Canada: Regulation Of Foreign Investment And Merger Regulation


The Investment Canada Act (the "ICA") is federal legislation that provides a framework to review investments by non- Canadians to ensure "net benefit" to Canada. Most investments by non-Canadians require only that the Director of Investments (an officer appointed under the Investment Canada Act) be notified of the investment while other, usually larger or culturally sensitive, investments by non-Canadians require an application, followed by a review by the Director and approval by the Industry Minister. Investments in culturally sensitive business activities are reviewed and approved by the Canadian Heritage Minister.

Notification Procedure

All establishments of new businesses in Canada, with the exception of "culturally sensitive" businesses, and all nonreviewable acquisitions by non-Canadians of Canadian businesses are generally subject to a notification procedure only. The form of notice requires information concerning the non-Canadian investor; the nature of the investment; a description of the Canadian business being established or acquired; details relating to the investor's officers, directors and shareholders; its sources of financing for the proposed investment; the transaction documents (or the principal terms and conditions, including the estimated total purchase price of the investment); whether the investor is owned, controlled or influenced, directly or indirectly, by a foreign government; and information to permit enterprise value information to be collected.

The notice is filed with the Director of Investments who issues a receipt if the notice is complete. The receipt indicates that the establishment, or acquisition, of the business is not reviewable under Part IV of the ICA.

Review Thresholds: WTO Transactions

By reason of the Agreement Establishing the World Trade Organization (WTO) between Canada and certain other countries (there are currently 161 WTO members), the review threshold for direct acquisitions by non-Canadians who are WTO investors or for direct acquisitions of Canadian businesses controlled by WTO investors will, as a result of amendments to the regulations made under the ICA effective April 24, 2015, be based on "enterprise value" of the acquired Canadian business (an increase from the 2015 threshold of C$369 million based on book value of the assets of the acquired business). The review threshold for WTO investments (by investors other than State-Owned Enterprises ("SOE"), which is addressed below) is C$600 million in "enterprise value," which will apply for a two year period ending in 2017, increasing to C$800 million for the next two years ending in 2019, followed by an increase to C$1 billion. For subsequent calendar years, the review threshold will be indexed annually to changes in Canada's nominal GDP, in accordance with the formula in the ICA.

Regulations made under the ICA in March of 2015 provide for a detailed methodology for calculating the enterprise value when an acquisition of control of a Canadian business has occurred. The calculation of enterprise value depends on the type of transaction contemplated (i.e., where the acquired entity is a publicly traded entity, a non-publicly traded entity, or if the transaction involves the acquisition of assets).

Under the new rules, where any portion of the total consideration to be paid by the investor is not known at the time the investment is implemented, the value of this unknown portion is deemed to be the amount that the investor represents and determines in good faith to be the fair market value. This provision will be applicable to contingent payment scenarios, including transactions with potential earn-outs the value of which may not be known at the time of the closing of the investment transaction. The provision also ascribes value in scenarios in which there is inadequate market price information, such as non-publicly traded shares.

Indirect acquisitions of control of non-cultural Canadian businesses by non-Canadians (i.e., by acquiring control of a non-Canadian parent of a Canadian subsidiary) are not subject to review for WTO investors (or for non-Canadian WTO sellers).

These newly established review thresholds (as well as the statutory exempt review for indirect acquisitions of control) are not applicable in certain enumerated circumstances set out in the ICA (see below).

Review Thresholds: Non-WTO Transactions

For the few non-WTO transactions, a book value method for determining the value of an acquired Canadian business will continue to apply. Direct acquisitions of shares of Canadian corporations carrying on Canadian businesses or acquisitions of the assets of such corporations are reviewable where the book value of the assets of the subject corporation is C$5 million or greater. Indirect acquisitions of control of a Canadian business are also reviewable, but the asset value thresholds for review are higher (C$50 million) unless the value of the assets of the Canadian business is C$5 million or greater and represents more than 50% of the book value involved in the international transaction.

Cultural Heritage or National Identity

Investment proposals, including indirect acquisitions of control, that might ordinarily be only notifiable can be ordered for review where the business is related to Canadian cultural heritage or national identity. Currently, these "culturally sensitive" businesses include the publication, distribution and sale or exhibition of books, magazines, periodicals, newspapers, films, videos and music. These acquisitions are subject to review where the book value of acquired assets exceeds C$5 million, while indirect acquisitions of control are subject to review where the book value of the acquired assets exceeds C$50 million (the federal Cabinet retains discretionary authority to review an investment in a cultural business falling below these thresholds).

