Understanding the recent proposed amendments to the Investment Canada Act

THOMAS TIMMINS: OK. Welcome, everyone. I believe we are live and ready to go. I'm absolutely delighted to be welcoming everyone to our webinar today. My name is Tom Timmins. I lead the energy practice here at Gowling WLG. And together with the able work of Sheila Carnegie, Luke Wong, Brian Lee, Peter Lukasiewicz, Frank Sur, Peter Zhang, Nancy Deng, Luc Lissoir, many, many others, people across Canada, across China, and around the world, I also lead our China practice here in Canada.

Today we're going to be discussing the Investment Canada Act and some recent proposed changes to that act that may be coming from the federal government of Canada. I am delighted to be joined today by my colleague Ian Macdonald. Before I introduce Ian, I just want to take us through a few housekeeping items.

First of all, today is Wednesday, February 1, 2023. It's a cold, clear day here in Toronto, Canada. I mention this because we're going to be going into a fair level of detail regarding the Investment Canada Act. And this video is being recorded. And of course, this is an area of law which is changing. And by the time you see this video, some of what we say here today may no longer be accurate and up to date. So please bear that in mind.

For those joining us from around the world, you will see a translation feature at the bottom of your window, of your Zoom window. You will also see that you can pose questions by hitting the Q&A icon at the bottom of your window as well. We look forward to answering some of those questions at the end of the session.

This video, and many, many other knowledge resources regarding a wide array of topics and issues, are available on our website at gowlingwlg.com/insights-resources. And that's a really good place to go for other similar topics regarding legal matters. Gowling WLG, of course, is an international business law firm with offices around the world, including across Canada, in the UK, in China, in Singapore, in Dubai, in continental Europe, and with sister firms in virtually all other global markets.

Now turning to our topic, many people are aware of the Investment Canada Act and many people know that it applies whenever a non-Canadian entity, that is, an entity that is not Canadian controlled, invests in Canada. Today, we're going to be, as I said, going into a fair level of detail regarding the act and regarding the proposed changes to the act. And so I'm absolutely delighted that we have Ian Macdonald, who is a very busy man these days, joining us to take us through some of the topics.

Ian heads our competition and foreign investment review practice. He sits with me here in Toronto. Among other things, he has experience, extensive experience with the national security review powers under the Investment Canada Act, having advised clients often as lead or sole counsel for a buyer or an investor through a full national security review process on more than half a dozen occasions, which is a lot in this particular area of law.

To put that in perspective, between the inception of the national security review, that's NSR, powers in 2009, and the end of the government's 2022 fiscal year, there were only a total of 52 NSRs, or national security reviews. Ian was lead counsel on the first full NSR to end with no further action by the government. All previous reviews prior to that had ended with catastrophe in some cases for the transaction, either to see it blocked or to see a divestiture, or to see the parties required to abort the transaction, the proposed transaction.

Ian has also advised on numerous extended initial reviews-- and we'll explain a little bit what that means as we get into it-- and dozens of precautionary preclosing filings. Ian is also the immediate past chair of the Foreign Investment Review Committee of the competition and foreign investment review law section of the Canadian Bar Association. And in that capacity, he was in frequent contact with senior investment review division officials about matters related to the administration of the act separate and apart from his extensive dealings with them on filework.

Ian is a frequent speaker and writer on the Investment Canada Act developments. And aside from all of that, he's a great guy and a wonderful resource. And we're very, very lucky to have him here at Gowling WLG. So Ian, over to you. I have a couple of questions, but maybe I'll let you start off.

IAN MACDONALD: OK. Well, thank you for that introduction, Tom. Just by way of 101 level overview, what the Investment Canada Act is, it's a statute that regulates foreign investment in Canada. And it essentially has two key components. One that requires mandatory notification or preclosing net benefit review and another that deals with a discretionary national security review powers.

So essentially, the establishment-- the acquisition of control of an existing Canadian business or the establishment of a new Canadian business by a non-Canadian, in terms of the ultimate controller of the buyer, even if it's a Canadian SPV that's [INAUDIBLE] you look out to the top, requires either preclosing net benefit review or simple notification. And which of those two is required depends on whether the applicable net benefit review thresholds have been exceeded.

There are many permutations of threshold, but we won't have time to go through them all today. But the most common ones are if the target company has an enterprise value in excess of $1.7-ish billion, if the investor is ultimately controlled by private sector citizens of a country with which Canada has a free trade agreement, $1.1 billion of enterprise value if it's private sector citizens of a country that is a member of the World Trade Organization, which is almost all countries, $454 million book value of target assets if the buyer is considered to be a state-owned enterprise, that is an entity that is either owned or influenced by a foreign state, foreign relative to Canada. And then there's a special category for cultural businesses that has a really low threshold of only $5 million of book value of assets.

So the most commonly recurring permutations are the $1.7-ish billion enterprise value or $1.1 billion enterprise value, which are very high net benefit review threshold. And as a result, are only a relatively small number of deals are subject to preclosing net benefit review every year. All of the rest of acquisitions of control or establishment of a new Canadian business do have to be notified to the Canadian government. But that's not an impediment to closing and can be done, and often is done, up to 30 days after closing.

Separate and apart from that regime, though, the government does have very broad discretionary powers to do a national security review regardless of whether the net benefit threshold is exceeded. And also even in the context of non-control level acquisitions or in the context of acquisitions where the target doesn't even meet the definition of a Canadian business, its links to Canada are too tenuous to actually be a full Canadian business, but it does have some part of its operations in Canada and therefore those powers apply.

Tom, I think you're on mute.

