/she may extend by an additional period of 30 calendar days) to determine whether the investment should be approved. The investment is deemed approved if the investor does not receive notice of approval or notice of extension by the end of the applicable review period. The review period may be further extended past 75 days for an additional period which is determined by agreement between the IRD and the investor. Although it is possible to obtain approval within the initial 45 day review period, it is prudent to allow 75 days (and potentially longer) for approval.
Net benefit is not defined in the ICA. However, the Minister will consider the following factors (which are not necessarily weighted equally) to determine whether an investment is likely to be of "net benefit":
- effect of the investment on the level and nature of economic activity in Canada;
- degree and significance of participation by Canadians in the Canadian business;
- effect of the investment on productivity, industrial efficiency, technological development, product innovation, and product variety in Canada;
- effect of the investment on competition with any industry in Canada;
- compatibility of the investment with national industrial, economic, and cultural policies; and
- contribution of the investment to Canada's ability to compete in world markets.
In practice, this means that the investor will have to set out details in its application for review on its plans for three to five years post-closing for Canadian employment, capital expenditures in Canada, Canadian management participation and responsibilities for the business, R&D activity in Canada, production in Canada and exports, and other relevant information. In addition, the investor typically must submit written binding undertakings to the Minister confirming its commitment to perform the key elements of these plans.
Between 1985 and 2012, the Minister reviewed and approved 1,664 investments. During this period, only two major proposals were disallowed by the Minister of Industry (i.e., Macdonald Dettwiler and Associates Ltd./Alliant Techsystems Inc. in May of 2008 and BHP Billiton plc's proposed hostile takeover of Potash Corporation of Saskatchewan in November 2010). Of the 98 cultural investments identified up to June 2008, only three proposals were disallowed. Note that these statistics do not reflect proposed investments which were withdrawn before the Minister reached a decision.
After receiving approval and implementing the investment, the investor must comply with its undertakings. The investor is also required to submit a "progress report" to the IRD approximately 18 months after closing, so that the IRD may assess whether the investor is complying with its undertakings. The Minister is empowered to demand that an investor comply with its undertakings. If an investor fails to comply with a demand issued by the Minister, the Minister may apply to a superior court for an order directing the investor to comply with the undertakings, requiring it to divest itself of the acquired assets or imposing a penalty not exceeding $10,000 for each day of contravention. In 2009, for the first time in the history of the ICA, the Minister brought court proceedings in relation to alleged shortcomings in an investor's undertakings (U.S. Steel case). In 2011, the Minister reached an out-of-court settlement with U.S. Steel, in return for U.S. Steel's commitment to significantly enhanced undertakings which will generate continued economic activity and provide economic benefit to communities in Canada.
Typically, however, an investor will reach an agreed solution with the Minister concerning failure to fulfill undertakings.
Investments by SOEs, including sovereign wealth funds, are analysed under the usual "net benefit" factors in the ICA, as well as special guidelines which refer to the nature and extent of control by the foreign government, the SOE's corporate governance, operating and reporting practices, and whether the acquired Canadian business will retain the ability to operate on a commercial basis. The Minister will consider requesting undertakings such as appointing independent Canadian directors, employing Canadians in senior management, incorporating the business in Canada and listing shares of the SOE or the Canadian business on a Canadian stock exchange.
To date, based on a limited number of cases, acquisitions of control by SOEs have been approved (for example, in 2011, Harvest Operations Corp.'s acquisition of producing and undeveloped assets from Hunt Oil Company of Canada, Sinopec's acquisition of Daylight Energy and CNOOC Limited's acquisition of OPTI Canada Inc.; in 2010, Sinopec's acquisition of ConocoPhilips' stake in Syncrude; and in 2009, International Petroleum Investment Company's acquisition of NOVA Chemicals Corp., Korea National Oil Corporation's acquisition of Harvest Energy Trust, and PetroChina International Investment Company's acquisition of a 60% interest in two oil sands projects from Athabasca Oil Sands Corp., were approved). Most recently, China National Offshore Oil Corporation has entered into an agreement to acquire Nexen Inc. The transaction represents the largest Chinese investment in Canada to date.
Acquisitions by SOEs which do not confer control are not reviewed under the SOE guidelines, but may be subject to review under the national security jurisdiction (see question #15 below ).
An investment is subject to national security review if the Minister considers that the investment could be injurious to national security and if the Governor in Council (i.e., the federal Cabinet, on the Minister's recommendation) makes an order for review. Notably, even investments which do not involve an acquisition of control of a Canadian business may be subject to national security review (see question #16 below).
National security is not defined in the ICA or regulations. The ICA does not indicate whether investments involving certain industries are likely to raise concerns in relation to national security. Nor does the ICA specify the origin or types of investors which are more likely to be subject to the national security provisions.
For an investment involving an acquisition of control, an investor may obtain comfort on national security issues by submitting a notification at any time prior to, or within 30 days after implementing an investment, or by submitting an application for review at any time prior to implementing an investment.
Note that there is no prescribed clearance process for transactions which do not involve an acquisition of control, even though such transactions may be subject to review under the ICA on the basis of national security.
The Minister has 45 days after the certified date (if a notification or application for review is filed) or after the date of implementation of the investment to (i) issue an order for national security review or (ii) give notice that an order for national security review may possibly be issued, in which case, the Minister has an additional 25 days to determine whether an order for national security review should be issued. Once an order for national security review has been made, the Minister has 45 days (unless a further period is agreed to between the Minister and the non-Canadian investor) to conduct the national security review. At the end of the 45 day review period, the Minister must (i) refer the investment to the Governor in Council together with a report of the Minister's findings and recommendations or (ii) send the non-Canadian investor notice indicating that no further action will be taken in respect of the investment if the Minister is satisfied that the investment would not be injurious to national security. From the date the Minister refers the investment to the Governor in Council, the Governor in Council has 15 days to take action with respect to the investment. In total, it could take 130 days for a national security review.
The Governor in Council may, by order, take any measures it considers advisable to protect national security. Measures include: (i) directing the investor not to implement the investment; (ii) authorizing the investment on the condition that the investor provide undertakings or implement the investment on specified conditions; or (iii) requiring divestiture of the investment (if previously completed).
The Macdonald Dettwiler case mentioned above was decided under the general net benefit to Canada jurisdiction of the ICA before the national security jurisdiction was enacted in early 2009. It clearly shows that, where appropriate, the government will be prepared to take action to disallow an investment raising national security issues.
It also appears that, in mid-2009, the government took steps to prohibit George Forrest International Afrique from acquiring Forsys Metals Corp. (a Canadian publicly-traded company with uranium interests in Africa).
Research in Motion Ltd. actively encouraged the government to block Ericsson's 2009 acquisition of Nortel's wireless assets, even though the asset value involved fell below the threshold for direct acquisitions. The government declined to intervene on national security grounds, and cited the fact that Nortel had licensed certain technologies to Ericsson on a non-exclusive basis.
The ICA review process assessing net benefit to Canada is undertaken separately from the review of a proposed transaction on competition law grounds under the Competition Act ("CA"). The CA review is undertaken by the Competition Bureau. However, the Minister may choose not to approve a proposed transaction until the Competition Bureau has cleared it under the CA: one of the net benefit factors listed in the ICA is the effect of the investment on competition within any industry in Canada.
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.