State-owned Enterprises

In 2007, the Canadian government released guidelines on what additional considerations the Industry Minister would take into account when reviewing proposed investments by SOEs. In late 2012 and in response to two investments made by SOEs in Canadian energy assets, including the Canadian oil sands, new guidelines (the "2012 SOE policy") were published amplifying the scope of the elements the government will consider important in determining the extent to which an investor is an SOE. The 2012 SOE Policy sets out additional factors that the Industry Minister will take into account when assessing proposed investments by SOEs (see below). In addition, as part of the June 2013 Amendments, a definition of an SOE was enacted to include "an entity that is controlled or influenced, directly or indirectly, by a government or agency" of a foreign state. As well, the Industry Minister has been given the power to determine that an otherwise Canadian-controlled entity is in fact not a Canadian-controlled entity if the Minister is "satisfied that the entity is controlled in fact by one or more" SOEs.

Direct acquisitions by non-Canadian WTO SOE investors are subject to review where the book value the assets of the acquired business exceeds C$369 million (the applicable threshold for transactions closing in 2015). Indirect acquisitions of control by WTO SOE investors remain exempt from review.


Where a proposed investment is reviewable, the Industry Minister (or the Canadian Heritage Minister in the case of "culturally sensitive" businesses) will approve the investment where the proposal is considered to be of "net benefit" to Canada. In assessing net benefit, the Minister will consider, with no particular weighting, such factors as the effect of the proposed investment on economic activity in Canada, participation by Canadians in the business, productivity, competition, the compatibility of the investment with national, industrial, economic or cultural policies and the contribution by the business to Canada's ability to compete in world markets.

As well, the 2012 SOE policy states that SOE investors will have to satisfy the Minister about the investment's "commercial orientation; freedom from political influence; adherence to Canadian laws...that promote sound corporate governance and transparency; and positive contributions to the productivity and industrial efficiency of the Canadian business."

National Security

In 2009, amendments were enacted to the ICA concerning investments that may be considered injurious to national security. The amendments introduce a process similar to that found in the United States under the Committee on Foreign Investment in the United States ("CFIUS") review process, pursuant to which CFIUS is authorized to review, investigate and block any transaction or investment that could result in the control of any U.S. businesses or assets by a foreign person that may raise national security concerns, or involve critical infrastructure.

Under the national security provisions of the ICA, if the relevant Minister has reasonable grounds to believe that an investment by a non-Canadian "could be injurious to national security," the Minister may send the non-Canadian a notice under Part IV.1 of the ICA (within 45 days of a notification or application for review) indicating that an order for review of the investment may be made. The review of an investment on the grounds of national security may occur whether or not an investment is otherwise subject to review on the basis of net benefit to Canada or otherwise only subject to notification under the ICA. Moreover, a national security review can occur even if there is no "acquisition of control" of a Canadian business (i.e., minority investments that do not transfer de facto control). There is no process for investors to request pre-closing approval in order to obtain comfort.

To date, there is neither legislation nor guidelines published on the meaning of "injurious to national security." Discussions with government officials suggest that very few investment proposals will cause a review under these new sections. There has been one reported case under the ICA dealing with national security issues. However, it is known that the Industry Minister has chosen, on at least a few other occasions, to apply the national security provisions to an investment.

There are significant time periods in the event of a national security review under Part IV.1 of the ICA. In March 2015, these periods were extended further for various stages of a national security review (once an investor has received a notice indicating that an order for review of the investment may be made). A national security review timeframe under the ICA that previously would have lasted for 130 days can now, under the new rules, be extended to 200 days (or longer with the consent of the investor).

Moreover, significant transaction uncertainty arises, particularly in the context of notifiable investments (i.e., those not ordinarily subject to review), in view of the 45-day waiting period under Part IV.1 in which the Minister may notify the non-Canadian investor of a possible national security review. To foreclose any risk of such a review arising after closing for investments that would not otherwise be subject to review, parties will often send the requisite notification to the Director of Investments at least 45 days before closing, thereby achieving certainty that no national security issues will arise.