THOMAS TIMMINS: That's not the first time I've done that. That's great, Ian. Thank you. So many clients-- in fact, many lawyers are not even aware of the notification requirement when a foreign-controlled entity is acquiring a Canadian investor-- investing in Canadian business. And this, of course, in today's context has become more important than ever. Ian, I'm wondering if you can give us a bit of background or a bit of summary regarding the evolution of the national security review powers leading up to the amendments, which people will have seen were proposed by the government of Canada in December.

IAN MACDONALD: Absolutely. And just your note, Tom, about some people not even being aware of it, so these powers were introduced in March of 2009. And prior to that time, the notification regime was still in place, but there was a lot of non-compliance. And no one has specific numbers. Maybe the government may have, to some degree, have a sense. But no one knows exactly how many people did not notify, but it was a lot. And it wasn't really enforced and there were no real consequences at that time.

But since the inception of the national security review powers, it's become more important to do that notification because once the government receives a notification, it has a 45-day window that opens to invoke the national security review powers or not. And if you don't notify, the government's window never begins and therefore it never ends.

And you can actually have situations where the government could come back at you years later if they find out about a transaction that was not properly notified. So just an important note on that point. I mean, there's a lot more knowledge now and people will take it much more seriously in terms of compliance, but we are still aware of some situations where notifications get missed and caught up with fact. So that's an important point to highlight.

So in any event, in March of 2009, the government introduced very broad national security review powers under the act. And they enabled the government to review any investment in a Canadian business by a non-Canadian on grounds of national security, including businesses that may have tenuous links to Canada. And the potential outcomes can be quite draconian.

So one thing they can do if the transaction has not closed is they can prohibit it from closing. Another is, if the transaction has closed, is they can require divestiture. And they can do that, require it in a short window at no floor price. So whatever the forced seller is able to get for it within a relatively short window could be the consequence.

Another option is that they take a look at it and say, OK, we've looked at it. No issues. You're clear to go. That used to be almost unheard of in the early years since the act was amended to add these powers, but has become a little bit more common. And another option is they can look at it and say, OK, we're not totally comfortable with the deal, but not so uncomfortable that we're going to block it or require divestiture, but we're going to impose conditions. And so the buyer can continue to own the business if they do x, y, and z. And they can impose conditions.

Subject to limited exceptions, and we'll get into some of those as we go through, the review process is confidential. And in the early years following 2009, it was a complete black box. Initially, the government did not provide any guidance as to the factors that could trigger a review or influence its outcome. And it very deliberately decided to afford itself the maximum flexibility of taking a we'll know it when we see it kind of approach.

This degree of opaqueness resulted in significant criticism from stakeholders because it made it difficult for them to-- for potential investors to assess before incurring potentially significant pursuit and diligence costs that can run into the millions sometimes, whether their deal might raise national security concerns, whether it's even worth going down the road of trying to do a deal. And then there was the argument by stakeholders that the government should be able to disclose some kind of information without compromising either national security or the confidentiality of the parties involved.

So between March of 2009 when the powers were added and the summer of 2016, you had fragments of information about some reviews became public. For example, if the target company was a publicly listed company and therefore had securities laws, disclosure obligations, it might have to disclose that its proposed acquisition has been caught up in the national security review powers. And so you'd get some fragments of information that way.

In some occasions, a disgruntled investor who was blocked and required to divest would actually hold their own press conference just complaining about the process and how they'd lost money, and it wasn't fair, and things like that. But generally, it was confidential and you only got fragments of information.

During this time, parties informally adopted a file early approach. And the reason for this is, as I mentioned earlier, once the government receives notice, it has 45 days to decide what to do and whether to invoke national security powers or not. So what some buyers would do is they, well, if I'm at risk, I'm not going to close this deal until I notify and wait 45 days. And if the government doesn't invoke its powers, then I can close with absolute certainty that they cannot come back at me post-closing. And if they do, I'd rather learn that I don't want them to do that. But if they do, I'd rather know it before closing than after when I have to try to unscramble the egg or have a fire sale divestiture.

But there were, at the time, differing views on what potentially at risk means. Certainly, it was more than a wild guess. You could apply common sense as a target military. You could observe other jurisdictions, such as the United States, where they had a more mature national security review regime under CFIUS and some public information about that. But there was still wide parameters as to what is at risk and what is not at risk.

In addition, some parties were extremely reluctant to file early, fearing that doing so was tantamount to red flagging or admitting that they were a problem, and they didn't want to do that. So in the summers of 2016 and 2017, the government, for the first time, released some high level statistics on the use of the national security review powers, including the number of reviews that had been conducted, broken down by year, and their outcomes.

And I remember looking at the 2016 disclosure and it painted a very bleak picture. There'd only been seven reviews done at that time, but they had all ended catastrophically with the transaction, either it was blocked preclosing, divestiture was required post-closing, or the parties simply aborted the deal.

Starting in 2017, in its annual report, the government started to disclose more information, including the industries in which the relevant Canadian business operated and, very importantly, the country of origin of the relevant foreign investors. They did not disclose whether the foreign investors were state-owned or not, but they did disclose the country of origin. And at that time, a very clear pattern started to emerge. And this was that the bulk of the reviews were being done on investors from one country, and that country was China.

And just to fast-forward a bit, Tom, at the outset, you mentioned the 52 total reviews that have been done since the inception of the powers in 2009 and March 31, 2022, which is the government's fiscal 2022 year end. And of those 52 full reviews, 30, so the majority, about 60%25, were done on investors from China. Another seven were done on investors from Russia. And between China and Russia, two countries account for little over 70%25 of total revenues. So a very clear-- this is not something that is used sort of if you do an average that US investors get x%25 and-- it's skewed heavily against Chinese investors in terms of the statistics.

And the other thing is you'll see countries like Switzerland or the UK, or France, or Singapore show up as the country of origin. And there may be more to the story than that because what that means that is the country of ultimate control of the investor as determined under the rules of the Investment Canada Act. What it doesn't mean is that there is not a link to a third country, such as a high net worth individual or oligarch whose citizenship has changed.

