On March 24, 2021, Canada's Minister of Innovation, Science and Industry issued updated national security review guidelines under the Investment Canada Act. The guidelines explain the government's approach to assessing potential national security risks posed by foreign investments and strongly encourage investors to notify the government of their investments at least 45 days before closing in certain circumstances.
Gowling WLG focus
The updated guidelines will make it harder for investors who may be perceived as a national security threat, particularly state-owned enterprises, to not realize that they should notify pre-closing. At the same time, they expanded the circumstances in which many investors who are unlikely to be perceived as a national security threat are also strongly encouraged to notify pre-closing, possibly having to delay closing to do so. The updated guidelines stop short of directly acknowledging what has historically been the most important trigger of a national security concern: a link between the investor and a perceived non-democratic country.
The updated guidelines are available here and the Minister's announcement is available here.
The updated guidelines:
- State that "some investments into Canada by state-owned enterprises may be motivated by non-commercial imperatives that could harm Canada's national security. The Government will subject all foreign investments by state-owned investors, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny….regardless of the value of the investment."
- Note that the Government has been applying enhanced scrutiny to, among other things, state-owned and perceived state-tied or influenced investors since April of 2020 pursuant to a temporary policy implemented near the outset of the COVID-19 pandemic, which remains in effect.
- Provide additional guidance as to what "sensitive technology" includes, by setting out a non-exhaustive list of technology fields and noting that it may be updated periodically as technologies evolve. The potential for the transfer of sensitive technology or know-how outside of Canada is a circumstance in which notification should be submitted pre-closing. The current list is available here.
- Note that the categories may be broadly interpreted by the government. For example, the first four refer to various forms of "advanced" technology, and the government may perceive the Canadian company's technology to be more advanced than the investor does.
- Identify the "potential impact of the investment on critical minerals and critical mineral supply chains" as a new circumstance where notification should be submitted pre-closing. Critical minerals are set out in the government's Critical Minerals List.
- Identify the "potential of the investment to enable access to sensitive personal data that could be leveraged to harm Canadian national security through its exploitation" as a new circumstance in which notification should be submitted pre-closing. Sensitive personal information includes but is not limited to the following data:
- personally identifiable health or genetic (e.g., health conditions or genetic test results);
- biometric (e.g., fingerprints);
- financial (e.g., confidential account information, including expenditures and debt);
- communications (e.g., private communications);
- geolocation; or,
- personal data concerning government officials; including members of the military or intelligence community.
- Add the following new catch-all category: "Investments that do not possess any of the above-listed characteristics may nevertheless present national security concerns where the investment would be injurious to Canada's national security."
- "Strongly encourage" investors to notify at least 45 days before closing if they are state-owned or subject to state-influence or where any of the other risk factors identified in the guidelines are present. Note that "encourage" was not prefaced by "strongly" in the initial guidelines and they did not differentiate between state and non-state investors.
What hasn't changed: The key risk factor is still not directly acknowledged
The initial guidelines, issued in December 2016, focused almost exclusively on characteristics of the target Canadian business rather than characteristics of the investor. This left many categories of investor, such as US and EU public companies and private equity funds, wondering whether they need to approach the guidelines in the same way as other categories of investors, such as state-owned enterprises of perceived non-democratic countries, particularly in the many situations in which the target Canadian business is only arguably on the fringes of a category where the guidance is to notify pre-closing and where notifying at least 45 days before closing means delaying closing.
In our observation and experience, by far the most important factor in determining whether a particular investment is likely to be perceived as a potential national security threat is a link between the investor and a perceived non-democratic country. A significant majority (17 of 22) of the national security reviews that have been done between when the power to do them was added to the Investment Canada Act and March 31, 2019, the most recent period for which information is available, have involved investors that are ultimately controlled in a perceived non-democratic country. For more information see the Investment Review Division's most recent Annual Report. While full information is not public, of the five reviews that have involved investors that are technically controlled in a democratic country (UK, Switzerland, Cyprus, Singapore), some are known or suspected to have had a link to a perceived non-democratic country, such as through a significant minority shareholder or a shareholder whose citizenship may have changed, and it is conceivable that all of them may have had such a link.
The updated guidelines move in the direction of addressing this reality by adding the provisions relating to state-owned and state-tied or influenced investors referred to above. However, they stop short of specifying a perceived non-democratic state. For example, there is nothing in the updated guidelines to indicate that a sovereign wealth fund of an EU member country would likely be perceived as presenting a different risk profile than a Chinese state-owned enterprise. Nor do the updated guidelines indicate that purely private sector investors that have no links to a perceived non-democratic country will generally be regarded as either presenting no, or at least relatively little, national security risk. This may be for a combination of diplomatic reasons and/or to preserve the government's flexibility to address presumably rare and unforeseen situations in which a private sector investor that has no links to a perceived non-democratic country may be regarded as a national security risk. However, the practical implication of this approach is that many investors who are not likely to be perceived as a national security risk will have to notify at least 45 days before closing, and possibly have to delay closing to do so, if they wish to adhere to the guidelines.
For additional information, see our article about the Investment Canada Act's national security review powers.
For additional advice or guidance in respect of the Investment Canada Act, Canadian competition and anti-trust laws or foreign investment reviews, please contact the authors, Ian Macdonald and/or Elad Gafni.