To date, more than 20,000 investment proposals have been filed with the Director of the Investment Review Division of Industry Canada and a number of other proposals with Cultural Sector Investment Review of Canadian Heritage. Most of these investment proposals have been filed by way of the notification procedures, which investments have not been subjected to review. Those proposals requiring the application and review procedure have all eventually been approved or otherwise withdrawn, with the exception of i) some culturally sensitive cases handled by Canadian Heritage; ii) one case handled by Industry Canada under the traditional Part IV net benefit provisions and iii) one case handled under the Part IV.1 national security provisions. Often the applicant has negotiated undertakings with the Director, which undertakings are designed to satisfy the Part IV net benefit to Canada criteria.



The Competition Act (Canada) is a federal statute that gives the Competition Tribunal (a tribunal established pursuant to the Competition Tribunal Act) (the "Tribunal") upon application by the Commissioner of Competition (the "Commissioner"), an officer responsible for administering the Competition Act, the power to make certain orders in connection with mergers that prevent or lessen or are likely to prevent or lessen competition substantially in Canada. A "merger" is defined to mean the acquisition or establishment, direct or indirect, by one or more persons (whether Canadian or non-Canadian), whether by purchase of shares or purchase or lease of assets, by amalgamation or combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person.

The Competition Act provides a list of factors for the Tribunal to consider in assessing whether a merger lessens competition substantially, including: competition from imports and by foreign competitors; the solvency of the target business; the availability of product or service substitutes; trade and other barriers to entry; and the competitive effect of other firms in the relevant market.

If the Tribunal finds that a merger or a proposed merger prevents or lessens, or is likely to prevent or lessen competition substantially, the Tribunal is permitted to make certain orders, including the prohibition of a merger before it occurs, the dissolution of a merger after it has occurred and the disposition of assets or shares. Subject to the issuance of an advance ruling certificate (see below), the Commissioner may challenge a merger by applying to the Tribunal for an order within one year following the date upon which the merger is substantially completed, notwithstanding the compliance by parties to a proposed transaction with the transaction notification provisions of the Competition Act.

Transaction Notification

As is the case in the United States under the Hart-Scott- Rodino ("HSR") notification process, the Competition Act provides that the parties to certain large transactions must notify the Commissioner prior to completing a transaction. While the Commissioner may review all mergers irrespective of size, the Competition Act requires notification of a proposed transaction if both a parties' threshold and a transaction threshold are exceeded.

The parties' threshold is exceeded if the parties to the proposed transaction, together with their affiliates, have combined assets in Canada or gross annual revenues from sales "in, from or into" Canada exceeding C$400 million. The transaction threshold is exceeded where, in respect of the following five forms of transactions:

(a) the acquisition of assets in Canada of an operating business;

(b) certain acquisitions of shares (see below) of the target corporation carrying on an operating business or of corporations carrying on an operating business controlled by that corporation;

(c) amalgamations of two or more corporations if one or more of those corporations carries on an operating business, or controls a corporation that carries on an operating business;

(d) other forms of non-corporate combinations; or

(e) an acquisition of an interest in a combination that carries on an operating business otherwise than through a corporation,

the target (or the entity formed by amalgamation/combination) has assets in Canada or revenues from sales in or from Canada exceeding C$86 million (the relevant transaction threshold for the remainder of 2015, which amount may be changed annually, by regulation, based on Canadian nominal gross domestic product).

Where both the parties' threshold and the transaction threshold are exceeded, notification under the Competition Act is required where persons, together with their affiliates, acquire more than 20% of the voting shares of a corporation that is publicly traded, or will acquire more than 50% if, prior to the proposed transaction, such persons owned more than 20%. In the case of voting shares of a corporation (none of the voting shares of which are publicly traded), the Competition Act requires notification (when the thresholds are exceeded) where persons acquiring such shares together with their affiliates would, as a result of the proposed transaction, own in the aggregate more than 35% of the voting shares or will acquire more than 50% if, prior to the proposed transaction, such persons owned more than 35%.

