On Oct. 28, 2022, Canada's federal government implemented a new policy under the Investment Canada Act (ICA) pursuant to which investments by foreign state owned or influenced enterprises in Canadian entities and/or assets in critical minerals sectors:
- will only receive net benefit approval "on an exceptional basis," where net benefit approval is required; and
- "will support a finding….that the investment could be injurious to Canada's national security," which could result in the use of the government's discretionary powers to block or condition investments or require post-closing divestiture, regardless of whether net benefit approval is required.
The new policy follows several months after a political controversy, which included Parliamentary hearings, over the government's decision to allow a Chinese company with a degree of state ownership to acquire Neo Lithium. Notably, Neo Lithium's projects were in Argentina, and its connection to Canada involved little more than its TSX Venture Exchange listing. The policy also follows recent remarks by senior government ministers advocating "friend-shoring," strengthening investment and trade relations with likeminded democracies and curbing relations with non-likeminded authoritarian regimes. It is likely no coincidence that the policy was announced on the same day as a joint visit by U.S. Secretary of State Antony Blinken and Canada's Foreign Affairs Minister Melanie Joly to a lithium battery recycling plant near Montreal.
Just days later, on November 2, the government ordered three Chinese firms to divest their investments in Canadian critical minerals companies:
- Sinomine (Hong Kong) Rare Metals Resources Co., Limited was ordered to divest its investment in Power Metals Corp, a Vancouver-based company that has exploration projects for lithium, cesium and tantalum in northern Ontario;
- Chengze Lithium International Limited was ordered to divest its investment in Lithium Chile Inc., a Calgary-based company with lithium projects in Chile and Argentina; and
- Zangge Mining Investment (Chengdu) Co., Ltd. was ordered to divest its investment in Ultra Lithium Inc., a Vancouver-based resource development firm with lithium and gold projects in both Canada and Argentina.
In a press release announcing the divestiture orders, the government noted that it will "act decisively when investments threaten our national security and our critical minerals supply chains, both at home and abroad."
The Canadian Press summarised the new policy and divestiture orders with the headline "Federal government moves to cut China out of Canadian critical mineral industry."
At the same time that it announced the divestiture orders, the government also announced that, in the interests of promoting transparency and improving the administration of Canada's investment review regime, it will, on a going forward basis, announce outcomes of final orders made under the ICA national security review powers. Until now, while the government has occasionally made public statements regarding specific national security reviews, it has typically not done so unless the parties themselves made the matter public.
Key takeaways
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State owned and influenced investors from non-likeminded authoritarian countries will be treated differently than state owned or influenced investors from likeminded democracies. Previous government guidance and policies have differentiated between state owned or influenced investors and purely private sector investors. However, within the category of state owned or influenced investors, previous guidance has not differentiated between democratic and non-democratic states. For the first time, the new policy and related press release explicitly differentiate between democratic and non-democratic regimes.
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Majority ownership of an investor by a state is not necessary to trigger a concern. Many articles about foreign investment and national security use the term "SOE" in a way that may leave the impression that it is binary and always clear whether a particular company is or is not an SOE. However, in some cases a state may own only a small percentage of a company, sometimes to an extent where senior company officers and directors may themselves not think of the company as an SOE. Both the ICA's definition of "SOE" and the new policy consider not just ownership but "influence," as perceived by the Canadian government, by a foreign state. In this regard, public information suggests the degree of state ownership in each of Sinomine and Chengze Lithium International, both of which are publicly traded companies on the Shenzhen Stock Exchange, is relatively small (less than 16 per cent of Sinomine and less than five per cent of Chengze).
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The policy affords the government very little flexibility to give net benefit approval, if it is required. In situations where the policy applies, it will be difficult for the government to give net benefit approval other than on an "exceptional basis" without creating a credibility problem. While the policy does not provide guidance on what may constitute exceptional circumstances, it uses the same language regarding exceptions as the 2012 oil sands policy. When former Prime Minister Harper introduced that policy, he stated that a future acquisition of control of a Canadian oil sands business by a foreign SOE would be approved under the ICA "on an exceptional basis only." Following the implementation of that policy almost no such approvals were given, or even sought. To our knowledge, the only exception involving a new acquisition of an oil sands business by a foreign SOE involved Repsol's 2015 acquisition of Talisman Energy. Notably, Repsol is controlled by a democratic country, Spain. Where net benefit is required, there is a strong possibility that the new policy will have a similar effect to the 2012 oil sands policy.
