Linda Hogg 0:19
Welcome. My name is Linda Hogg. I'm a partner in Gowling WLG's Vancouver office. I practice corporate and securities law with a particular emphasis on corporate finance and regulatory compliance for both public and private companies in the mining sector.
Ian Macdonald 0:37
Hello, my name is Ian Macdonald and I'm a partner in Gowling WLG's Toronto office. I advise domestic and international businesses on all aspects of Foreign Investment Review and competition and anti-trust law, I've been lead counsel on multiple full national security reviews under the Investment Canada Act, as well as multiple extended initial reviews, also known as potential reviews, and dozens of precautionary pre closing notifications.
Linda Hogg 1:04
In April of this year, the Canadian federal government in their budget proposed up to $3.8 billion over eight years to implement Canada's first critical minerals strategy. As more economies globally prepare to transition to low carbon futures, and the global demand for critical minerals increases, the federal government has recognized that Canada is in a unique position to capitalize on this demand due to Canada's abundance of critical minerals. In the budget of 2022. The federal government noted that critical mining projects critical mineral mining projects come with a unique set of challenges that can often include remote locations, changing prices, and a lengthy regulatory process. As a result, the budget proposes to make crypto mining projects less risky to encourage their development and to broaden Canada's place in the critical mining industry. Today, Ian and I are focusing on one of those regulatory processes, the Investment Canada Act, Canada's commitment to critical mineral mining projects, and its desire to make Canada a more attractive place and destination for critical mineral investment interacts with the Investment Canada Act's national security review region. Initially, Ian, can you describe for us what is the investment Canada Act and what is its purpose?
Ian Macdonald 2:41
Thanks, Linda. So the investment Canada Act is a statute that regulates foreign investment in Canada, foreign investment is critical to the Canadian economy. But the Canadian government wants to ensure that it's done on terms that are beneficial to Canada. And there are a number of key parts to the investment Canada Act. One is a net benefit review regime. So there are a number of different permutations of financial threshold, depending on the characteristics of the buyer, the characteristics of the target company and the structure of the deal. And if those mechanical financial thresholds are exceeded, then the buyer must submit an application for net benefit review and approval to the government and obtain that approval before closing the deal for any kind of a control level acquisition. Now most of those thresholds are so high that very few deals per year exceed that. And for all other control level acquisitions that don't exceed the net benefit review threshold, the investor is still required to notify. So notification is a more simple form. That includes some information about the investor and its ultimate controller, as well as the target business. And it's not an impediment to closing. It can be submitted up to 30 days after closing or it can also be submitted pre closing. In addition to that there is a national security review regime. This was added to the Act relatively recently in 2009. And it gives the government very broad discretionary powers to review deals that could be injurious to Canada's national security. So all control level acquisitions of a Canadian business by a non-Canadian, are brought to the government's attention either through net benefit review or more commonly, through notification. And those receive and initial every single one of those receives an initial screening for national security review risk, the vast majority are cleared without further action. However, the government if it finds that there may be problems or has some questions, can go do a second stage call the notice of extended initial review, which buys it a little more time to make a decision. And then if it thinks that there may be a national security problem, we can go to a full review and determine whether there is or is not a problem. And at the conclusion of which it can impose some very significant remedies, including blocking deals pre closing, or acquiring divestiture post closing, or imposing conditions on a foreign owner, foreign investors ownership of the business. The national security review powers also give the government broad powers over non control level acquisitions that do not need to be brought to the government's attention. But then the government may find out about through some of them that.
Linda Hogg 5:47
Given the severity of the potential national security view remedies that you've set out, is there a way for investors to obtain pre closing certainty regarding national security review risk?
Ian Macdonald 6:00
Yes, there is. And essentially, that is to file at least 45 days before closing, for investments that are below the net benefit review threshold. So if you if you're above the net benefit review threshold, you'd have to notify before closing anyway. But that's a very small percentage of deals for the for the vast majority of it don't need to do that. The investor can voluntarily do their notification before closing instead of post closing. And the government that has 45 days to decide whether to invoke the national security review powers, if it does not, then the parties can close with certainty that they will not face a post closing national security review, or problem. And if it does, in both the powers, then at least the parties know before closing what the outcome will be. There's a caveat for this that relates to non control level acquisition. So at the moment, a foreign investor and a non control level acquisition cannot formally trigger the government's 45 day window to decide what which way it's going to go on national security. Having said that, two things one is that the government if you if the party voluntarily engages with the government in an informal manner, the investment review division will do its best to give some level of feedback they want this level of engagement for people who think that they may have issues, and they'll try to give some degree of comfort. But in addition to that, there are proposed amendments that are under consideration that would allow if they are implemented, foreign investors investors in non control level acquisitions to trigger that 45 day window in the same way as for control level acquisitions.
Linda Hogg 7:52
Thank you, how does a foreign investor know whether its investment may be perceived as a threat to Canada's national security?