And the concern really could be related to say Russia, but another country may show up as the country of ultimate control perhaps, or it could be a minority investor from one country that doesn't tip control but they said, well, that's enough to cause the concern.

And then-- so in late 2016, following a lot of pressure from stakeholders, the government published national security review guidelines for the first time. And they included a non-exhaustive list of risk factors that, if present, they recommended-- they formally recommended the approach of filing at least 45 days before closing. And these are-- a lot of these things were common sense, military, defense, sensitive technology, critical infrastructure, things of that nature. I won't go through them all. We don't have time. But they're in a list on the government website.

And one of the things that those initial guidelines did, though, was they focused almost exclusively on the characteristics of the target company. So if you read those guidelines, you would say, OK, I'm a US public company buyer trying to buy a Canadian [INAUDIBLE] company that is sensitive according to the business. These guidelines would suggest that I'm at exactly the same risk as a Russian oligarch because they didn't get into the characteristics of the buyer.

But in fact, the reviews statistics, and for people who practice in the area, knew that that's clearly not the case, that the characteristics of the buyer are critically important to determining whether a review is going to be conducted and its outcome. Arguably, in my view, the much more important variable than the characteristics of a target. And we're aware of both public and non-public examples where a buyer from one country posed an unmitigated problem but a buyer from another country did not pose a problem.

And one public example that I can share is the MTS Allstream deal from a number of years ago, where initially MTS tried to sell the Allstream division to a company controlled by an Egyptian billionaire, ultimately controlled by an Egyptian billionaire. And that was blocked and that became public. But after that deal failed, the Allstream division was subsequently sold to Zayo, a US company, without any problem. So that's a tangible public example of how important the characteristics of the buyer can be.

So fast-forward now to 2020, the government implemented an enhanced scrutiny policy at the outset of COVID in which they said that basically they would do enhanced scrutiny, including using the national security review powers in relation to certain businesses that were critical to Canada's supply chain or to its response to COVID and, importantly, if the buyer was state-owned or state-influenced, not just state-owned but state-influenced.

Because they felt that at the time, a lot of companies lost their value and the fear was that you'd have opportunistic buyers coming in and buying distressed Canadian companies at a low price. And if that was compounded by those buyers being backed by a foreign state, that they'd want to do enhanced scrutiny. So that was really one of the-- a key moment in terms of identifying characteristics of the buyer as a potential national security issue to formally do that.

Then in 2021, March of 2021, the government amended the national security guidelines to add more risk factors, including identifying an appendix of sensitive technologies, adding a reference to critical minerals and a critical minerals list, and personal information and personally identifiable information as risk factors. And then they formally adopted in the guidelines what was initially meant to be a temporary enhanced scrutiny policy, saying that if the buyer is owned by a foreign state or influenced by a foreign state, that that would be another situation where the buyer should recommend-- should file at least 45 days before closing.

And now we'll get to 2022, which was a very active year and brings us to the amendments that we'll really get into in detail in a second. So early in 2022, the government enacted a Russia policy after Russia's invasion of Ukraine. And in deals where the net benefit review threshold was exceeded, they said it would only be granted on an exceptional basis. That's not all that relevant because Russians weren't doing a lot of deals over the net benefit threshold anyway.

But then they also said that for deals below that threshold, if a buyer had links to the Russian state, that that could trigger national security concerns. In the summer of 2022, they enacted a formal voluntary filing mechanism for deals that did not trigger formal notification.

And this was a real value to investors because prior to this time, you had a gap in the act where if a buyer was buying a non-controlling interest in a Canadian company or was buying a company that didn't meet the definition of Canadian business, but had enough of a link to Canada that national security jurisdiction attached, the buyer could not, in other those circumstances, trigger the formal 45 day before-- file 45 day before closing approach.

They could informally approach the government and try to get their views, but they couldn't file and wait 45 days and then have an absolute certainty that if the period is allowed, that they could close. And the government addressed that as a deficiency and therefore started allowing investors to formally do that. And at the same time, they put a cost on the parties who chose not to voluntarily notify those kind of deals before closing by giving a five-year window post-closing if someone didn't voluntarily notify in a circumstance that could be sensitive.

Then in October of 2022, they enacted a critical minerals policy, which stated that for deals that exceeded the net benefit review threshold, if a buyer was foreign state-owned or influenced, that net benefit approval would only be granted in exceptional circumstances. And for deals below the threshold, that if the buyer was foreign state-owned or influenced, that it could trigger a national security review concerns.

And when that policy was announced, people immediately started thinking, well, in our critical minerals sector, there are a lot of companies that have a tactical link to Canada because they come to the TSX, the Toronto Stock venture exchange, but that's really their only link to Canada. That the critical minerals are in South America. And so we have this nice policy. How are they going to use it, though, for deals that have that tenuous [INAUDIBLE]

Well, we didn't have to wait very long to find out because very shortly after they enacted that policy, they publicly announced that three Chinese companies were being forced to divest recent acquisitions in Canadian critical minerals companies. And there are a couple of things that are really important to know about that divestiture order and the press release surrounding it.

One was that in all three cases, the investors had acquired minority interests in the Canadian target company. Two, the second thing is that in two of those cases, the link to Canada of the Canadian company was somewhat tenuous and that there was a TSXV listing, but the assets were actually in South America. The third company had a mixture of assets in Canada and South America.

And this all followed a political controversy that included parliamentary hearings over the Zijin-Neo Lithium deal, where the government was criticized by opposition parties over allowing that deal to proceed without-- whether there should have been a full national security review. And so then we see this policy. We see three companies named publicly.

