On March 25, 2015, the Canadian government announced that it
would implement long-awaited changes to Canada's foreign
investment review regime under the Investment Canada Act (ICA).
These changes will significantly alter the threshold used in most
transactions to determine whether foreign investments will be
subject to review under the ICA. The changes will also implement
more detailed information requirements for notifications and
applications for review. In addition, the government announced that
it has increased the maximum possible review period under the
ICA's national security review provisions.
New Review Threshold
As described in previous communications in
July 2009 and
May 2012, the federal government previously announced its plans
to amend the general ICA "net benefit" review threshold
for most acquisitions of Canadian businesses by non-Canadians from
a threshold based on the book value of the Canadian business's
assets to one based on the enterprise value of the Canadian
business. These changes will be made effective as of April 24,
Specifically, under the current thresholds, direct acquisitions
of control of Canadian businesses (either share acquisitions or
asset acquisitions) by non-Canadians are generally subject to net
benefit review if the book value of the Canadian business's
assets exceeds C$369 million. (Lower thresholds currently apply to
acquisitions of Canadian "cultural businesses".)
Following implementation of the ICA amendments, a net benefit
review will generally be required only if the "enterprise
value" of the business to be acquired exceeds C$600 million,
rising progressively to C$1 billion over the next four years.
The current C$369-million book value threshold will continue to
apply to acquisitions by state-owned enterprises, and the current
lower book value threshold will continue to apply to acquisitions
of cultural businesses. Most indirect acquisitions of Canadian
businesses (i.e., acquisitions of foreign companies with Canadian
subsidiaries) will still not be subject to net benefit review.
The amendments include a number of provisions relating to the
calculation of enterprise value. In the case of an acquisition of
control of a Canadian business that is publicly traded, the
enterprise value of the Canadian business will be the market
capitalization of the entity plus its liabilities (excluding
operating liabilities) and minus its cash and cash equivalents.
Market capitalization will be determined on the basis of the
average daily closing price of each class of security outstanding
multiplied by the average number of that security outstanding,
calculated over a prescribed time period.
In the case of an acquisition of control of a Canadian business
that is not publicly traded or in the case of an asset acquisition,
the enterprise value of the Canadian business will be the
acquisition value plus liabilities assumed (excluding operating
liabilities) and minus cash and cash equivalents.
The new enterprise value threshold reflects the Canadian
government's stated objective of focusing the ICA's net
benefit review process on only the most significant transactions
involving foreign investments in Canada. The new thresholds are
likely to significantly reduce the number of transactions subject
to net benefit review by Industry Canada. However, some
transactions subject to review under the new enterprise value
threshold may not have met the book value review threshold.
The ICA amendments will implement significant additions to the
information that must be provided by foreign investors as part of
their applications for review (or, if no net benefit review is
required, their post-closing notifications). Specifically, starting
on April 24, 2015, foreign investors will be required to disclose
the names, addresses, contact information and dates of birth of
their directors, officers and significant (>10%) shareholders as
part of their ICA filings. In addition, foreign investors will also
need to provide information concerning any ownership interests held
by foreign states, directly or indirectly, in the investor. There
is no express materiality threshold for reporting on state
National Security Review Timelines
In addition to the general net benefit review regime under the
ICA, the Act contains provisions allowing the government to review
a wide range of investments in Canada by a non-Canadian on national
security grounds. Previously, if a national security review was
implemented, the government had up to 130 days to complete its
review (with further extensions possible only with the consent of
the investor). As a result of amendments that will come into force
immediately, the government now has up to 200 days to complete its
review (subject to further possible extensions on consent).
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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