Canada: Proposed Amendments To National Security Review Regime Include Mandatory Pre-Closing Filings

On Wednesday, December 7, the Minister of Innovation, Science, and Industry introduced the National Security Review of Investments Modernization Act. It proposes significant amendments to the national security regime operated under the Investment Canada Act.

The amendments will primarily impact foreign investment in businesses operating directly or indirectly in "sensitive sectors" in Canada. The main highlights for Canadian businesses and foreign investors looking to invest in Canada are:

Mandatory Pre-Closing Notifications for Prescribed Businesses

Foreign investors investing directly or indirectly in Canadian businesses that operate in to-be-prescribed sensitive sectors will need to make a pre-closing filing, (including for certain minority investments), with a potential fine of at least C$500,000 for failure to file the mandatory notice in relation to a sensitive sector. This amendment will align Canada with other international jurisdictions that also require mandatory pre-closing filings for sensitive sectors (e.g., CFIUS in the US, NSIA in the UK).

While the list of prescribed sensitive sectors has not yet been published, we expect that, consistent with past guidance, businesses operating in the critical minerals supply chain or other critical infrastructure, those dealing with advanced technologies (such as AI or quantum computing), those dealing with military or defence technologies, and businesses that handle sensitive personal data/information of Canadian citizens may be included within the scope of the new mandatory pre-closing filing regime.

Greater Ministerial Powers During National Security Reviews

The Minister will be able to impose interim conditions on foreign investments subject to a national security review. The amendments also shift certain decisions down from the federal Cabinet to the Minister (including certain review extensions and the ability to approve investments on the basis of undertakings).

Foreign Intelligence Sharing

The amendments allow the Minister to disclose privileged information obtained in the course of a national security review to foreign governments or foreign agencies for the purpose of national security reviews.

Closed Proceedings for Judicial Reviews of National Security Decisions or Orders

The Minister will be able to request a closed proceeding regarding the disclosure of evidence that could be injurious to international relations, national defence, or national security. If the judge agrees with the Minister's request, applicants looking to challenge national security decisions or orders will only be provided with a summary of the evidence.

Key Takeaways

In the lead up to and following implementation of the amendments, foreign investors looking to make investments in Canadian businesses in sensitive sectors (including foreign businesses with Canadian subsidiaries operating in such sectors) should engage Canadian counsel in advance of implementing such investments, and may need to include appropriate interim periods prior to closing such investments.

Canadian businesses operating in sensitive sectors should ensure they are aware of the filing requirements and review timelines when seeking investments from foreign investors and plan accordingly.

It will also be important for the government to define the sensitive sectors in a clear and objective manner so as not create an ambiguous legal obligation. This is particularly important given the potential breadth of the filing requirement in respect of minority investments (including, arguably, indirect minority investments) with the government not proposing a clear bright line minority percentage below which a filing would not be required in relation to a sensitive sector.

For context, the Canadian government currently receives ~1,000 notifications per year under the Investment Canada Act, which is high by international standards. By way of comparison, in the United States, an economy more than 10 times larger than Canada and with an indisputably strong focus on protecting national security, CFIUS in 2021 received 436 filings (272 notices and 164 declarations). Adjusting for the size of the economy, if the US were to require filings in the same manner that Canada currently requires filings, one would expect over 10,000 CFIUS filings per year when in fact there are only roughly 400 such filings. This is of course without taking into account the changes proposed in Canada yesterday, which would be predicted to materially increase the number of notifications filed per year under the Investment Canada Act.

It is also the case that over 99% of transactions do not ultimately result in a national security prohibition or divestiture such that one would expect the new filing requirements, in the vast majority of cases, to simply impose an additional regulatory burden and an impediment to transaction completion.

It is also not clear to us that Canadian law firms would even be consulted in the many scenarios which could be subject to a new filing requirement, such that filings may be readily missed. By way of example, under the amendments, suppose that an American investor acquires 6% of an American company together with the right to appoint a director to such American company. Suppose also that the American company operates in say 20 countries, one of which happens by chance to be Canada, via a very small branch operation. Today, and indeed for the entire existence of the Investment Canada Act dating to the 1980s, that transaction could close without the blessing of the Canadian government or the involvement of any Canadian advisors. In future, once the amendments are passed, if the American company is active in a sensitive sector, the parties could arguably not complete their transaction until the Canadian government permitted closing to occur. Unintentional non-compliance with the new rules may therefore arise as an issue to be dealt with in future – regulation unfortunately tends to beget more regulation.

The Stikeman Elliott Competition & Foreign Investment group will continue to closely monitor the proposed amendments' progress through the legislative process and will provide ongoing updates as appropriate.

If you would like to discuss the potential impact of the proposed amendments on your business or future investment plans in Canada, do not hesitate to reach out to any member of the Stikeman Elliott Competition & Foreign Investment group.

The author would like to acknowledge the support and assistance of Giancarlo Discenza, articling student at law.

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.