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The policy allows for flexibility if net benefit approval is not required, but SOEs should proceed with caution. "Could be injurious" to national security affords the government significant flexibility to consider factors such as the applicable critical mineral(s), mining project, alternative sources, country of the foreign investor and degree of state ownership or influence. This flexibility is likely to be applied in a way that results in more extended initial reviews (which afford the government additional time to decide whether to order a full national security review) and more full national security reviews, as well as increased use of the government's powers to impose remedies such as a blocking or divestiture order or conditions on investment. The government almost certainly wishes to avoid a repeat of the high-profile controversy that followed the Zijin/Neo Lithium transaction. To the contrary, the November 2 divestiture orders suggest that it wishes to be seen to be taking strong positions. Investors who are state owned (including minority interests) or may be perceived by the Canadian government as being influenced by a foreign government, particularly a non-democratic government, should submit their ICA notice at least 45 days before closing a critical minerals investment with ties to Canada.
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The government is clearly prepared to enforce the policy in respect of critical minerals properties that are located outside of Canada. Similar to Neo Lithium and Lithium Chile, the mining projects of a fair number of "Canadian" mining companies are located outside of Canada, and the company's connection to Canada may involve little more than a stock market listing and, in some cases, a head office function. While the policy does not explicitly differentiate between mineral properties located inside and outside of Canada, the government's November 2 divestiture orders demonstrate that it is prepared to enforce the policy as it considers necessary to protect Canada's critical minerals supply chain "both at home and abroad." It is worth noting that, even before the new policy, there was precedent for the use of the national security powers in situations where the target's mineral properties are located outside of Canada, including: (i) the 2009 proposed take-over of Forsys Metals Corporation, which had a uranium project in Namibia, by George Forest International Afrique, which was reportedly abandoned shortly after George Forest received a letter prohibiting it from closing pending further national security review amid speculation that the government of Iran may have been providing purchase financing; and (ii) in 2020, the government issued a notice of extended initial review of Endeavour Mining's acquisition of SEMAFO, which had gold mines in Burkina Faso, but ultimately let the deal proceed.
Many mining companies that do not otherwise have a strong connection to Canada choose to list on the TSX or TSX Venture Exchange because they are considered relatively attractive vehicles through which to raise growth capital. Some may argue that the government's use of the ICA's national security review powers to "block the exit" in respect of certain companies with mining properties outside of Canada may adversely affect Canada's attractiveness for future mining investment. However, many other jurisdictions with developed capital markets either have adopted, are considering adopting, or may adopt their own national security review regimes, which may limit or eliminate potential benefits of forum shopping.
Transacting parties may attempt to find other ways to avoid the application of the policy when the mining properties are outside of Canada, such as buying the non-Canadian mining assets or the shares of a non-Canadian subsidiary that holds the assets rather than buying the shares of the Canadian parent company, or by simply entering into a long term offtake agreement to purchase all or substantially all of a mine's output. In this regard, we note that the ICA contains a form of anti-avoidance provision, section 39(1)(g), and the government could also attempt to use other tools, such as controlled goods legislation, if it thinks that its policy objectives are being actively evaded.
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It will not be surprising if the government tightens scrutiny of investments by state owned or influenced entities of non-democratic regimes in areas other than critical minerals. While the new policy and the November 2 divestiture orders relate specifically to critical minerals, the broader context suggests that the government is changing its stance towards relations with non-democratic regimes, which may influence its use of the national security review powers in other areas.
The ICA
The ICA regulates foreign investment into Canada by encouraging investment on terms that are of "net benefit to Canada." All acquisitions of control of an existing Canadian business or the establishment of a new Canadian business by a foreign investor are subject to either notification or net benefit review, depending on whether or not the investment exceeds the applicable financial threshold for a net benefit review. The net benefit review threshold in 2022 for most direct investments by SOEs is C$454 million based on the book value of the target's assets. Where net benefit approval is required, it must be obtained pre-closing. Notifications, however, can be submitted before closing or up to 30 days post-closing.
In addition to net benefit reviews, the government also has the discretionary right under the ICA to review any foreign investment in a Canadian business to determine if the investment "could be injurious to national security." National security reviews can be initiated regardless of the investment size (i.e., there are no financial thresholds) and captures not only the establishment of a new Canadian business or the acquisition of control of an existing Canadian business, but also minority investments and the establishment of any entity "carrying on … any part of its operations in Canada." As such, the national security review powers can apply to investments in businesses with only tenuous links to Canada.
The national security review process has three main stages. The initial review period begins when the foreign investor files its notification form. The government has 45 days from receiving a complete notification form to decide whether to invoke the national security review powers, but may extend the initial review period by an additional 45 days by issuing a notice of extended initial review. If a full national security review is ordered, the government has 45 days to conduct its review, which may also be extended unilaterally for an additional 45 days. Further extensions may also occur on consent of the investor. Finally, the government has 20 days from the end of the national security review period to render its disposition. Where the government determines that an investment would be injurious to Canada`s national security, it can impose significant remedies including blocking deals pre-closing, imposing conditions on deals, or requiring divestiture post-closing.