And that was a departure from the past, a very significant departure as well because historically, the government had not made reviews public. They'd become public if the parties made them public, but not the government. And not only did they do that in these three deals, but they announced, at that time, that going forward, if a national security review gets to the final stage of a cabinet order, that they will at that time announce the outcome, including detailed information.

And that was a very significant change because we've worked with a lot of clients over the years who say, look, we're a global company. We do work all over the world. And in many jurisdictions, one of the questions that we have to answer to get into that jurisdiction is, have you ever been prohibited or bad, or subject to conditions under the national security review regimes or any other regime of any other country?

And so if you get a blocking order or a divestiture order under the Canada-- under the Investment Canada Act, you would then have to answer that question affirmatively, which a lot of people don't want to do for obvious reasons. So historically, what-- and this will still be possible, is that if you have not implemented your investment yet-- so let's say you file preclosing or you establish a new Canadian business, but it hasn't become a Canadian business. There's a bit of a technical explanation there.

So a lot of-- the date of incorporation of a business is not the date of implementation of a new business. You actually have to be capable of generating revenue. So if you have not reached the implementation point, you can withdraw your ICA notification and terminate the process. And you can still do that. So if you get caught up in the national security review powers and you haven't got to a final outcome and you have not yet implemented, then you can pull your notice and terminate the process, and then you will not be publicly named by the Canadian government.

But if you do get caught up in the full review process and it comes to a cabinet decision, then because of this new announcement and policy, they will name the party. And just-- I'll get into maybe the full process so that people know how you--

THOMAS TIMMINS: That'd be great. Yeah.

IAN MACDONALD: So it all starts by submitting a notice. Once you submit your notice, the government has 45 days to decide whether to invoke the powers. The best outcome for an investor is that they don't invoke the powers. Your 45 days passes-- 45 days from a complete notice. So if there are deficiencies, your 45 days will not start until those-- you work those out with the government. But they'll tell you when the start date is. And if it ends without any notice, things are good.

Another thing they can do is they can, at the end of the initial 45 days, is they can put you into what's called an extended initial review or a notice of potential review. So that doesn't mean they're doing a full review. It just means that they're buying themselves an additional 45 days to decide whether to do a full review.

And then if you don't get the best outcome, which is no notice at the end of the first 45 days, if you get punted into the second 45 days, the second best outcome is to not go past that 45 days to get a notice at the end of that second 45 days that says, OK, we're not doing anything more to you. You are free to close if you have [AUDIO OUT] not pursuing this further.

But the next stage is that they can order a full review. And this is ordered by the full-- at present, this is ordered by the full federal cabinet. So it's not something that is taken lightly at all. And they order a full review at that stage if they want. And at that stage, they had to set out a summary of concerns. You generally know what the concerns are even if they don't tell you, just common sense based on what or who the buyer is or who the-- or the nature of the target's business and any Q&A that you've had with the officials leading up to that point.

But if they get to the full review stage, they have to tell you in a summary of concerns what the concerns are. And then you have the right to try and address those concerns. And so the initial review period if they order a full review is 45 days. They have a unilateral right to an additional 45 days, which they almost always take. And then have the right to ask for a consensual extension of that, which isn't really consensual because if you're asked for consent and you don't consent, you know what the outcome is going to be. You'll get a bad outcome.

So nominally, the-- and then from there, the matter can be referred to cabinet, and they have 20 days to make a decision. So if you have not implemented, you can pull at any point prior to a cabinet decision. And the process can take up to 200 days or more, depending on any consensual extension.

And then in December of last year, they announced some major amendments to the act. So that's-- I know that was a lot of information, but I thought it was important to get out the--

THOMAS TIMMINS: Well, that's great. That's great, Ian. So some of the key takeaways here is this can take time. And this is one of those things if you are acquiring or building a business in Canada, that you need to think through early and get good advice and support on early. That's really my impression. Ian, can you tell us about the amendments?

And I really want to stress for folks-- and folks, if you do have questions, please post them at the bottom of the screen, but I really do want to stress for folks these are proposed amendments. They're not law yet. And Ian, maybe you could help us understand what's been proposed.

IAN MACDONALD: Absolutely. And Tom, I just want to pick up on one of the things you said about planning early and taking this seriously. And I'll go back to sort of your earlier comment about some people not even doing the form. So prior to the implementation of the national security review powers in 2009, the form was a really easy thing to fill out. It took about a maximum of an hour or so. A junior associate could do it. In some cases, the administrative assistant of-- like lawyers who live and breathe the ICA had done so many that they could do it alone in about an hour.

But in conjunction with the implementation of the national security review powers, the form was fundamentally revamped to elicit a lot more information about the bar that would help with the national security, the assessment of whether there's a national security review risk, including a lot of detail about upstream ownership. And one of the questions is, does a foreign state have a direct or indirect ownership of the investor?

And so that may seem like a pretty simple question in the abstract, but I can tell you from years of experience now, that question alone can take as much time as the rest of the form entirely. So in some cases, it's obvious. You have a special purpose acquisition vehicle way down the chain. And at the top, you have 100%25 state-owned enterprise [INAUDIBLE].

However, in other cases, you have much more complex ownership structures. For example, private equity funds. Private equity funds almost always have limited partners invested in them that fall within the definition of state-owned enterprise because a public sector pension fund would be a state-owned enterprise and a public sector pension fund often invests in private equity funds. That's how they deploy some of their capital.

So first of all, you're dealing with people way up the chain that can get into really small numbers. But on top of that, you have a layer of-- sometimes you have a layer of privacy or confidentiality where you're-- the direct buyer is, say, an operating company and they're owned 25%25 by a private equity fund or they could be owned by multiple different private equity funds.