Where the above-noted parties' and transaction thresholds are exceeded, the parties to the proposed transaction must notify the Commissioner by supplying information in accordance with the Competition Act and Section 16 of the Notifiable Transaction Regulations before completing the merger. Typically, counsel for the acquiring party will also file a submission concerning the competitive impact of the proposed transaction. While all of the information provided to the Commissioner is treated as confidential under the Competition Act, the Commissioner has taken the position that the confidentiality provisions in the Competition Act permit the Competition Bureau to share the information filed with them and their review with others on the grounds that such exchanges are made for purposes relating to the administration or enforcement of the Competition Act. Also, the Competition Bureau has the power to speak with affected parties and others for the purposes of gathering information as part of their review. In the ordinary course filing parties are aware of certain of and consent to these activities by the regulatory authorities.

A notification must include all studies, surveys, analyses and reports "prepared or received by an officer or director ... for the purposes of evaluating or analysing the proposed transaction." This broad information requirement is similar to that found in Item 4(c) of the HSR notification reporting form which must be submitted under the U.S. pre-merger notification rules. Once the notification form is filed with the Commissioner, the parties must wait 30 days before completing the transaction, unless the Competition Bureau issues a supplementary information request, or SIR, within 30 days of the original filing, in which case the 30-day waiting period will commence once the parties have complied with the SIR. The Bureau has indicated that it "will only issue a SIR when the proposed transaction raises significant competition issues and additional information is required." In cases where the Commissioner has no concerns about the proposed merger, an advance ruling certificate (see below) or a "no-action letter" may be issued that will allow the parties to proceed with the proposed transaction even if the 30-day waiting period has not expired.

The Competition Act imposes criminal sanctions for failure to comply with the notification or waiting requirements. In addition, administrative monetary penalties of up to C$10,000 per day may be assessed for non-compliance. Typically, a transaction will proceed following the expiry of the waiting period, unless the Commissioner applies or threatens to apply to the Tribunal to prevent the proposed transaction from proceeding in cases where the Commissioner believes that substantive competition issues will arise from the proposed transaction.

The Competition Act provides limited exemptions to the notification requirements when a transaction otherwise exceeds the two financial thresholds referred to above. For example, transactions between affiliated parties are exempt from the notification requirements.

Advance Ruling Certificates

Parties to a proposed merger, whether or not subject to transaction notification, may apply to the Commissioner for an advance ruling certificate (an "ARC") with respect to such merger. If issued, the ARC certifies that the Commissioner is satisfied that the proposed merger will not prevent or lessen competition substantially. Parties will often apply for an ARC when it is clear that no substantive competition issues will arise in connection with the proposed transaction and will often couple such application with the transaction notice filing.

Receipt of an ARC exempts the parties from the transaction notification requirements which otherwise may apply. Upon issuing an ARC, the Commissioner cannot apply to the Tribunal in respect of the proposed merger solely on the basis of information that is the same or substantially the same as the information on the basis of which the ARC was issued, provided the merger has been substantially completed within one year following the issuance of the ARC.


Bribery Offences

In 1999, Canada ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions through the enactment of the Corruption of Foreign Public Officials Act ("CFPOA"). The legislation was largely unenforced, with only one conviction under the CFPOA in the first six years after enactment. Canada has since, however, begun to commit resources to anti-corruption, with the Royal Canadian Mounted Police establishing dedicated enforcement units.

Under the current CFPOA, every person commits an offence who, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official. Additionally, it is an offence under the CFPOA to keep false books or records for the purpose of bribing a foreign public.

The CFPOA provides exemptions for payments that are not illegal under the domestic law of the foreign country or the payment of certain reasonable expenses incurred in good faith by the foreign public official on their behalf. Amendments to the CFPOA not currently in force will remove a currently available exemption for facilitation payments.

Transparency in the Extractive Sector

The stated purpose of the Extractive Sector Transparency Measures Act ("ESTMA") is "to implement Canada's international commitments to participate in the fight against corruption through the imposition of measures applicable to the extractive sector."

The ESTMA affects commercial developers of "oil, gas or minerals" who have a sufficient connection to Canada. Developers who meet certain criteria must report to the Minister regarding payments they make to various parties (payees).

The ESTMA defines "payee" broadly to include any domestic or foreign government, trust, board, commission, corporation or other body or authority, including bodies established by two or more governments, or government delegates. For financial years starting after June 1, 2017, Aboriginal governments will also be considered payees.

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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