This year has seen several significant developments related to the Investment Canada Act (the Act). These include the enhancement of the enforcement powers of the Minister of Industry (the Minister) and the expansion of the Minister's power to now also review transactions on the grounds they may be injurious to Canada's national security. The Act was amended in March 2009 and draft regulations to implement those amendments were published in July 2009. Not only has the Minister flexed his muscles by using - for the first time - the preamendment provisions to require a non-Canadian investor to fulfill its undertakings, but it also appears that he may have used the new national security powers to delay at least one transaction.
Overview Of Amendments
The legislation that implemented Canada's 2009 federal budget (Bill C-10) also included significant changes to the Act.1 The important amendments, some of which are not yet in force, are the following:
- Increased Threshold For Investments Made By A WTO Investor. The review threshold for acquisitions of control of a Canadian business (other than a cultural business) will be increased to $1 billion over five years, and the measurement standard will be changed from a gross assets test to an "enterprise value" of the acquired assets. These changes will only come into force when implementing regulations (described further below) are enacted.
- National Security Test And Review Procedure. The amendments introduced a broad national security test and review process, authorizing the Minister to review investments that "could be injurious to national security," regardless of the size of transaction. These changes are now in force, although regulations (described further below) must be enacted to implement the timeline for the national security review.
- Elimination Of Lower Threshold For Transactions In Non-Cultural Sectors. The lower thresholds for the review of transactions in the transportation, uranium production and financial services sectors have been repealed. Only cultural businesses remain subject to the lower threshold of $5 million.
- Written Reasons For Not Approving An Investment. Where the Minister is not satisfied an investment is of net benefit to Canada, the Minister is now required to provide reasons for the decision to block the investment.
- New Undertakings. If the Minister believes a non-Canadian has failed to comply with a written undertaking relating to an investment the Minister is satisfied or is deemed to be satisfied is likely to be of net benefit to Canada, the Minister would be able to accept a new undertaking from the non-Canadian after the investment has been implemented.
On July 11, 2009, Industry Canada published proposed new National Security Review of Investments Regulations and amendments to the Investment Canada Regulations (collectively, the Draft Regulations). The Draft regulations set out the process for national security reviews and establish the basis for calculating the new investment review threshold. They also increase the informational requirements for non-Canadians in applications for review and notification forms for net benefit and national security review purposes. It is expected the Draft Regulations will come into force sometime in the fall of 2009, with the national security regulations enacted first.
National Security Review Process
Bill C-10 added a national security test and review process to the Act that authorizes the government to take any measures in respect of an investment that threatens national security. Following the Minister's review and consultations with the Minister of Public Safety and Emergency Preparedness, the Minister is required to refer transactions of concern to national security to the Governor in Council, which has the ability to take any measures in respect of the investment that the Governor in Council considers advisable to protect national security, including prohibiting investments made by non-Canadians. Bill C-10 set out a framework for such reviews but did not include any details on the time periods for such reviews.
The Draft Regulations prescribe the time periods that will apply to the various steps in the national security review process. The duration of a review can vary depending on several factors, such as whether the transaction is notifiable or reviewable, the seriousness of the potential security threat, the imminence of such security threat and the complexity of the review. That being said, it seems unavoidable that parties to transactions subject to a national security review will often incur significant delays (which, in some cases, might be as long as 130 days) before obtaining regulatory approval.
The Draft Regulations also list the investigative bodies with which pertinent information concerning investments that have raised national security concerns can be shared, including the Department of Public Safety and Emergency Preparedness, the Canadian Security Intelligence Service, the Royal Canadian Mounted Police, the Communications Security Establishment, and the Department of National Defence. Although the initial draft of the national security regulations did not include a pre-clearance mechanism, it is expected that the final version will, at least for notifiable transactions. Despite providing some guidance on the review process, the Draft Regulations remain silent on the definition of "national security" or the existence of criteria to judge whether a proposed investment may constitute a national security threat.2 They also lack any mechanism for pre-clearing transactions that do not give rise to national security concerns. The Governor in Council therefore retains broad discretion in making such determinations. It is hoped the Minister will publish some guidelines on this topic in order to increase transparency and assist foreign investors in understanding the potential for a national security review.
New Investment Review Threshold
The Act requires investments meet certain monetary thresholds be approved by the Minister and be deemed to be of "net benefit" to Canada before they can be implemented. The current investment review threshold for WTO investors is $312 million in book value of assets, although an exception is made for acquisitions of Canadian cultural businesses, for which a lower threshold applies ($5 million or $50 million depending on whether the investment is direct or indirect). The amendments to the Act have increased this threshold to $600 million in "enterprise value" (this figure will rise to $1 billion over the next four years). However, the new thresholds will only come into force once the Draft Regulations defining the "enterprise value" of a corporation's assets have been finalized.