And they have to go to them and say, we need information about the identity of your investors, you may consider to be very confidential, and we need to give some of that information to the Canadian government. So that's just something to keep in mind at the early stages the-- our government looks all the way to the top, including to relatively small indirect investors, particularly when those are state-owned.

THOMAS TIMMINS: So they get right up into people-- into the business and into the private affairs. And that's something to note. So Ian, the amendments. And we have one question in already. Maybe you could tell us about the amendments. And then the question is, when do we think those amendments will come into effect? And of course, that's anybody's guess, but I'll lob that one at you as well.

IAN MACDONALD: So that is the million-dollar question. And I will-- we tend to take a poll and give a prize to the person who gets it right. But no, I have some-- so just before planning for this session, I consulted with our library about what status the bill is at. And it hasn't really moved anywhere since it was introduced in December. And so we don't-- the short answer is we don't know.

Shortly after the amendments were announced, the Investment Review Division held a background or an information session with the bar. And at that time, they were thinking sort of late spring, early summer is when some of the things that have to be prescribed in regulation might be ready, but we don't know. I mean, it's a minority government, yes, with a sort of a coalition. And things may change as it goes through.

So the short answer is we don't know. I don't think it will happen in the immediate future. And as I said, it hasn't moved anywhere since it was being-- since being implemented. So I would-- my best earliest guess would be sometime in the spring, but it could be later.

So the amendments really had seven key aspects. The first and certainly the most important to most investors, well, there will be a new preclosing filing requirement for prescribed business sectors. We don't know exactly what those are yet. We can have some data points to indicate, but those will have to be set out in regulations.

And so if a non-Canadian is going to acquire either control or a non-controlling interest in a Canadian business that is within one of these prescribed sectors, and the non-Canadian will, as a result of the investment, have access to or be able to direct the use of material non-public information or material assets, and the investor would also have the power to appoint or nominate board of directors or senior management, or trustee if it's a trust, or a general partner if it's a partnership, or other special prescribed rights with respect to the entity, then notification will be required preclosing.

So one of the things I think people will want to know is, what are the key sectors. Those that are still going to be set out in regulations, but the minister in the press release surrounding the announcement gave some indications, including critical minerals, vaccines, semiconductors, quantum computing, cyber security, artificial intelligence, information technologies, and personal data collection.

And I realize those are very broad categories. And personal-- I mean, so many businesses have some degree of personal data that there could be a lot of businesses caught. Based on two reference points that I can offer, I think the government is going to have to work hard on setting these out so as to be both functional and to be not too over inclusive so that every deal requires prenotification.

We've worked with-- and this is not new to Canada. I mean, sorry, this is new to Canada, but it's not new to national security review regimes generally. The US already has this and the UK. And we've worked with council in the US that it can be a process. It's where a lot of back and forth about, do we have a preclosing notification or not? Because it's hard to apply sometimes these rules to figure it out.

And in the information session that the Investment Review Division held shortly after the amendments were introduced, they acknowledge that this will require some work. And they essentially indicated that if once you see the regulations you still have questions, engage with them to get a yes or a no on whether you have a preclosing notification obligation.

Another point that I think is worth referencing here is that based on the legislation as currently drafted, there will not be any exceptions for major Canadian allies. So in the US, they've carved out from their preclosing notification obligations certain categories of buyer of which Canadians are one, but our draft, and it may change as the bill moves through, does not contemplate that.

Now some people will find that a headache, but that actually-- because they'll say, well, I'm not going to be viewed as a national security risk on a US public company. There's zero history of a US public company having been viewed as a national security risk, but I have to delay my closing to allow for this. But at the same time, it can level the playing field.

One of the things we've experienced since the inception of the powers is, particularly in auction situations or bidding situations, where one buyer is a buyer that may be perceived as posing risks. They're a Chinese buyer with a degree of state ownership-- state ownership and the target is somewhat sensitive. And they believe that they are bidding against-- they don't know for sure, but they believe that one of the other bidders on the target company is a US public company or private equity fund who is not going to think that they're at risk.

And they think, OK, well, I'm a US public company. I can differentiate myself from other bidders by saying, even though this target is military or sensitive technology, I am willing to close without prefiling national security, whereas other buyers may be at risk. And you do see targets and sellers playing that and leveraging that to their advantage saying-- sometimes you'll even see in a draft purchase agreement, the buyer shall not file ICA until after closing because the seller wants to take your money and run.

If the buyer gets a review post-closing and a divestiture order that requires sale at a fire sale price, it's not the seller's problem. And this preclosing notification obligation will level that playing field to some degree, in part, by not having an exception. So there are pluses for some stakeholders and minuses for others, but something worth noting because we've seen that dynamic come up many, many times.

THOMAS TIMMINS: That's a good point, Ian, because-- and the other thing is, is that it takes into account that the world is a changing place and the relationships that Canada has with other countries. Canada is a trading nation and the relationships that we have with other countries are evolving, constantly evolving. And it's-- like it's a chessboard, or probably more accurately, it's a Go board with a lot of different things moving in different directions at all times. So that's good. What about the power to extend for the minister?

IAN MACDONALD: Yes. So that's a new one. As I said earlier, to get to the full-- so right now, you have the notice. The extended initial review is fairly easy because the minister can do that without a cabinet order. There's consultation with the Minister of Public Safety, but you don't need a full cabinet order. But to go to a full review, right now you need a full cabinet order. If the amendment is passed in its current form, the minister will actually be able to do that without going to a full cabinet review. So it just makes things more efficient for the government.

THOMAS TIMMINS: That's great. And then the other amendments?

IAN MACDONALD: So another one is the minister will have a new authority to impose conditions during a national security review. So right now, one of the only-- there is an injunction effectively if you haven't closed. So if you notify before closing and you get a notice of extended initial review or full review, you cannot close until the process plays out in a way that allows you to close. But if you have closed or if you're still doing due diligence, there is no restriction on the kind of data that can be provided for the purpose of diligence, or if you already own the business and it's a post-closing review.

