On March 25, 2015, the Canadian government published two long-awaited regulations amending the Investment Canada Act. One is intended to reduce the number of transactions that are subject to pre-closing review and approval, but will increase the amount of detailed information required in routine filings for transactions that are not reviewable. The second will lengthen the period for transactions undergoing a national security review by providing the government additional time to complete such reviews.
Thresholds for review
Under the Investment Canada Act, the acquisition of control of a Canadian business by a non-Canadian is generally subject to pre-closing review and approval by the Minister of Industry where the book value of the Canadian business's assets exceeds C$369 million. At the conclusion of the review, the minister must be satisfied that the proposed transaction is likely to result in "net benefit" to Canada.
Lower thresholds exist for the acquisition of control of a business related to Canada's national identity or cultural heritage,1 or where the buyer is not from a member of the World Trade Organization. Transactions that are not subject to pre-closing review are subject to a notification requirement that entails completing a relatively straightforward two-page form within 30 days of the transaction's closing. All investments in a Canadian business by a non-Canadian, regardless of the interest obtained or value of the interest, are also subject to review on national security grounds.
Beginning April 24, 2015, the threshold for the net benefit review will generally be based on the enterprise value of the Canadian business. The threshold will be C$600 million for two years, followed by two years at C$800 million, and then C$1 billion for a year, after which it will be adjusted annually for inflation.
How enterprise value is determined will depend on the nature of the transaction:
|Publicly traded entity: acquisition of shares||Market capitalization plus total liabilities (excluding operating liabilities), minus cash and cash equivalents|
|Not publicly traded entity: acquisition of shares||Total acquisition value, plus total liabilities (excluding operating liabilities), minus cash and cash equivalents|
|Acquisition of assets||Total acquisition value, plus assumed liabilities, minus cash and cash equivalents transferred to buyer|
The enterprise value test will not apply to all transactions. The government is maintaining lower review thresholds for cultural industries, investors from non-WTO members, and state-owned enterprises. These investments will continue to be reviewable based on a book value of assets test using the current monetary thresholds.
There will also be no change in how indirect acquisitions of control are treated. When control of a Canadian business is acquired due to the acquisition of control of its foreign parent company, and where the buyer is from a WTO-member nation, the transaction will not be subject to review unless the acquired business carries on a cultural business. In such a case, if the threshold is exceeded, the review could occur post-closing.
New information requirements
Under the new regulations, the amount of information that must be supplied in both an application for review and in a post-closing notification will increase, and will doubtless require additional time and resources to compile. This will have a significant impact on notifications, as they have traditionally been straightforward to complete and required little more than basic information about the parties and the transaction. Among the new information that must be provided are:
- The legal names of the investor's directors as well as the investor's five highest-paid officers, together with a business and personal mailing address, telephone and fax number, email address, and date of birth for each person;
- An indication of whether a foreign state has a direct or indirect ownership interest in the investor, as well as information about any special rights or influence the foreign state may have over the business or the appointment of its officers;
- The sources of funding for the investment; and
- Descriptions of the products of the Canadian business, including the associated NAICS codes.
Certain of these requirements are, according to the government, designed to provide it with the information it considers necessary to properly undertake a national security review.
Parties should ensure they provide themselves additional time to prepare notifications given these new requirements.
Longer national security reviews
The second regulation published on March 25 relates to the national security provisions of the Investment Canada Act. Any transaction that involves the acquisition of an interest in a Canadian business by a non-Canadian can by reviewed and actions taken where the government believes the investment could be injurious to Canada's national security. There is no monetary threshold. The amendments to the regulation, which took effect March 13, 2015, provide the government with additional time during certain phases of its national security review. As such, in cases where a review is commenced, the review can be expected to take longer than under the previous rules.
1. Cultural businesses include the publication, sale or distribution of books, magazines, periodicals or newspapers, and the production, distribution, sale or exhibition of (i) film or video recordings or (ii) audio or music video recordings.
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