1 Foreign Investment Policy
1.1 What is the national policy with regard to the review of foreign investments (including transactions) on national security and public order grounds?
The review of foreign investments in Canada is governed primarily under the Investment Canada Act ("ICA"), which sets out the processes for three types of review of foreign investments: economic; cultural; and national security.
Economic: Subject to certain limited exemptions, under the economic provisions of the ICA, every acquisition of control by a non-Canadian of a Canadian business, even where the target business is already controlled by a non-Canadian, requires either an administrative notification (which can be filed up to 30 days post-closing) or a detailed pre-closing review (during which time closing of the investment is prohibited). Whether a transaction is subject to notification or review depends on whether certain financial and ownership thresholds are met. The applicable financial threshold to a given transaction depends on several factors, including the structure of the transaction, the value of the transaction or business and the investor or vendor (including the nationality and the investor's potential status as a state-owned or state-influenced entity). See question 3.1, below, for the applicable rules and thresholds. If an investment requires review, it must be approved by the federal government on the basis that it is likely to be of "net benefit" to Canada. Such a "net benefit" determination typically requires that the investor provide legally binding undertakings regarding the future conduct of the acquired business.
Cultural: For an investment in a Canadian business that has activities related to Canada's cultural heritage or national identity (which activities are defined exhaustively in the ICA), the Minister of Canadian Heritage has jurisdiction to review the investment on a pre-closing (and, in some cases, post-closing) basis if certain financial thresholds are exceeded. The cultural business review thresholds are much lower than the economic review thresholds, and are set out in question 3.1. Cultural review is separate from economic review; where it is required, the Minister must approve the transaction on the basis that it is likely to be of "net benefit" to Canada. Such approval typically requires that the investor provide binding undertakings relating to cultural matters.
National Security: There is no separate mandatory process requiring pre-clearance or separate filings for transactions that raise or may raise national security concerns. When either a review or notification under the ICA is filed with the federal government (under the economic and/or cultural provisions of the ICA, described above), the investment will also be screened for possible national security concerns. In addition, transactions that do not trigger a notification or review requirement (including where they do not result in a change of control of a Canadian business, such as minority investments) can also be subject to a review for national security concerns if the transaction comes to the attention of the Government. In both cases, a national security review of an investment may be ordered if the Minister of Innovation, Science and Industry believes the investment could be "injurious to Canada's national security" (which is not defined in the ICA).
1.2 Are there any particular strategic considerations that apply during foreign investment reviews?
For transactions subject to economic and/or cultural business review, the approval process can be lengthy (i.e., 60 to 90 days) and typically requires the investor to commit to binding undertakings to obtain approval. Foreign investors should consider the potential ICA implications of their transactions very early in the planning process, and should ensure that potential undertakings are consistent with commercial objectives. In some cases, advance consultation with the Canadian Government is advisable, and public relations or government relations support may be helpful for high-profile acquisitions.
With respect to national security reviews, timing is an important strategic consideration. As noted in question 1.1 above, there is no separate filing or pre-clearance process required for the national security review process. As a result, in many cases, an investment which may be expected to raise national security concerns requires only the filing of a notification within 30 days after closing, or, such as in the case of a minority investment, may not require any notification at all. However, for regulatory certainty, there may be a benefit to filing a notification early, well in advance of closing a transaction, or to advising the Canadian Government of an upcoming investment that does not require notification. Such proactive steps can ensure that any national security issues arise (and are resolved) prior to closing, rather than after.
1.3 Are there any current proposals to change the foreign investment review policy or the current laws?
In July 2020, the Canadian Government announced a temporary change in its foreign investment policy on the basis that declines in valuations of Canadian companies due to the COVID-19 pandemic could result in opportunistic investment behaviour. It will therefore be increasing its scrutiny of inbound foreign investments to ensure they do not introduce new risks to Canada's economy or national security.
The Government further specified it will apply heightened scrutiny to foreign investments of any value, controlling or non-controlling, in Canadian businesses related to public health or involved in the supply of critical goods and services to Canadians or to the Canadian Government. Its announcement also indicates that investments by state-owned enterprises (or private investors closely tied to or subject to direction from foreign governments) will be subject to enhanced scrutiny under the ICA.
2 Law and Scope of Application
2.1 What laws apply to the control of foreign investments (including transactions) on grounds of national security and public order? Are there any notable developments in the last year?
The ICA applies to the review of foreign investments in Canadian businesses across all sectors and includes both national security and public interest ("net benefit") reviews. In addition, some regulated sectors have sector-specific legislation regulating investments (including foreign investments) into undertakings in these sectors, including for telecommunications companies (Telecommunications Act), broadcasting companies (Broadcasting Act), financial institutions (Bank Act) and transportation undertakings (Canada Transportation Act).