Ian Macdonald 8:01
Threat? That's a great question and one with an evolving answer. So initially, in the first several years after the national security regime was adopted, there was no official guidance, the government very deliberately wanted to afford itself Max the maximum flexibility of taking a will know it when we see it kind of approach. So investors were left with it with what was essentially a complete black box and had to apply common sense, such as you know, does the target produce military goods, or to observe the experiences of in other jurisdictions that have more mature and public regimes such as the United States. But as you can imagine, the government received a fair amount of criticism for this, because often there are significant perceived costs, they can run into the millions of dollars and due diligence and other pursuit costs. And investors didn't want to sit necessarily, and curl those, only to find later on, that they have a problem. So in late 2016, the Government published national security guidelines that identified a non exhaustive list of potential risk factors, and recommended that investors file pre closing, if any, such any of those factors are present. Then in 2021, the government updated those guidelines to identify additional risk factors. Also, about five years ago, the government started publishing generic and high level information about completed reviews such as the number of national TV reviews done any year and their outcome and the country of ultimate control of the buyer and the industry that the target operates in.
Linda Hogg 9:54
So we've looking at all of that, are there any factors that have come out in the guidelines that are specific to relevant to the mining sector in Canada?
Ian Macdonald 10:03
Yes, in the 2021 update to the guidelines, one of the things that was added was the potential impact of the investment on critical minerals and critical mineral supply chains as a factor where notifications should be done pre closing. And this This was accompanied by a list of 31 critical minerals, which, among others include cesium chromium, cobalt, copper, graphite, helium, lithium, lithium is a big one that's received a lot of attention in the press recently. We'll discuss that in more detail in a moment. magnesium, manganese, molybdenum and nickel, platinum group metals, potash, rare earth elements, tantalum, tin, titanium, tungsten, uranium, vanadium, and zek. Notably, gold is not on the list.
Linda Hogg 11:04
That's extremely interesting. And certainly Lithium has been in the news a great deal lately. A characteristic? Yes, a characteristic that we all know that is common to Canadian mining companies is that the connection to candidate is often limited to a TSX listing and a head office function. But the project or mine itself is located outside of Canada. Are these transactions subject to national security view powers?
Ian Macdonald 11:31
Yes, they are, which comes as a surprise to some foreign investors. And in fact, they have been invoked on a number of deals with a minor project is located outside of Canada.
Linda Hogg 11:46
And that is the struggle when you say how does it touch Canada that they do invoke that. So acknowledging that full information on the use of the national security review powers is not public information? What are you able to share about their use in the context of mining transactions, both where the mind is inside of Canada or the project is outside of Canada.
Ian Macdonald 12:11
So Linda, well, while the process is generally confidential, the target company in many mining deals is often a public company, and to comply with its securities law disclosure obligations, some degree of information about the process is disclosed. So one of the earliest ones was George forest, and forces which forest had a uranium project in Namibia. And the parties issued a press release that didn't provide full information, but it did indicate that there was an issue with the deal related to the investment Canada Act. And stakeholders and industry experts were able to determine based on public information that the deal was below the net benefit review threshold. So the only kind of problem with the investment tax would have to be by process of elimination of reverse engineering related to national security. There were also media reports that Iran and or North Korea may have been involved in the financing of the acquisition. Also, more recently, there was the Endeavor SnapVault deal, which is a Gold Project in patina Fassa. In this deal, the government did not ultimately block the deal, but did go to the first extended stage, so they went to a notice of potential review, and ultimately allow the deal to proceed. But there was a temporary injunction on closing, as they went through through that extended initial review. There was also the TMAC Shangdong deal, which was a gold mining project in northern Canada, that was blocked, not notably, this was likely blocked due to the mines location as strategic location for Canada, rather than the substance of mine. As we discussed a minute ago, gold is not on the critical minerals list. There was also media speculation that different tensions between Canada and China are related to the detention of the to Michael's and, and Meng Wanzhou. And they also have played a factor in the blocking. Then, of course, there was the more recent criticism of the government for not doing the full national security review of these a gem Neo lithium deal, which was a project in Argentina relating to lithium. In that case, opposition parties attacked the government for not doing the work. And the Minister of innovation Science and Industry stood at Neo lithium is not really even a Canadian company, as its assets are in Argentina, it's directors that are in the United Kingdom, and it only has three Canadian employees. In and around this time and preceding it, there were about seven In a number of articles in the news about the percentage of the global lithium supply and reserves and resources that are owned by various Chinese companies that are considered collectively as being owned by China is significant in an area where lithium is becoming more and more important, in terms of the move to electric ended and away from fossil fuels. Based on public information, it is also known that prior to the Neo lithium deal, Sachin was able to acquire nevsun resources, which was a copper mining project, which is a critical mineral but predates the guidelines for reference to critical minerals, as well as continental gold and Kiana goldfields, there are gold projects, those three deals were done between 2018 and 2020.
Linda Hogg 16:00
Incredibly interesting, and you're right, lithium with the battery manufacturing is completely in the news these days. Are there some investors at a higher risk of a national security review problem than others?