The definition of "enterprise value" provided in the Draft Regulations differs depending on the type of transaction contemplated:
- For acquisitions of control of a publicly traded Canadian corporation, the enterprise value of the Canadian corporation's assets is equal to its market capitalization plus its total liabilities minus its cash and cash equivalents.
- For acquisitions of control of non-publicly traded Canadian corporations, or acquisitions of control of all or substantially all the assets of a Canadian corporation, the enterprise value is calculated following the "book value of assets" method as currently set out in the Investment Canada Regulations.
The introduction of the "market capitalization" test for publicly traded Canadian corporations may prove problematic in certain cases. Market capitalization is calculated by multiplying the average daily closing price of each class of publicly traded equity securities by the average daily number of outstanding equity securities of that class over the last 20 days of trading in the entity's last fiscal quarter, then adding the results.
In addition, if there are unlisted equity securities, the same calculation is done and added to the results for the publicly traded shares, except the average daily closing price of the primary class of publicly traded shares is used as a proxy price. Because market capitalization can only be calculated at the end of the fiscal quarter, which immediately precedes the closing of a transaction, transactions that meet the investment review threshold at the time of their announcement may, in certain cases, no longer meet the threshold at the time of closing.
Conversely, if the share price increases between the time of announcement and closing, a transaction that was not reviewable when announced could be reviewable at the time of closing. Investors will therefore need to determine whether to undergo a review that may not ultimately be necessary, but that could prevent delays at closing.
Additional Information Requirements
Finally, the Draft Regulations introduce additional information requirements for non-Canadians in investment review applications and notification forms. Investors will be required to disclose the names and contact information of members of their boards of directors, the names of their five highest paid officers and any individual or entity that owns 10 per cent or more of the equity or voting rights of the investor. They will also need to provide a detailed description of the business activities that will be carried on by the Canadian business, including the products and services that will be manufactured sold or exported by the Canadian business and the code assigned to such products and services by the North American Industry Classification System (NAICS 2007) - Canada, 2007. Further, investors will need to indicate the source of funding for the investment and disclose any ownership interests held by a foreign government.
These disclosure requirements are aimed at clearly identifying who controls (or controls in fact) the foreign investor and what type of business activities will be conducted as a result of the foreign investment. The requirements with respect to state ownership are consistent with the government's guidelines on state-owned enterprises issued last year, which aim to give additional tools to the government to prevent investments by state-owned enterprises that are considered a national security threat.
Recent Enforcement Activities
The Draft Regulations were released the same week the Minister announced his intention to go to court to order that U.S. Steel Corp. comply with the employment and production-related undertakings it gave to the government in connection with its November 2007 acquisition of Stelco Inc. The Minister has also requested the court impose a penalty of $10,000 per day calculated from November 1, 2008. This is the first time the Minister has taken such an action and highlights the importance that the government places on investors fulfilling the commitments they make when negotiating approvals under the Act.
The Minister may also have used his new national security review powers to delay an acquisition of a Canadian publicly-traded company, the chief asset of which is a uranium mine in Namibia. On August 19, 2009, Forsys Metals Corp. announced the company that had agreed to purchase it, George Forrest International Afrique S.P.R.L. (GFI), claimed to have received a notification from Industry Canada advising GFI the company could not proceed with its acquisition of Forsys pending further notice from Industry Canada. The book value of Forsys' assets was below the $312 million review threshold, meaning the only basis for such a notice would have been the national security provisions of the Act. Press reports suggest GFI had difficulty securing financing to complete the transaction, and may have turned to entities with ties to Iran or North Korea. Unfortunately, we will never know how the review process would have unfolded, as Forsys terminated its transaction with GFI following the latter's failure to transfer funds in accordance with the transaction agreement.
The current Conservative government has demonstrated its willingness to use the full force of the Act. Following its unprecedented decision to block a proposed investment in 2008,3 the Minister has now taken steps to require an investor to honour the undertakings it provided in order to obtain approval. The Minister also appears to have used his new power to review investments on the grounds of national security. While obtaining approval under the Investment Canada Act was traditionally regarded as relatively routine, under the current enforcement climate, where the Minister has been given significantly greater discretion to intervene, investors are well served to exercise caution by planning for long lead times to secure approval if national security could be an issue and to take care in drafting undertakings to provide some latitude in the event they are subsequently challenged by the Minister.
2. The lack of guidelines regarding the meaning of national security means that interested parties or competitors may seek to interfere with or delay transactions that may not raise national security issues. For example, Research in Motion recently argued that it was in Canada's "national interest" to review the proposed sale of some of Nortel Networks' wireless assets to Ericsson. After considering the matter, the Minister concluded that there were no grounds to believe this transaction could be injurious to Canada's national security.
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