Most non-Canadian companies thinking about acquisitions in Canada are aware that their transactions may be subject to the notification and substantive review provisions of the Competition Act. However, it often comes as a rude surprise to foreign acquirors that they also must contend with the Investment Canada Act ("ICA"), Canada's foreign investment review legislation. Indeed, some foreign acquirors learn to their dismay that it is ICA approval, rather than clearance under the Competition Act, which can prove to be more time-consuming to obtain.
The costs of ICA approval can be significant as well. In a recent acquisition, for example, the foreign investor was obliged to provide an extensive series of undertakings in order to secure ICA approval, including: agreeing to pursue over $1.4 billion in major infrastructure projects; committing to various additional capital expenditures; maintaining the Canadian business's corporate offices in Canada along with significant resident Canadian management; adding two Canadian citizens to its board of director's; conducting a comprehensive feasibility analysis of potential projects in Canada; and increasing existing levels of support to local communities.
Given the potential impact of the ICA, set out below are some key aspects of this legislation that non-Canadians should be familiar with when contemplating a potential acquisition in Canada.
- The ICA applies to any acquisition by a "non-Canadian" of "control" of a "Canadian business". (The ICA also applies if a non-Canadian establishes a new business in Canada,) Depending upon whether the statutory thresholds are met, an acquisition by a non-Canadian may be subject to review by Canada's minister of industry, or by Canada's minister of Canadian heritage if the transaction involves the acquisition of a "cultural" business. Even if a transaction is not subject to review, notification must be provided to the responsible minister that the acquisition has taken place.
- The thresholds for review under the ICA are largely based on the value of the assets of the Canadian business being acquired. These thresholds will vary depending on whether: (i) the acquiror or the vendor qualifies as a "WTO Investor" under the ICA (i.e., is controlled by citizens of WTO member countries); (ii) the acquisition of control of the Canadian business is "direct" or "indirect" (the latter involving the acquisition of a foreign corporation with a Canadian subsidiary); and (iii) the Canadian business is engaged in certain prescribed industries (cultural business, transportation services, financial services or uranium mining).
- Currently, the direct acquisition of a Canadian business by or from a WTO investor is subject to review only if the assets of the Canadian business exceed $265 million (Cdn.) in value. Indirect acquisitions involving WTO investors are not reviewable. The thresholds are much lower if non-WTO investors or the prescribed industries referred to above are involved: $5 million for direct investments and $50 million for indirect investments. (In some circumstances, investments in cultural businesses can be reviewable even if they fall below these thresholds.)
- Reviewable investments are assessed by the responsible minister to determine if they are of "net benefit" to Canada. The ICA sets out a series of criteria which the minister may consider in making this determination, 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 compatibility of the investment with national industrial, economic and cultural policies; the contribution of the investment to Canada's ability to compete in world markets; and the effect of the investment on competition.
- In the case of direct acquisitions, investors are obliged to submit their applications for review and obtain the minister's approval prior to closing the transaction. The review process for indirect acquisitions, however, generally takes place following closing (investors are entitled to file prior to closing should they choose to do so). In either event, there is an initial 45-day review period, which may be extended unilaterally by the minister by up to an additional 30 days, and beyond that with the consent of the investor.
- Transactions are rarely denied approval under the ICA's "net benefit" test. However, it has become common practice for the responsible mister to require undertakings from the investor as a condition of approval. These undertakings generally involve, among other things, commitments to maintain a certain level of employment in relation to the Canadian business, guarantee participation of Canadians as directors or in management and make capital expenditures in Canada.
According to press reports, Industry Minster Maxime Bernier is considering a review of the ICA that would liberalize even further the rules governing foreign investment in Canada. The one exception would be to include specific powers for the minister to review (and block) transactions on national security grounds. Concerns about providing for national security review under the ICA surfaced in 2005 when state-owned China Minmetals Corp. sought to acquire Noranda Inc. The Minmetals transaction did not proceed, but the former Liberal government introduced proposed amendments to the ICA to ensure that the minister would be able to review transactions on national security grounds. The Liberals were defeated before these amendments could be passed, but it appears that the minority Conservative government intends to proceed with similar legislation. This would put Canada in line with other major trading partners, such as the United States, that also permit the screening of foreign investments for reasons of national security.
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.