Canada: Foreign Investment In Canada: Osler Fall 2017 Update

Introduction

It has been an eventful year so far for foreign investment review in Canada. As expected (see our December 2016 Update), liberalization has been the dominant theme. The most noteworthy development has been the significant increase to the financial threshold used to determine whether private-sector investments in Canadian businesses will be subject to "net-benefit" review under the Investment Canada Act (ICA). The threshold began the year at $600 million, but was raised to $1 billion on June 22 (see our June 2017 Update), and to $1.5 billion on September 21 for investors from the European Union (EU), the United States (U.S.) and select other nations that have free trade agreements with Canada, as a result of the implementation of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).

While the government carefully assesses all investments in Canada from a national security perspective, including those that do not lead to a change of control, the national security review power continues to be used judiciously, as is evident from the release in 2017 of statistics on the national security review process. Canada's openness to foreign investment in 2017 has notably included some investments from China, which outpaced investments from the U.S. in asset value according to the Investment Review Division's (IRD) statistics for the 2017 fiscal year (April 1, 2016 to March 31, 2017 (FY 2017)). Finally, although the government has stated its intention to maintain existing protections for the Canadian cultural sector, it has adopted a flexible approach in addressing foreign investment in newer, digital media, most recently through the agreement reached with Netflix.

Threshold increases

The most significant change to the ICA in 2017 has been the implementation of higher thresholds for review and approval of transactions under the "net-benefit" provisions of the ICA. On June 22, 2017, the "net-benefit" review threshold for private sector investors from World Trade Organization member states (WTO investors) was increased to $1 billion in enterprise value. The legislation also provides for annual adjustments to be made to the threshold to reflect a GDP-based index, starting on January 1, 2019.

A few months later, the implementation of CETA on September 21, 2017 increased the threshold to $1.5 billion in enterprise value for private sector investors from the EU. As the U.S., Mexico, Chile, Colombia, Honduras, Panama, Peru and South Korea all have free trade agreements with Canada that include a most-favoured nation provision, the threshold for a "net-benefit" review increased to $1.5 billion for private sector investors from those nations as well.

These threshold increases also apply to transactions where the purchaser is not a private sector WTO investor or from one of the countries listed in the above paragraph, but the vendor is an investor that satisfies one of those criteria. However, the threshold changes do not apply to investments by state-owned enterprises, which are still subject to a book value of assets threshold ($379 million in 2017). 

These changes will likely result in a significant decrease in the number of investments subject to review under the "net-benefit" provisions of the ICA. As review under the ICA can be time consuming (75-plus days) and approval is typically granted subject to commitments from the non-Canadian investor regarding its operation of the business following closing, the higher threshold will provide investors in Canada with improved timing certainty regarding the completion of acquisitions in Canada as well as increased flexibility in their operation of acquired businesses.

Implementation of CETA

Under CETA, investors from the EU can take advantage of preferred access to the Canadian market, and vice-versa. In addition to the increased investment threshold described above, this preferred access includes the immediate elimination of the vast majority of tariffs applied to transactions in goods and services, as well as other benefits discussed in greater detail in our review of the agreement.

However, investment-specific aspects of CETA, including investor protection and the investor-state dispute settlement mechanism, must be approved by the parliaments of the 28 EU members prior to being implemented. Until this occurs, investors will not be able to invoke the mechanism through which investors can bring a claim against the state outside of national courts.  

National security review

The 2016-2017 Investment Canada Act Annual Report (Annual Report) includes statistics on the national security review process, providing insight into a process that has historically been opaque. The Annual Report indicates that national security reviews are rarely conducted, as only five of the 737 investments subject to at least notification under the ICA were formally reviewed for national security reasons in FY 2017. While it continues to be clear that very few transactions are blocked, subject to commitments, or materially delayed due to national security concerns, it should be noted that these statistics do not reflect the full impact of the national security review process. For example, the statistics do not include potential transactions that were abandoned at an early stage due to concerns raised informally. Further, Osler's experience suggests that the IRD is more actively co-operating with Canada's national security agencies to informally screen investments prior to determining that no formal national security review will be conducted. The purpose of this increased engagement appears to be an effort to rule out national security concerns. In some cases, it involves asking investors to provide additional information about their businesses and activities on a voluntary basis. Accordingly, identifying potential issues in advance and, where appropriate, proactively addressing them, may help clarify any issues and avoid delays. According to the Annual Report, the three most important factors that led to national security reviews in FY 2017 were:  

  • the potential for transfer of sensitive dual-use technology or know-how outside of Canada;
  • the potential for negative impacts on the supply of critical services to Canadians or the government; and
  • the potential to enable foreign surveillance or espionage.

