Canada: Canadian Government Reported Increased Number Of National Security Reviews, Divestiture Orders In Fiscal 2016-2017

Last Updated: January 11 2018
Article by Ian Macdonald

The Investment Review Division published its annual report on the administration of the Investment Canada Act for the fiscal year ended March 31, 2017.  The report contains information on the Canadian government's use of the Act's national security review powers, among other things.  This is the second annual report in which the government has released information on the use of these powers, and the first since the government published national security review guidelines in December 2016 and since annual public reporting on the use of the national security review powers became a legal obligation in June 2017.

Gowling WLG focus

In 2016-2017, five national security reviews were conducted (one of which was a re-review of a previous review that was judicially challenged). Three of these reviews resulted in divestiture orders. Two resulted in the transaction being permitted subject to non-public conditions.  No transactions were blocked prior to closing, and no reviews concluded with the foreign investor being permitted to own the target Canadian business condition-free.

As a result, in our view, fiscal 2016-2017 saw a comparatively high number of national security reviews and divestiture orders. To put that into context, between 2009, when the national security review powers were added to the Act, and the end of fiscal 2015-2016, a total of 8 national security reviews were conducted, two of which resulted in divestiture orders (three others were blocked before closing and one was abandoned by the parties).

Background

In 2009, the Canadian government introduced broad national security review powers under the Act.  These powers enable the government to review any investment in a Canadian business by a non-Canadian.  The potential outcomes of such a review are:

  • the investment is allowed to proceed, with or without conditions;
  • closing of the investment is prohibited; or
  • the non-Canadian is required to divest the Canadian business if closing has already occurred.

The government did not originally provide any guidance as to the factors that could trigger a national security review or influence its outcome.  This degree of opaqueness resulted in significant criticism from stakeholders. Among other things, it made it difficult for potential investors to assess, before incurring significant pursuit costs, the national security review risks associated with a transaction.

In the summer of 2016, the government released, for the first time, some high level information on the use of the national security review powers, including the number of reviews that had been conducted, broken down by year, and their outcomes (see our August 2016 MarketCaps for more information). In December 2016, the government released Guidelines on the National Security Review of Investments under the Investment Canada Act (see our January 2017 MarketCaps for more information). Included in the guidelines is a non-exhaustive list of factors the government will consider in assessing national security risk, as well as guidance on filing notifications under the Act. Among other things, the guidelines encourage investors to file their notification form at least 45 days before the planned closing date for the investment, particularly where any of the risk factors listed in the guidelines are present. The rationale behind this is that if the government has not initiated the national security review process within 45 days from receiving a notification form, then it no longer has a right to do so and the investor can close with confidence that it will not subsequently face a potential divestiture order on national security grounds.

Key Facts and Insights

Summarized below are the number of national security reviews that have occurred and their outcomes, broken down by year, since the national security review powers were added to Act in 2009.

* One review was pursuant to a court order.  Although not specified in the annual report, this would have been the O-Net Communications/ITF Technologies transaction, which was the subject of a great deal of media attention and controversy.  The (former Conservative) government ordered Chinese controlled O-Net Communications to divest Montreal based ITF Technologies.  O-Net Communications sought judicial review.  The (current Liberal) government agreed to do a new review, the result of which was that O-Net Communications was permitted to continue to own ITF Technologies subject to non-public conditions.    

** The outcome may have occurred in a different fiscal year but relates to a review that commenced in the identified fiscal year.

These facts support the following observations:

