Canada: National Security Review of Foreign Investments to be Introduced in Canada

The Minister of Industry has tabled amendments to the Investment Canada Act (the "ICA") to permit the review of foreign investments that could compromise national security.

The ICA applies whenever a non-Canadian establishes a new Canadian business or seeks to acquire control of an existing one. However, review and approval is currently only required where the asset value of an existing Canadian business exceeds high thresholds or where the investment is in one of four sensitive sectors: culture, financial services, transportation and uranium production. Where a review is required, investments must meet a "net benefit to Canada" test.

Under the proposals in Bill C-59, the Government will be able to review and set conditions on or potentially block virtually any investment that involves "national security". In announcing the proposed amendments, the Government described them as being "similar in purpose to legislation already adopted by Canada’s major trading partners, such as the United States, Germany and Japan, as well as other industrialized nations." The new powers will exist alongside the current provisions of the ICA, meaning parallel reviews on national security and "net benefit" grounds will be possible – under different procedures, timetables and substantive standards.

The Government has indicated that it intends to use its new national security powers sparingly, but the Bill C- 59 proposals would give it broad discretion:

• "National security" is not defined. (Although the potentially wide jurisdiction to regulate investments on that basis will likely be limited by international trade commitments, national security carve-outs in agreements such as the GATT are open to potentially broad interpretation.)

• National security reviews could be conducted regardless of whether the usual asset value or sensitive sector thresholds are met.

• For these purposes, the definition of what constitutes a Canadian business would be expanded and the level at which control of a business is acquired would be lowered.

The announced changes follow media reports of the potential acquisition of major Canadian mining and energy companies (Noranda and Husky) by state-owned enterprises from China. While neither transaction proceeded, these events focused attention on the scope of the ICA. Concerns were expressed that:

• A foreign state could exert political pressure on the Canadian Government through its ownership of important Canadian businesses.

• The Government should be able to block the acquisition of Canadian businesses by foreign governments with poor human rights records.

• Foreign state-owned corporations not fully committed to free market principles might tolerate the inefficient allocation of acquired resources to achieve other non-market objectives of their governments.

• The possible existence of foreign spies in Canada could lead to industrial espionage.

These issues have not been addressed in Bill C-59 for a variety of good reasons, including the ability of the current ICA and other existing domestic legislation to adequately deal with them. However, it is possible that the broad national security powers could be stretched beyond traditional military and related concerns to cover some of these sensitivities in particular cases.

Where the Canadian Government believes that the acquisition or establishment of a Canadian business could give rise to national security concerns, a notice will be sent to the investor requiring that the investment not be implemented pending completion of a first-phase assessment of whether a full review will be conducted. (Investors are not required to submit notifications or applications for national security review although the regular forms will still have to be submitted in connection with most foreign investments as part of the existing ICA process.) If there is a review, the investor will be entitled to make representations as to why the investment should be permitted. The Government would also be able to compel the production of information needed to complete a national security review. The final outcome of a review will be a Cabinet (Governor-in-Council) decision.

Bill C-59 is expected to be considered by the House of Commons’ Industry Committee in the autumn. Some Committee members had previously expressed an interest in conducting a general review of the legislation. It remains to be seen whether the Committee will seek to consider some of the broader concerns considered above or whether its review will be limited to technical aspects of the specific Bill C-59 proposals. In any event, its review will very likely involve detailed consideration of the potentially sweeping scope of the new rules, including the lack of definition of national security and the discretion that would be available to block foreign investments on this basis. 

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