As discussed above, a notable change in 2020 was the Canadian Government's enhanced scrutiny of foreign investments as a result of the coronavirus pandemic. Since this announcement, there has been an increase in the use of the national security review process on transactions that might not historically have invited scrutiny. Transactions that would appear to have little nexus to national security (i.e., ones which do not relate to the Government's stated interest in sectors such as health, food, or infrastructure in Canada) and transactions involving reputable purchasers and target businesses (e.g., U.S. private equity investors) have received notices of potential national security review.
2.2 What kinds of foreign investments, foreign investors and transactions are caught? Is the acquisition of minority interests caught?
The national security provisions of the ICA apply to all direct or indirect investments by non-Canadians in entities that have one or more of: (a) a place of operations in Canada; (b) an individual or individuals in Canada who are employed or self-employed in connection with the entity's operations; or (c) assets in Canada used in carrying on the entity's operations.
The economic and cultural review and notification provisions of the ICA apply to acquisitions of direct or indirect control of a Canadian business by a non-Canadian investor.
Control: Whether control is acquired will depend on the structure of the target entity:
- Corporate target: the acquisition of less than a majority but one-third or more of the voting shares of a corporation is presumed to be an acquisition of control, but this presumption can be rebutted if it can be demonstrated that the purchaser has not acquired control in fact of the target. The acquisition of a majority of the voting shares of a corporation is deemed to be an acquisition of control.
- Non-corporate targets: for non-corporate entities, such as limited partnerships and trusts, the acquisition of a majority of the economic interests of the entity is deemed to be an acquisition of control (but there is no presumption of control for the acquisition of less than a majority of the voting interests).
Canadian business: A Canadian business is defined as a business carried on in Canada that has: (a) a place of business in Canada; (b) an individual or individuals in Canada who are employed or self-employed in connection with the business; and (c) assets in Canada used in carrying on the business.
Non-Canadian investor: The assessment of whether a foreign investor is considered a "non-Canadian investor" is described further in the response to question 2.4 below. In short, the assessment of whether an investor is Canadian or non-Canadian depends on ultimate control, rather than the jurisdiction of incorporation of the investing entity.
With respect to the national security and cultural business provisions of the ICA, the Minister also has jurisdiction to determine (including retroactively) that any investor is a non-Canadian (even where the investor would otherwise qualify as a Canadian within the meaning of the ICA) and/or that an acquisition of control has or has not occurred. Further, with respect to any of the provisions of the ICA, the Minister may determine that an entity which would otherwise qualify as a Canadian-controlled entity is controlled in fact by one or more state-owned enterprises (and is thus considered a foreign investor).
2.3 What are the sectors and activities that are particularly under scrutiny? Are there any sector-specific review mechanisms in place?
As noted above, investments in cultural businesses are subject to lower economic thresholds requiring pre-closing review under the ICA. A cultural business is defined as one that carries on any activities relating to the publication, distribution, production, exhibition or sale of books, magazines, periodicals, newspapers, film or video recordings, audio of video music recordings, music, radio communications to the general public, or any radio, television and cable television broadcasting undertakings or satellite programming and broadcast network services (even to a de minimis extent).
With respect to national security, the Government has announced that it will scrutinise investments in certain types of Canadian businesses engaged in sensitive and health-related industries. The Government's Guidelines on the National Security Review of Investments set out certain non-exhaustive factors that the Government will take into account when assessing whether an investment is likely to be "injurious to national security". These factors suggest categories of activities (rather than specific sectors) that can raise national security concerns, including: (i) the Canadian business' involvement in the research, manufacture or sale of goods and technology that is sensitive for defence or military purposes or in activities relating to Canada's defence capabilities and interests; (ii) the Canadian business' involvement in critical infrastructure; and (iii) the Canadian business' involvement in sensitive technology or know-how.
Finally, as described in question 2.1, above, certain industry sectors have sector-specific ownership restrictions (separate from and in addition to the ICA).
2.4 How are terms such as 'foreign investor' and 'foreign investment' specifically addressed in the law?
A foreign investor is defined under the ICA as an individual, a government or agency thereof or an entity that is not a Canadian. As a result, any investor that would not qualify as a Canadian within the meaning of the ICA is a foreign investor.
For individuals, a Canadian is defined as either a (i) Canadian citizen, or (ii) a permanent resident ordinarily resident in Canada for not more than one year after the time at which he or she first became eligible to apply for Canadian citizenship.
Originally Published by Global Legal Group Ltd, London.
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