  • When considered in the context of all transactions that could have been reviewed under the national security powers, the percentage that have actually been reviewed is negligible, less than 0.25%.  5,208 transactions have been brought to the Canadian government's attention through the submission of a notification form or (normal course, non-national security) review form since the national security review powers were enacted.  It bears mentioning that 5,208 transactions is an artificially low denominator for the calculation because it only covers control level acquisitions.  The national security review powers can be applied to the acquisition of any interest in a Canadian business, including non-control level acquisitions.  Statistics on non-control level acquisitions are not available.
  • If a national security review is conducted, there is a good chance that the result will be catastrophic to the transaction.
    • In eight of the twelve transactions that have been reviewed the foreign investor was not permitted to own the target Canadian business – either the transaction was blocked pre-closing, the parties aborted it during the review, or post-closing divestiture was required.
    • In four of the twelve transactions the foreign investor was permitted to own the target Canadian business subject to non-public conditions.
      • Please note that because O-Net/ITF was reviewed twice, there have been 13 reviews of 12 transactions, and one of the five "divestiture required" outcomes set out in the table above was converted to a "non-public conditions imposed" outcome.
    • Allowing a transaction to proceed, condition free, after a national security review is an option that is available to the government, but based on the information in the annual reports, this has never happened.
    • We acknowledge that the review of 12 transactions is a small sample size and that it is therefore important to not overstate the significance of any apparent patterns or trends.  At the same time, a recurring theme does seem fairly clear.  Zero of the transactions that have been reviewed have been permitted to close unencumbered.  Some kind of a remedy was considered necessary in every case.  In two thirds of the reviews, the outcome was catastrophic to the transaction.  In the other third, conditions were imposed. 

It also bears mentioning that the 2016-2017 report contains an incrementally higher degree of information than the 2015-2016 report. In addition to reporting on the number of reviews conducted in the year and their outcomes, the report identifies the number of notices of potential national security review that were issued and their outcomes (a notice of potential review affords the government additional time to decide whether to conduct a full review), and identifies the risk factors that influenced the review/no review decisions and the outcomes of the reviews that were conducted.

Four notices of potential national security review were issued in fiscal 2016-2017. In two of those transactions, the government decided that a full review was not necessary and took no further action.  In the other two, a full review was conducted and resulted in either a divesture order or the imposition of conditions. Statistics on notices of potential review in previous years are not available.

The report indicates that, of the risk factors identified in the national security review guidelines, the following most commonly influenced the decision to conduct a review and the outcome of the review:

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

Other influential risk factors, which are also outlined in the guidelines, were the potential for injury to Canada's defence capabilities; the potential for injury to Canada's international interests; and the potential of the investment to involve or facilitate organized crime.

The report also indicates that the decision of whether to conduct a review and its outcome is influenced by a "consideration of the application of other domestic legal frameworks which protect against threats to national security and apply to both Canadian and non-Canadian controlled businesses." Although the report does not provide examples, plausible examples include a Foreign Ownership, Control or Influence review by the Canadian Industrial Security Directorate or a change of control review by a provincial or federal energy regulator.

Finally, like the 2015-2016 report, in the cases where a national security review was conducted the 2016-2017 report does not identify the industries in which the relevant Canadian businesses operated, the countries of origin of the relevant foreign investors, or whether the relevant foreign investors were state-owned enterprises.  The report states that "the information herein is published in accordance with confidentiality and privileged information requirements and the need to safeguard national security." However, considering that approximately five pages of the report that relate to non-national security review matters are devoted to breaking down investments by economic sector and country of origin, it is at least conceivable that another factor may have motivated the government's decision to not disclose this information, even in a highly aggregated form, in relation to national security reviews.  Specifically, concerns about the potential impact on diplomatic relations with the relevant countries may have been a factor, particularly if this information may have revealed that investors from one country or a small group of countries have been the subject of a disproportionately high number of reviews.  For example, fragments of information about four of the national security reviews that have been conducted have become public, and two of them involved Chinese investors, and news reports have suggested that Canada's national security review regime has become an area of contention in relations between Canada and China.

The 2015-2016 and 2016-2017 reports may not disclose as much information about the use of the national security review powers as some stakeholders would have liked.  Nevertheless, between these reports, the national security review guidelines and the fragments of information that have become public about some national security reviews, foreign investors now have a good sense as to what factors may give rise to national security concerns, when they should file their notification forms at least 45 days before the planned closing date, and when they should engage with the Investment Review Division at an early stage in their transaction planning. Given the number of post-closing divestiture orders that have been issued, where the risk factors identified in the guidelines are present it is particularly important that foreign investors insist on submitting their notification form at least 45 days before closing (possibly over the objections of sellers, who may prefer that a buyer wait until after closing when the risk of a post-closing review and divestiture order would, in the absence of any indemnification or unwinding provisions negotiated into the purchase agreement, be solely the buyer's problem).

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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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