On October 28, 2022, the Government of Canada released a policy providing additional clarity about how the Investment Canada Act (ICA) will be applied to investments in Canadian entities and assets in critical minerals sectors from foreign state-owned enterprises (SOEs). This policy indicates that investments by SOEs in Canadian critical minerals businesses will face high levels of scrutiny under Canada's foreign investment review regime.
While this policy statement is a very notable development under the ICA, it also bears noting that such investments are, we would say, already subject to careful scrutiny under the ICA and that since 2009 the Canadian Government has had the unilateral, unfettered discretion to block or unwind such investments - and indeed any investment at all - using its national security powers. Our assessment therefore is that the policy statement seems designed to serve a strong "signalling effect" to the M&A community and Canada's trade partners, consistent with other, recent messaging regarding the government's evolving foreign policy priorities, rather than newly impact a meaningful number of transactions.
Background
The Government of Canada's focus on critical minerals has sharpened in recent years, given their increasing importance in sustaining the future economic success of Canada. Critical minerals are essential for renewable energy and clean technology applications, such as electric vehicles, and are required inputs for other critical supply chains and critical infrastructure.
Canada and the United States finalized a Joint Action Plan on Critical Minerals Collaboration in January 2020. The Government of Canada published the Critical Minerals List on March 11, 2021, which includes 31 minerals,1 many of which are currently produced in Canada, while others are not produced in Canada but may be mined by Canadian companies abroad. The Government's updated Guidelines on the National Security Review of Investments, released March 21, 2021, included "the potential impact of the investment on critical minerals and critical mineral supply chains" as a factor that the Minister of Innovation, Science and Industry and the Canadian Government may take into account when reviewing investments on national security grounds pursuant to the ICA.
This past January, the Minister was summoned before the Standing Committee on Industry and Technology to answer questions about why the Government allowed the acquisition of a Canadian-headquartered lithium company with lithium assets in Argentina (Neo Lithium) by a state-owned Chinese mining company (Zijin Mining) without conducting a full national security review under the ICA, following which the Standing Committee issued a report recommending that all investments by SOEs be subject to full national security reviews under the ICA. On October 21, 2022 the Minister made comments about "decoupling" from China and "other regimes in the world which don't share the same values" during a visit to the United States.
The Policy Statement
The targets of the new policy statement are foreign state-owned enterprises, which includes the government of a foreign state (including federal, state and local governments as well as government agencies), entities that are controlled or influenced by a foreign government or agency thereof (including sovereign wealth funds) and individuals who act under the direction or influence of a foreign government or agency thereof. The policy statement applies equally to SOEs from "friendly" countries and SOEs from countries such as China and Russia, although we expect that significantly greater scrutiny will be applied to SOEs from "hostile or non-likeminded regimes or states", consistent with the Minister's recent comments.
The policy statement includes guidance for the two main review powers under the ICA - net benefit review and national security review.
Net Benefit Review
Net benefit review only occurs for acquisitions of control of Canadian businesses (not minority acquisitions), when the transaction meets certain defined thresholds. For direct acquisitions of control of Canadian businesses by SOEs in 2022, the net benefit review threshold is $454 million in asset value. The Minister must approve transactions above this threshold by determining that they are of "net benefit" to Canada. Interestingly, it is now the case that only roughly five or so transactions per year meet the relevant net benefit thresholds, in part because this government previously decided, in its early years in power, in a very different policy environment, to massively increase the net benefit thresholds. We are not aware of a transaction involving an SOE acquiring a critical mineral business that has even required a net benefit review in the past couple years. One high-profile mining transaction that was subject to net benefit review, the Shandong / TMAC Resources transaction, was in fact blocked on national security grounds, even though it did not involve a critical mineral business, thereby illustrating the government's existing ability and willingness to block any transaction raising national security concerns, with or without a policy statement
Pursuant to the policy statement, net benefit approval of acquisitions of control of a Canadian business involving critical minerals by a SOE will only occur on an "exceptional" basis. This does not mean that such a transaction will never be approved, but it will be difficult to obtain approval and most likely require extensive undertakings be provided to the Government.
National Security Review
All investments by non-Canadians in Canadian businesses, including minority investments and indirect investments regardless of value, are subject to potential national security review under the ICA. In the past fiscal year, the Government received ICA notifications in respect of over 1,200 transactions which were then subject to an initial national security screen, with roughly 24 transactions then proceeding to the next stage of national security review. Pursuant to the policy statement, investments by SOEs involving a Canadian business or entity operating in a critical minerals sector in Canada will be subject to at least a potential national security review. While the policy statement does not go so far as to indicate that such investments will be blocked on national security grounds, we expect that significant scrutiny will be applied to such investments. The policy statement also clarifies the Government view that the national security provisions apply broadly across the supply chain to include entities involved only in exploration activities (which are not typically considered Canadian businesses for ICA purposes).
Key Takeaways for Businesses and Investors
This new policy is the latest in a series of comprehensive policies with respect to the Government of Canada's review of investments under the ICA.
Canadian businesses involved in the critical minerals sector should carefully consider any plans to solicit foreign investment from SOEs or entities subject to influence by foreign states, and appropriate protections can be built into any such investment agreements.
Non-Canadian investors looking to invest in Canadian businesses involved in the critical minerals sector should take care to identify any SOE interests or influence over their shareholders or operations and should weigh the benefits of advance consultation with ISED's Investment Review Division prior to implementing any such investments.
Footnote
1. The 31 minerals on the Critical Minerals List are Aluminum, Antimony, Bismuth, Cesium, Chromium, Cobalt, Copper, Fluorspar, Gallium, Germanium, Graphite, Helium, Indium, Lithium, Magnesium, Manganese, Molybdenum, Nickel, Niobium, Platinum group metals, Potash, Rare earth elements, Scandium, Tantalum, Tellurium, Tin, Titanium, Tungsten, Uranium, Vanadium and Zinc. There are six platinum group metals and 17 rare earth elements, bringing the total number of critical minerals to 52.
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