And so the theory of harm that they're trying to address is national security injury occurring during the national security review process. So let's say that the concern relates to the transfer of sensitive technology, say, well, the buyer has already closed this deal and they own the target. And our concern is that they're going to transfer sensitive technology.

The minister can now come in and say, there should be no communication between the target and the buyer until the end of the review and to try and prevent that transfer of technology. Or if it hasn't closed and diligence is still occurring, they can tighten up what is allowed to be disclosed to the buyer and diligence to, again, prevent injury before closing. And these conditions can bleed into approval. You could then have a conditioned approval. And those conditions could continue from preclosing into post-closing.

Related to that, as I said, the minister will now have the authority to accept undertakings to mitigate national security review risk. And one of the criticisms that's been leveled against the government to date is that although mitigation is theoretically an outcome where it's not a binary, you can't on the business or you can on the business. You can own the business subject to a condition x, y, and z. They don't really use that power. And they've been criticized for that.

And I think perhaps one of the reasons they haven't used it is that at present, mitigation has to be ordered by the federal cabinet. And it's clunky and static. And under the proposed amendments, the minister can order it or accept it and then amend it or terminate it. So they could say, well, when you bought the business, we had these concerns. Three years later, the concerns no longer apply, either a competitor has more sensitive technology and this technology is no longer sensitive. We don't care as much if it gets transferred.

Or when you bought, you had a 35%25 minority shareholder who we didn't like and we didn't want that person getting any information about the target. And so we ring-fenced them. But now they've sold out and they're no longer there. So the condition can go away. So there's more-- and it's more flexible and less cumbersome is the idea with that amendment.

THOMAS TIMMINS: I mean, we've got stronger penalties as well I understand.

IAN MACDONALD: Yes. Yeah. So--

THOMAS TIMMINS: Worth mentioning.

IAN MACDONALD: Yeah. Yeah, absolutely. So right now, there's a penalty of up to $10,000 a day for non-compliance. That's been in the act for years. And the thinking is that $10,000 a day is not-- in many contexts, is not a material amount anymore and it should be updated. And not only should be updated, it should be updated to an amount that is more material at present and can evolve over time, so with inflation or CPI so it will allow the government to impose higher fines for non-compliance and to increase those.

But that's really not, in my view, the important one. The important one is that they're going to put a fine of up to $500,000 for failing to notify preclosing if required. And that too will grow over time. So they're going to really want to eliminate situations where parties fail to notify preclosing if they're required to do so as a result of the amendments.

THOMAS TIMMINS: Yeah. And even that might-- I mean, might not be material on some deals unfortunately or fortunately, depending on your perspective. And what about information sharing, Ian? I know that's crucial, particularly when we think about the government of Canada sharing information with other countries, which may be of significant concern. So information sharing and then also during judicial review.

IAN MACDONALD: Yeah. So I'll deal with the information sharing with counterparts first. Right now-- so there's a section in the Investment Canada Act, Section 36, that provides for the confidentiality of information that is provided to the government by the investor during the review process. And there are certain exceptions to that related to the administration of the act and whatnot.

But the theory generally is that in order for the government to do its job, the investor will have to provide very sensitive-- in some cases, it's most sensitive information to the Canadian government. And the corollary of that is the Canadian government says, OK, we know that we're demanding that you openly provide us very sensitive information, and we're going to protect that with a robust confidentiality provision.

And there are certain exceptions at present, but one of the exceptions at present does not include is sharing information with foreign governments that may help the Canadian government assess the risk with respect to the investment that it's considering. And the amendments will now allow them to do this. Now, they've been very clear to say, no, don't worry. We're not going to share with anyone.

They'll still want to share it with people who themselves or other governments who themselves will treat it confidentially. And they haven't provided a list saying, we'll share it with the US and the UK, but not with certain other countries. But I'm sure that's the thinking that they'll go through.

And one of the things that came out in the background relating to this investment is that the theory of harm that the government is pursuing sometimes is that an investor is trying to acquire a piece of sensitive technology from multiple jurisdictions at the same time or-- so they may want to say, go to the UK or the US or some other and say, look, this investor is coming here trying to buy this target. This target has this sensitive technology. Are they trying to buy any companies in your country that have the same or similar technology? So that's one of the background to this.

And then on judicial review, I think this one is more technical and is unlikely to come up very often. There have been very few judicial reviews. So I guess by way of starters, there's no right of appeal to a decision under the national security review powers of the Investment Canada Act, but there is a right to judicial review, which essentially means, was the review done fairly?

And there was a very high profile review a number of years ago, O-Net and ITF, where the parties appealed-- sorry, sought judicial review at the end of receiving a divestiture order. And the government actually changed its outcome, not as a result of judicial review, it was politics perhaps involved as a conservative government had ordered divestiture and then a liberal government, upon judicial review, allowed a conditional approval of the deal.

But one of the things at play in that judicial review was that the parties were not given enough information, to address the concerns that were raised. And parties often seek further information about the concerns. And this is a balancing act because the Canadian government says, well, listen, for us to disclose the full picture to you is a national security problem in its own right, and we can't do that. So they try to give you less-- they give you less information than you want, but what they think is enough for you to sort of address their concerns.

On judicial review, parties often seek more information or a complaint they weren't given enough. So what this allows is for a judge to hear a case, without the parties being present, to decide what information may or may not be made public, if it's going to interfere with international relations or affect the safety of a person, or have an effect on national defense. So it's meant to strengthen the government's side really on judicial review.