Liberalization with regards to Chinese investment

The current Liberal government's efforts to encourage foreign investment represent a notable shift from the previous Conservative government. The government is now more open to investment from China. Canada and China are holding exploratory discussions regarding a possible free trade agreement. Chinese investment in Canada, both in terms of number of discrete investments and the aggregate enterprise value of those investments, was second only to investments from the U.S. in FY 2017. In terms of asset value of the investments, total investment from China actually exceeded that of the U.S.

Hytera's takeover of Norsat International (Norsat) was a recent high-profile example of Canada's approach to investment from China. Norsat, based in Vancouver, produces satellite equipment and transceivers, including those for military applications. Hytera, a private Chinese firm, proposed a friendly takeover and, despite considerable criticism — including from the U.S. — the transaction was approved by the Canadian government. The approval was granted without a full national security review, instead only requiring a 45-day extension on the standard 45-day initial review period required under the ICA. The lack of a full national security review, particularly in light of the government's past hesitation in allowing Chinese investors to acquire assets in sensitive industries, was a surprising development and was the subject of considerable media comment in Canada and the U.S. (for example, see this article from The Globe and Mail). While the government's approach to investment from China continues to evolve, and there continue to be certain types of investments that would be expected to attract a high level of scrutiny, the government's response to the Norsat acquisition suggests a higher level of comfort with investments from China.

Several other high-profile transactions from Chinese investors were reviewed and approved by the government in 2017. These include Anbang Insurance's (Anbang) takeover of Retirement Concepts, which operates retirement homes in British Columbia, Calgary and Montréal. Anbang, which is privately owned and one of China's largest insurers, has faced questions in the U.S. relating to its ownership structure and possible ties to the government of China. The Canadian government approved the transaction as being of a net benefit to the Canadian economy.

In another notable development relating to the review of investment from China in sensitive Canadian industries on national security grounds, the government revisited and approved Hong Kong-based O-Net Communications' (O-Net) takeover of Montreal-based ITF Technologies, despite the previous Conservative government's rejection of the same transaction in 2015. As described in greater detail in our Osler Update on the decision, this approval was granted despite O-Net reportedly being 25% owned by the China Electronics Corporation, a Chinese state-owned enterprise. Though the unique facts of the O-Net transaction may limit its precedential value, it does stand as another example of the government's willingness to work with investors and find solutions in certain circumstances where a viable path to approval previously may not have been possible.

Canada's treatment of investment from China is diverging somewhat from that of the U.S., where the momentum appears to be towards increased scrutiny of investment from China. According to the recently released report by the Committee on Foreign Investment in the United States (CFIUS) based on the voluntary disclosure provided to it, Chinese investors accounted for more investments than any other nation in 2015, continuing the trend that started in 2012. However, investments from China have been increasingly subject to lengthy reviews, remedial commitments and in a few high-profile cases, disallowed. There has been speculation that Chinese investors may opt to divert investment to jurisdictions that appear to be more welcoming of investment from China, such as the EU or Canada.

Cultural policy

On September 28, 2017, Minister of Canadian Heritage Mélanie Joly (Minister Joly) launched Creative Canada, a new policy framework for Canada's cultural industries. With respect to international investment, the policy advocates an extension of the current protections for domestic industry. When discussing the ongoing NAFTA renegotiations, Minister Joly stated that the government is committed to "maintaining the flexibility for Canadian culture in NAFTA by exempting our cultural industries." It therefore seems likely that the government will seek to maintain the low threshold of $5 million in book value of assets for a "net-benefit" review of a direct investment in cultural industries (as compared to non-cultural businesses) and that the government will attempt to preserve restrictive policies applicable to certain sectors (e.g., film distribution, newspapers, magazines) in a renegotiated NAFTA, despite likely opposition from the U.S.

That being said, the government has signalled some flexibility when dealing with foreign investors. The announcement at the Creative Canada launch that Netflix has agreed to invest $500 million in Canadian productions over five years — and will not be subject to the same cultural support framework as domestic players in the broadcasting industry — is an indication that the government may be prepared to exercise some flexibility in applying the traditional framework when handling foreign investment in cultural industries, especially those in newer, digital media. 

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions