The Canadian government has announced that it will apply enhanced scrutiny to foreign direct investments in certain businesses, and to all foreign investments by state-owned investors. Enhanced scrutiny may involve Investment Review Division staff "requesting additional information or extensions of timelines for review" under the Investment Canada Act (ICA). This approach will continue to apply until "the economy recovers from the effects of the COVID-19 pandemic."
Gowling WLG Focus
The government's announcement does not introduce any new or expanded powers to the ICA. Rather, it explains how the government will exercise existing powers under current circumstances. The key takeaway is that if a proposed transaction falls into one of the categories covered by the announcement, the buyer should seriously consider notifying it to the Investment Review Division at least 45 days before closing.
Background
By way of overview, the acquisition of control of a Canadian business requires either: (i) pre-closing "net benefit" review and approval; or (ii) notification (for additional information see Guide to Doing Business in Canada: Regulation of foreign investment). The pre-closing review thresholds applicable to most transactions are so high that almost all transactions only require notification. Notification is not an impediment to closing as it does not need to be submitted until 30 days after closing, and in most cases is not submitted until after closing.
However, it is advisable for a buyer to notify the government, at least 45 days before closing, of a transaction that could give rise to national security concerns (as perceived by the government). The national security provisions of the ICA give the government broad discretionary powers to review foreign investments of any size, including non-controlling investments, and to block a proposed investment, allow an investment with conditions (which can be imposed pre- or post-closing), or order post-closing divestiture. For control level acquisitions, the government has up to 45 days from receipt of a completed notification to invoke the powers.
The government has previously issued guidance advising foreign investors to consider the potential application of the national security review provisions in the early stages of their transaction planning and to engage with Investment Review Division officials where applicable (for more information see January 2017 MarketCaps). The government's recent announcement re-iterates this and, in the context of the two categories of investment described below, reminds stakeholders that "To obtain regulatory certainty, foreign investors must file a notification under the Act at least 45 days before closing."
Announcement
The Canadian government intends to:
- "scrutinize with particular attention" under the ICA foreign direct investments "of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government"; and
- "subject all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny under the Act."
While acknowledging that foreign investment is critical to the Canadian economy and stressing that Canada remains "open to investment that benefits Canadians", the government is concerned that:
- COVID-19 related declines in business valuations "could lead to opportunistic investment behavior"; and
- in relation to state-owned enterprises, that they "may be motivated by non-commercial imperatives that could harm Canada's economic or national security interests, a risk that is amplified in the current context."
"Related to public health" and the supply of "critical goods and services" are fairly broad categories, and it remains to be seen how the government will apply "enhanced scrutiny" to specific transactions, particularly those that may be closer to the fringes of these categories than the core. Due to this uncertainty and the potentially significant adverse consequences that can result from a post-closing national security review, it would be prudent for foreign investors involved in transactions that are or may (as perceived by the government) be covered by the announcement to err on the side of caution and submit their notifications at least 45 days before closing.
It is also notable that while both the national security review powers and the government's announcement apply to non-control level acquisitions, notification is not required in respect of non-control level acquisitions and it does not formally trigger the 45 days in which the government can decide whether to invoke the national security review powers. However, investors involved in such transactions can informally engage with the Investment Review Division for their views.