But again, this doesn't come up very often. To my knowledge, there's only really been two judicial reviews of national security review outcomes because the outcome of a successful judicial review is really only that the government would have to do the review again but do it fairly and they could get to the same outcome perhaps. So it's not a silver bullet. Sorry.

THOMAS TIMMINS: No, go ahead.

IAN MACDONALD: You go ahead. I think--

THOMAS TIMMINS: I was just going to ask you another question, Ian. So Canada, of course, is a small trading nation known for its openness and transparency. And we spend a lot of time actually-- the governments of Canada spend a lot of time traveling around the world trying to attract trade and attract foreign investment. And foreign investment is crucial for our economy. What effect do you think these amendments will have on the level and the nature of foreign investment in Canada, particularly from certain jurisdictions? I'm thinking of China, but I'm also thinking of a lot of other places.

IAN MACDONALD: That's an excellent question, Tom. And the government is very mindful. And with every amendment they've made, including the most recent amendment, they're careful to say, we want foreign investment. We're not trying to shut out foreign investment. We're not trying to chill foreign investment. But we do want and need the right kind of foreign investment and we do need to protect national security.

So they're trying to strike a balance here between enhancing powers to protect national security while at the same time not having a chilling effect on foreign investment. Whether they get that right, I think is an open question. I think there's an element of wait and see, but also that some things are already fairly clear. I can tell you following--

Let's step back from the amendments. Let's go one notch back to the critical minerals policy and then the three divestiture orders. Following that, I think there are a lot of parties in that industry saying, well, do we want to invest in the TSXV to begin with? If we're already there, can we continue ourselves to another jurisdiction that might not have these powers on an exit?

And so I think that in some areas, you'll see a tightening for sure, but I don't think that there's an intent to block out all foreign investments or to significantly curtail foreign investment from China in certain respects. As we were preparing for this session, I went back to the Investment Review Division's annual reports for the last five years. And in the last five years, China has been among the top five foreign investors into Canada by a number of transactions. And in the last three years, it's been in the top three, or tied for third or in the top three, behind the US and the UK.

So I know the Indo-Pacific strategy talks about moving to other parties-- and trying to rebalance with a greater emphasis on other parts of Asia, but those are some pretty big shoes to fill in terms of where China has been. And I don't think they want to shut out or view that as a practical thing, shutting out China altogether. But I do think you'll see a lot more scrutiny on some deals and some more deals may get prohibited or conditioned. And as a result, some deals not get attempted in the first place.

THOMAS TIMMINS: So we're coming up to the hour here. But I'm going to actually propose that we go over a little bit because we have some excellent questions that have come in, if folks will forgive me. Ian, you talked a little bit about some of the history. Just kind of broad brush, what kind of trends are you seeing or what do you see of trend-wise going forward?

IAN MACDONALD: So what we're seeing recently and what I think will continue into the future is more scrutiny, more full reviews, more extended initial reviews, more detailed requests for information, but also more no further action outcomes at the end of a full review.

So a couple of years ago-- I mentioned the first seven reviews in 2016, '17 ish when the stats were initially published. For the first eight or nine years, it was really catastrophic. If you ended up in a full review, the statistics were horrific. It looked like your deal was one way or another going to end very badly, either it wouldn't close, divestiture would be required, or you just give up and withdraw. That's not the case anymore.

I don't want to-- I certainly don't want to understate. If you get into a full review, that's very serious and there's a very good chance that it could end badly for the deal. But what you're seeing is a lot more reviews in the last couple of years that end with no further action. So the government takes a very close look and then says, OK, you're clear to go. And I think with these new powers, you may see more conditional approvals.

And I should say-- I want to de-abstract that term because people may be sitting there saying, well, conditioned. What if it's a horrific condition and I can't live with it? Conditional approvals will only be saying the government is not going to impose a condition on someone that they don't have-- have not been explicitly told by the investor that they can live because without-- to have a condition, you have to have some element of trust. And if they didn't trust the investor to adhere to the condition, they wouldn't impose a condition. They would just block the deal or require divestiture. And so I think you're going to see more of that as well.

THOMAS TIMMINS: Ian. So we, of course, as Canadians have to compete to attract foreign investment. And we're competing with our neighbors to the South and our neighbors across the Atlantic and other countries and jurisdictions all around the world. How do we compare-- are we-- do we stand out as an unduly conservative or restrictive jurisdiction, or how do you think we compare? I know you have a pretty deep knowledge from being in this space for so many years.

IAN MACDONALD: So I think the critical minerals policy and the way it was used right after it was established may have given the impression that we're sticking out as an unduly conservative jurisdiction, but on balance we don't. And a couple of things to say about that. One is that a lot-- so last September, I chaired a panel at a CBA conference.

THOMAS TIMMINS: The Bar Association.

IAN MACDONALD: Yeah, Canadian Bar Association on the rise of national security reviews. And many jurisdictions around the world are implementing new national security review regimes or are enhancing the powers under existing regimes. So Canada is not alone in doing this. And as I mentioned, some jurisdictions already have a preclosing notification obligation already. And Canada is moving in line with that.

And then-- I mean, the US-- when the US has an issue with the deal, for example, it can be pretty draconian in terms of blocking it. One thing that we don't have full knowledge of but we do have some data points on is the extent to which Canada's proposed amendments and its critical minerals policy and the way it was used may actually be influenced by discussions with allies.

As you and some members of our audience may recall, a number of years ago, there was a deal, [INAUDIBLE] where a Chinese company acquired a Canadian company that had satellite technology. And the Canadian government was criticized quite heavily publicly for allowing that deal to go through without a national safety review, including by some US politicians. And so in that case, we actually saw that publicly.

