On February 11, 2025, the Attorney General of Canada (the "Attorney General") filed an enforcement application in Federal Court under section 40 of the Investment Canada Act ("ICA"). The application represents the first time the Canadian government has sought court-ordered divestitures for non-compliance with the ICA's national security regime.
The application seeks a court order against Gator Capital Ltd ("Gator") requiring the company to divest its minority stake in Lithium Chile Inc. ("Lithium Chile"). Gator served as a divestiture buyer with respect to a separate national security order more than two years ago, when the Federal Cabinet ordered Chengze Lithium International Limited ("Chengze") to divest the same minority position in Lithium Chile (the "Historical Divestiture Order"), reported in our previous bulletin.
This litigation further highlights the heightened national security enforcement climate in Canada, especially for investments involving critical minerals and investors with actual or perceived connections to China. It also serves as an important reminder of the breadth of the national security provisions of the ICA, and the powerful tools available to the Canadian government in the event of alleged non-compliance with the statutory scheme. Going forward, investors may expect the government to leverage the Minister's power to impose interim conditions to maintain control over key voting, information sharing and other governance rights pending completion of reviews and, separately, require that divestiture buyers be approved by the Canadian government before divestitures are completed, akin to the purchaser approval powers that the Canadian government (through the Commissioner of Competition) obtains in the context of competition law merger remedies.
Historical Divestiture Order
In a high profile announcement on November 2, 2022, the Minister of Innovation, Science and Industry (the "Minister") announced that Federal Cabinet had ordered the divestiture of three separate and unrelated investments completed in 2022 by Chinese investors. The Historical Divestiture Order was one of these three orders: the acquisition of a 19.35% interest in Lithium Chile by Chengze.
The Canadian government's national security jurisdiction is broadly defined, capturing any establishment of a new Canadian business or acquisition of control of a Canadian business by a non-Canadian, as well as non-control acquisitions involving a target entity (whether or not it qualifies as a "business") carrying on some operations in Canada, provided the entity has at least one of a place of operations in Canada, an individual in Canada employed in connection with those operations, or assets in Canada used to carry on those operations.
Though the Chengze / Lithium Chile transaction had very limited nexus to Canada – while Lithium Chile is traded on the TSX-V, its productive operations are exclusively in South America – the government concluded that Lithium Chile "maintains a registered office and place of operations in Calgary, Alberta" and that it is a Canadian business within the meaning of the ICA.
As part of the Historical Divestiture Order, the Canadian government "ordered Chengze, inter alia, to divest itself of its investment in Lithium Chile within 90 days" and further ordered that "Chengze must not sell or assign its shares in Lithium Chile to an affiliate nor to a state-owned enterprise of the People's Republic of China [...] or a company that is influenced by the government of the [People's Republic of China]".1 However, it appears that the order did not specify any process to allow the Canadian government to confirm that Chengze's divestiture was in compliance with the order before it was completed.
On February 16, 2023, Chengze notified the Canadian government that it had divested all of its shares in Lithium Chile to Gator. Chengze subsequently provided the Foreign Investment Review and Economic Security Branch of Innovation, Science and Economic Development Canada ("FIRES") with documentation evidencing the divestiture and compliance with the Federal Cabinet's November 2022 order, including a transaction agreement for the divestiture as well as an identity document for Mr. Wing Hong Chan (who was identified as Gator's sole shareholder).
Information Requests of Gator as Divestiture Buyer
Following the divestiture, FIRES made a series of attempts to contact Gator and Mr. Chan with requests for information to determine whether Gator was Canadian controlled, a Chinese state-owned enterprise, or a company influenced by the Chinese state. The Minister issued formal requests under section 39 of the ICA on June 8, 2023 (the "First Demand"), on October 23, 2023, (the "Second Demand"), and December 5, 2023 (the "Third Demand").
The Minister coupled the Second Demand with a declaration under subsection 26(2.2) of the ICA that Gator was "not a Canadian controlled entity" (a declaration the Minister is empowered to make where an entity "has refused or neglected to provide, within a reasonable time, information that the Minister or the [FIRES] has requested").
Following these steps, FIRES made additional attempts to contact Mr. Chan, and eventually succeeded in reaching him by telephone in June 2024. The government stated that Mr. Chan confirmed on this call that he had received copies of the requests for information but did not respond to them.
The Enforcement Application
The enforcement application represents the first time the government has sought court ordered divestitures for alleged non-compliance with the ICA's national security regime, which powers are contained in section 40 of the ICA. If the government's application meets the applicable statutory tests (namely, that the Minister was justified in sending the demand and the person has failed to comply with the demand), the court may make "any order or orders as, in its opinion, the circumstances require". Subsection 40(1) of the ICA also sets out a non-exhaustive list of potential remedies, including injunctions, divestitures, and monetary penalties of up to C$10,000 per day (which are set at some point to increase to C$50,000 per day).