Ian Macdonald 16:12
Absolutely. Without question. China would be in a category all its own, a majority of reviews 23 of the 40 that had been done between the inception of the powers, and the last reporting period, which is March 31 2021. Were on Chinese investors. A significant majority of total reviews have been on investors from countries that would generally be perceived by the Canadian government as being non democratic, there can be some debate about whether a country is democratic or not. And parties from countries that are not perceived by Canada as being democratic democratic may take a different view, but generally, that the Canadian government would think of as non democratic have costed a representative a significant majority of total reviews. There have also been some reviews on buyers that have been ultimately controlled in countries that would generally be considered democratic. These include the UK, France, and Switzerland, among others. However, these buyers may have had ties to a non democratic country, I am a minority shareholder from a non democratic country or a minority shareholder whose citizenship had changed. One of the criticisms of the initial national security review guidelines is that is that the risk factors focused almost exclusively on the characteristics of the target company, when in reality, the characteristics of the buyer are arguably much more important. So with the initial guidelines, you would read them and say, well, a US public company that is widely held should proceed the same way as a Chinese State Owned Enterprise. When in reality that, you know, the observed experience was that that's definitely not the case. We are aware of public and non public examples where a transaction involving a buyer from one country pose an unmitigated problem, but a buyer from another country did not pose a problem and was allowed to proceed. An example of this is the MTS allstream. Deal. Initially, to be it was proposed to be acquired by a company that was ultimately controlled by an Egyptian billionaire, and that was blocked. And then MTS allstream was subsequently sold to Zayo, a US company without a national security problem. This is this has been addressed to some degree in the 2021 update to the national security review guidelines were the state owned enterprises and investors that may be assessed as being tied to a foreign state, or identified as a risk factor where we're notification should be done before closing. And I should also add that there have actually been calls. Nothing's been enacted yet, but there have been calls, including by some within within Kenny government to subject all investments by state owned enterprises from authoritarian states to a full national security review. So there's there's definitely a difference in the risk profile between buyers that are from countries that would generally be considered non democratic by Canada and buyers that are not and they did not have ties to such to such countries.
Linda Hogg 19:38
Extremely interesting when you look at them, the political structure coming into it. And what is your advice to investors and companies whose transactions may raise concerns?
Ian Macdonald 19:50
In a nutshell is to insist on filing pre closing and that can be much easier to say than to do in practice for a number of years. Since often deals have critical timing, deadlines, and to have legal counsel come along and say, Well delay things by at least 45 days to allow for this notification is not viewed, is not always welcomed. In other cases, particularly in auction contacts or competitive bidding situations, where you have a buyer from one country, so let's say you have a US public company that may not perceive much national security review risk and may be willing to notify post closing, even if the guidelines say that this is a situation based on the target. This characteristics were not definitively done post closing bidding against Chinese State Owned Enterprise who may feel a stronger need to or more risk by not notifying Intel post closing but at the same time doesn't want to lose the deal to someone else. Now often. Money trumps all of these things and if the party but is insisting on, on filing, pre closing is paying is offering a lot more money and the target or the shareholder kind of the target thinks that the deal will actually ultimately clear national security, that that dynamic tends to get worked out to allow closing. But but it is starting to allow for a pre closing filing. But it is something that does come up quite frequently.
Linda Hogg 21:32
it certainly becomes a risk factor in analyzing the deals. Yeah, so one has to look at. When filing that pre closing, do you recommend any advocacy? Or other proactive steps to avoid problems? Or do you recommend submitting it and just waiting the 45 days? What has been your experience?
Ian Macdonald 21:51
Well, it's it's a context specific question Linda, but often there is some form of ag advocacy. So if, for example, you have a US public company, buyer that has done multiple other deals in Canada, and is already known to the Canadian investment review division through the review of previous deals, and that our may already own things in Canada that are much more sensitive and the buyer, you may just you may just put the form in with no with nothing. And when you're 45 days. And in fact in some of those cases, the buyer is often willing to take the risk of notifying post closing if there are commercial reasons to do so. However, if you have a buyer that maybe a higher degree of risk, then often some degree of advocacy is very helpful. And there are two reasons for this. So ultimately, you want to persuade the Canadian government that there is no substantive national security problem. But but you also want to ideally, persuade them that they don't even need to involve the extent the second 45 day period, the extended initial review period. And so to do that, it's helpful in my experience, in our experience to lead with an advocacy document that accompanies the form that describes the buyer describes the target preamps questions that the government may likely ask and explains why the government should have no issues with this deals to ideally Devin to not only agree with that, but to get them to agree with that in the first 45 days, rather than delaying things by saying that they need another 45 for a notice if extended initial review.
Linda Hogg 23:38
Thank you. That is true that pre empting of their questions to try to focus it. And thank you very much, Ian, any closing comments?
Ian Macdonald 23:48
Yes, absolutely. Linda. Anyone who has viewed this and would like more information should feel free to contact either you or I. And there's also additional information on our website. We have a very detailed guide that provides a lot more information about the Investment Canada Act, as well as a number of articles that we've written on develops on developments, such as, as the guidelines and whatnot. With that, Thank you.
Linda Hogg 24:17
Thank you