First published June 23, 2005
Earlier this week the Minister of Industry introduced Bill C-59 to amend the Investment Canada Act (the "Act"), Canada's foreign investment legislation. The Bill would allow the Canadian government to review any foreign investment to establish or acquire control of, or a partial interest in, a Canadian business where such investment might compromise Canada's national security. Bill C-59 received first reading on June 20, 2005.
The Investment Canada Act
Under the Act as it now stands, any acquisition by a "non-Canadian" of control of a business carried on in Canada (or the establishment of a Canadian business by a non-Canadian) is either notifiable or reviewable under the Act.
The Minister of Industry (or where the Canadian business is cultural, the Minister of Canadian Heritage) reviews investments which exceed certain thresholds. (The thresholds largely depend on the value of the assets of the Canadian business being acquired and status of the investor.) There are two review thresholds in this regard: the general review threshold and the significantly higher threshold for investors controlled by citizens of World Trade Organization member countries ("WTO investors"). Currently, a direct acquisition of a Canadian business by a WTO investor is subject to review only if the assets of the Canadian business exceed $250 million. Indirect acquisitions (e.g. where a Canadian business is acquired indirectly by virtue of the acquisition of a foreign corporation with a Canadian subsidiary) by or from a WTO investor are not reviewable. However, some types of Canadian businesses are specifically excluded from the higher WTO threshold, including cultural businesses and businesses providing certain financial or transportation services. The asset value review thresholds for these types of businesses are much lower, $5 million for direct investments and $50 million for indirect investments. (In some circumstances, investments in cultural businesses below these thresholds could still be reviewed.)
Reviewable investments are assessed by the Minister in order to determine if they are of "net benefit" to Canada. In that regard, the Act sets out criteria which the Minister must consider, including the effect of the investment on the level and nature of economic activity and employment in Canada, the degree and significance of participation by Canadians in the Canadian business, the effect of the investment on competition within an industry in Canada, the compatibility of the investment with national industrial, economic and cultural policies, and the contribution of the investment to Canada's ability to compete in world markets. In order to satisfy the net benefit to Canada test, the investor is usually required to give undertakings to, for example, maintain a certain level of employment in relation to the Canadian business, guarantee participation of Canadians as directors or in management or make capital expenditures in Canada.
In essence, Bill C-59 proposes an additional review procedure that the Minister of Industry may invoke in any case in which the Minister believes on reasonable grounds that an investment, "could be injurious to national security". The Bill gives the Minister special powers in relation to the review of investments involving national security issues, namely:
- the Minister would be entitled to review an investment on national security grounds regardless of the dollar value of the assets of the Canadian business involved;
- the Minister could review the acquisition of part of a Canadian business, even if control is not acquired (thus, an acquisition of a minority position in a Canadian business could trigger a review);
- corporate reorganizations, which are generally exempt from the Act, could be subject to a review on national security grounds;
- once the Minister commences a review, the parties would not be permitted to close until the Minister is satisfied that the transaction does not threaten national security;
- the Minister would have broad powers to investigate and obtain information from the investor and third parties; and
- upon concluding a review, the Minister would be entitled to block closing or require undertakings or divestitures where satisfied that the investment "would be injurious to national security".
Although the Act applies only to investments by "non-Canadians", regardless of an entity's actual ownership structure, the Minister may determine that the entity is not a "Canadian" if he determines that it is controlled in fact by non-Canadians.
According to a press release issued by the Minister's office, the proposed national security review power is intended to be consistent with legislation adopted by several of Canada's major trading partners, such as the United States, Germany and Japan, as well as other industrialized nations. At the same time, the Minister has stated that Bill C-59 is not intended to discourage foreign investment in Canada. Rather, it is an update of Canada's security system, "not a change in Canada's investment policy".
Last fall, the Act attracted attention arising from concerns about a proposal by Minmetals (a corporation largely controlled by the government of China) to acquire Noranda, a major Canadian resource company. In particular, concerns were raised about the limitations of the Act's current review criteria.
The Minister has indicated that he expects that reviews for national security purposes will be rare. That said, it remains to be seen how the proposed review power would be applied in practice, and it is not unprecedented for legislation originally intended to be temporary or infrequently applied to become entrenched in Canadian government policy.
Perhaps of most potential concern to foreign investors is the absence of any guidance on what matters are likely to raise possible issues of national security. We understand that the government's current intention is to limit the Bill's application to defense or military concerns, and not economic security, for example. Certainly, transactions involving Canada's defense industry or suppliers to that industry could be subjected to the new review process if the Bill is passed, but it remains to be seen how broadly the Minister will interpret the proposed review power. A recent illustration of how the concept of national security can be interpreted has arisen in the U.S. in connection with a bid by CNOOC Ltd. (a Chinese oil company) for U.S. oil company Unocal Corp. In that case, the press has reported that two U.S. Republican Members of Congress have called for a review of CNOOC's bid by the U.S. Committee on Foreign Investments because of its implications for U.S. national security.
Most transactions will not be affected by Bill C-59 if it is implemented. However, the Bill would create uncertainty with respect to potential delay and possible demands for undertakings to the government for any transaction that could relate to Canada's national security. Until the government clarifies its proposed policy, it may be prudent to confirm whether potential acquisition targets in Canada directly or indirectly conduct any business with the Department of National Defence or carry on any activities that could reasonably relate to Canada's national security. If so, and if Bill C-59 is enacted as proposed, in some cases it may be prudent to proactively approach the Minister for either assurance that he will not apply the national security review procedure to a particular transaction or, if he will, to obtain approval of a proposed transaction.
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.