In these proceedings, the Attorney General is seeking an order against Gator for alleged non-compliance with the Third Demand. The key relief sought is the divestiture by Gator of its shares of Lithium Chile to a Trustee within 30 days of the order,2 with those shares to be disposed of by the Trustee to a purchaser (and on terms) to be approved by the Minister. As an alternative to divestiture, the Attorney General has sought a court order directing Gator to respond to the Third Demand to the satisfaction of the Minister within 30 days (and has sought an order enjoining Gator's ability to dispose of its position in Lithium Chile and any rights held via its shares in Lithium Chile's shares, pending such response). In addition, the Attorney General has sought a monetary penalty against Gator for non-compliance, to be determined by the court.
Key Takeaways for the ICA National Security Process
This novel application raises several important takeaways:
- Potential for Prior Approval Requirements for Future Divestitures. The Historical Divestiture Order prohibited Chengze from divesting its interest in Lithium Chile to a Chinese state-owned enterprise or to a company influenced by the government of China, without providing the Canadian government with any prior approval rights concerning such buyer. Given the action against Gator is premised on Chengze having divested its interest to a prohibited party, it would not be surprising if future divestiture orders made under the ICA's national security regime include provisions enabling the Minister to approve a divestiture buyer before such divestiture takes place. Indeed, in the application against Gator, this mechanism has been included in the remedies sought from the court.
- Interim Measures. Since September 2024, the Minister has had the power to impose interim conditions on an investment where the Minister is "satisfied that it is necessary for the purpose of preventing injury to national security that could arise during that review".3 FIRES' Administrative Note on Interim Conditions also contemplates interim conditions restricting the non-Canadian investor's governance rights.4 Going forward, it is possible that the government may impose interim restrictions on voting, information sharing and other governance matters (or potentially stricter measures such as trustee structures) in instances where it considers a divestiture order to be likely.
- Jurisdictional Questions Remain. Though this litigation evidences the government's powers where it reviews an investment under the ICA's national security regime in respect of entities that it concludes constitute a "Canadian business" (which, ultimately, it would be for a court to decide), if the facts were different, there would remain open questions concerning the government's jurisdiction to make such orders. This could be seen in two ways. First, if the transaction concerned the sale of an entity with nothing more than a listing in Canada (i.e., no assets, employees, place of business, or operations in Canada) the government's national security jurisdiction under section 25.1(c) of the ICA may not be engaged. Second, if the acquired business was a foreign entity of a Canadian parent, a Canadian court may struggle to order the vesting of the non-Canadian entity's shares as a remedy under sections 40 and 41 of the ICA.
- Global Authorities are Alert to Non-Compliance with National Security Frameworks. The facts of this case bear resemblance to a similar national security review fact pattern in Australia. In June 2024, Australia's Foreign Investment Review Board ordered that Yuxiao Fund Pte Ltd and its associates (based in China) reduce their shareholding in Northern Mineral Limited (an Australian rare earths miner). That stake was sold to two Hong Kong registered companies, but Australia's Treasury is now investigating the new shareholders to establish whether their connections to China frustrate the purpose of the original order.5 Together, these cases suggest that authorities will be on alert for perceived circumventions of national security remedies in the future.
- Declaration that Gator is Not Canadian Controlled. The ICA contains provisions that contemplate non-compliance and ascribe severe consequences for parties that breach its requirements. In this case, failure to respond to the government's information request led to a declaration that Gator was not Canadian-controlled, providing the basis for the subsequent legal proceedings against Gator. Accordingly, this action is an important reminder that non-Canadian investors cannot assume that the Canadian government will let non-Canadians ignore its efforts to administer the ICA. Furthermore, in this case the government allowed its investigation to span a number of years; it is to be seen whether the Canadian government will be as lenient in this regard in future investigations.
Footnotes
1. Attorney General of Canada v. Gator Capital Ltd., Notice of Application, File No. T-472-25.
2. If Gator fails to comply with that order voluntarily, the Attorney General has sought an order by the court vesting the shares in a Trustee named by the court pursuant to section 41 of the ICA (that is, without requiring action by Gator).
3. Investment Canada Act, RSC 1985, c 28, s. 25.3(1.1).
4. FIRES, Administrative Note on Interim Conditions, September 3, 2024, online: https://ised-isde.canada.ca/site/investment-canada-act/en/administrative-note-interim-conditions.
5. The Australian, "Australian government warns China over Northern Minerals' rare earths project in Western Australia", Brad Thompson (December 2, 2024), accessible: https://www.theaustralian.com.au/business/mining-energy/australian-government-warns-china-over-northern-minerals-rare-earths-project-in-western-australia/news-story/93f7bd70a76eab3b9ddde63206f00a3b.
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