What you don't necessarily see publicly about what may be occurring behind the scenes is what we know is there was a political controversy within Canada following the Zijin-Neo Lithium deal. And the Canadian opposition parties were certainly critical of the Canadian government. What we don't know but I would not be surprised at all to learn is if the US government or applicable government representatives were calling their Canadian counterparts and exerting pressure on them to say, look, the TSX vehicle is the door. We don't have the powers under CFIUS to get at this, but you do. And use them.

So there may have been some external pressure there as well. And that-- one of the open questions that remains to be seen how it plays out is, if as a result of our critical minerals policy parties try to find other jurisdictions that don't have these restrictions to do their deals in and through to raise capital through, is if those other jurisdictions, either of their own volition or under pressure from powerful countries, like the US, find themselves wanting to or effectively forced into developing their own national security powers to prevent avoidance of [INAUDIBLE]. Open question. I don't know the answer, but I think it's something that is certainly going to be a factor at play.

THOMAS TIMMINS: It's good to hear your perspective on that because we certainly are competing all the time with jurisdictions around the world to attract investment. So that's good. Ian, we have kind of a technical question that's come in from our audience about the 45-day period, which obviously is important. The question was, will the time that the applicant spends preparing answers to review officials questions, how does that factor in to the 40 or the calculation of the 45-day periods? Maybe you could just help us understand that a little bit better.

IAN MACDONALD: That is a great question that causes me, from a practical perspective, to lose sleep at night because-- not because-- the technical answers is fairly clear, but it's because of the consequences of the answer, which is-- so as an investor or as counsel to an investor, you never want things to go past the stage you're in. You always want to end in the stage you're in. So the best scenario is you don't go to the first 45 days.

But at the same time, the government, they get a lot of these forms and there's a bigger-- and they're beefing up their own staff at the same time, but they get a lot of these forms. There's a bigger focus on national security. And so they can't answer-- they can't even prepare their questions all that quickly in some cases. And it's not just one person who prepare it. They get a form, they have to say, well, who is this forum relevant to? And they have to go sometimes to multiple different agencies to even get the questions.

And so sometimes you'll get questions later in the-- maybe on the 45th day or you'll get punted into the next stage and then you get questions. So in deals where we anticipate potential concerns, we try to engage. We don't just lob in the form. We lob in the form with some advocacy saying, this deal is not a problem because of x, y, and z. And you tailor that depending on the circumstances.

And then we call them and say, do you have any questions? Do you have any questions? Can we engage with you? And we try to get those questions asked early so that they can be answered early. Because the short answer is, there is no totaling of the 45 days to well you answer the question. So if you get questions on day 35 and it's going to take you seven days to answer them, it's almost inevitable that you will get punted to the next stage.

Because if you answer them on day 42 and the government then needs time to review the answers and to discuss among them, they only have three days left. And so you want to sort of try to get the questions as asked on day 14 and answer them on day 21. And so that was the time remaining in your 45 days. Sometimes that's more possible than others.

THOMAS TIMMINS: OK. A great question. One other question. I know we're at time here. Kind of a broader question but-- and you've been watching this for so long, Ian, but why the amendments? Where do you think this came out? Is this something that's been rattling around the federal government for years or is this a response to the invasion of Ukraine? Is this a response to the cooling of Canada's relations with other countries? What do you think is driving this or any theories on that?

IAN MACDONALD: I think there should be-- I think there are multiple reasons and different reasons for different parts of the amendments. I think-- I mean, first of all, I think geopolitics and relations with certain countries have changed, I think quite obviously to some people. So I think our review regime and the way it's being applied is changing with it.

I think that, for example, on the prenotice, on the preclosing notice, first of all, a number of other major jurisdictions do it. And I think to some degree, the Canadian government-- if you look through the review statistics and the government has a table the outcomes, divestiture required, where post-closing divestiture was required, you wonder sometimes, because some of these deals become public, you wonder sometimes whether the Canadian government is saying, well, is the remedy hollow at this stage?

We've ordered divestiture eight months after closing and it was a technology transfer concern. So we didn't trust the buyer to own the company without transferring the technology and longer term. What do you think happens to that technology already? So they're probably sitting there saying, to have effective remedies, we have to have those. And I think on some of the deals are not that large.

A cynical view could be that a post-closing divestiture firesale could simply be a cost of doing business. We got the technology. We paid x. We had a fire sale. We lost 50%25, 75%25, but it doesn't matter. We got the technology. The Canadian government may be sitting there cynically saying, well, that's the calculus. We're going to shut it down. A post-closing fire sale is not good enough. We need them to just not get the technology in the first place.

I think on things like the minister having the power to extend, on the minister having the power to impose conditions, on the minister having the power to accept undertakings, those are all things that I think will benefit both sides because the process has just been clunky and cumbersome without them. And so I think those are generally-- we'll have pluses and minuses, but on balance it could have some pluses for both sides.

And then the information sharing and judicial review, I think it's just to strengthen the act in the government's favor to help it with its [INAUDIBLE] and protection of information.

THOMAS TIMMINS: That's great. Obviously, this is going to be a continuing story and there will be future amendments in years to come. And it's going to be evolving and we're going to see what other countries do and learn as it goes. So very interesting. Ian, thank you very much.

And to our audience, I want to thank you for participating and for your questions. This video will be-- is recorded and will be posted on our website within the next few days. I also want to send out a special thanks to Solange Espinoza, Erika Guerrero, and William Nykyforuk who have-- we wouldn't have been able to do this really without them and helped us make this happen, and everybody in our marketing and technology team here at Gowling WLG.

Once again, everyone, thank you and thank you for joining us. This will be posted. There are certainly lots of other resources at our website if we can be of assistance. And if you have feedback or additional questions, please don't hesitate to reach out to Ian or I, or any member of our team, and we'll be honored to help. So thank you again, everyone. Have a great afternoon. Cheers.