In cases where national security issues may arise, particularly where foreign investors are state owned or subject to state influence, investors are encouraged to file their notifications at least 45 days before the planned closing date in order to be able to close the investment with certainty in relation to the national security review provisions.
With respect to non-control level acquisitions, there is no obligation on the foreign investor to file an ICA notification. However, the advantage of doing so is that it triggers a 45-day period in which the government must decide whether to invoke its national security review powers, whereas in the absence of a notification the government has 5 years from the implementation of a non-control level investment to raise national security concerns. Accordingly, foreign investors in non-control level acquisitions that may raise national security issues are also encouraged to file their notifications at least 45 days before the planned closing date in order to be able to close with certainty.
The new policy
The policy sets out a framework for net benefit and national security reviews under the ICA involving investments into Canada's critical minerals sectors and supply chains by foreign state owned or influenced investors. The basis for the policy is that critical minerals are of strategic importance for the sustainable economic success of Canada and its allies, and some investments into Canada by SOEs can be motivated by non-commercial imperatives that are contrary to Canada's interests.
With respect to net benefit reviews, the guidelines state that applications for acquisitions of control of a Canadian business involving critical minerals by a foreign SOE will only be approved on an exceptional basis. Factors that will be examined to determine whether a proposed investment would be of net benefit include:
- the extent to which a foreign state is likely to exercise direct operational and strategic control over the Canadian business as a result of the transaction;
- the degree of competition that exists in the sector, and the potential for significant concentration of foreign ownership in the sector as a result of the transaction;
- the corporate governance and reporting structure of the foreign SOE, including whether it adheres to Canadian standards of corporate governance and to Canadian laws and practices, including free market principles in its Canadian operations;
- whether the Canadian business to be acquired is likely to continue to operate on a commercial basis. This can include considerations such as where products will be exported or processed, the participation of Canadians in its operations in Canada and elsewhere, the impact of the investment on productivity and industrial efficiency in Canada, support of ongoing innovation, research and development in Canada, and appropriate levels of capital expenditures to maintain the Canadian business in a globally competitive position.
With respect to national security reviews, the guidelines state that the participation of an SOE or state-influenced investor in an investment involving a Canadian business or entity operating in a critical minerals sector in Canada will support a finding by the Minister that there are reasonable grounds to believe that the investment could be injurious to Canada's national security. In practical terms, this is likely to result in more notices of extended initial reviews and more full national security reviews, as well as more extensive use of the national security powers to impose remedies such as blocking orders, divestiture orders and conditions on investment.
The guidelines also set out certain factors that can be considered in assessing whether a particular transaction involving critical minerals would be injurious to national security (which would support a disposition resulting in a remedy or conditions on the closing of a deal):
- the size, scope and location of the Canadian business;
- the nature and strategic value to Canada of the mineral assets or supply chain involved;
- the degree of control or influence an SOE would likely exert on the Canadian business, the supply chain and the industry;
- the effect the transaction may have on the ability of Canadian supply chains to exploit the asset or access alternative sources (including domestic supply); and
- the current geopolitical circumstances and potential impact on allied relations.
Additional comments
While relatively few investments exceed the financial thresholds for net benefit reviews and therefore would not be impacted by the portions of the policy that relate to net benefit reviews, the consequences of the policy with respect to national security reviews applies very broadly since the government can initiate national security reviews regardless of the value of the transaction, in cases of direct or indirect acquisitions of a controlling or non-controlling interest in an existing Canadian business, as well as to the establishment of a new Canadian business.
However, as alluded to in the new policy, its relevance with respect to the ICA's national security powers is likely to have the greatest impact on investments involving SOEs or state-influenced investors from countries that are "hostile" or that are governed by "non-likeminded regimes." This is consistent with the federal government's past practice in enforcing the national security review powers under the ICA and with the geopolitical context in which the guidelines were adopted.
First, as previously noted, the new policy follows on the heels of the political controversy surrounding the Zijin/Neo Lithium deal. The government's decision not to invoke its national security powers to review and/or block the deal despite the finalization in January 2020 of a Canada-U.S. plan to secure supply chains for critical minerals and the issuance in March 2021 of updated National Security Review Guidelines that listed critical minerals, including lithium, as well as investments by state-owned or state-influenced actors, as areas of key concern for the Canadian government, led to significant criticism.
Secondly, the new policy appears to operationalize a key political initiative recently championed by the federal government and Deputy Prime Minister Chrystia Freeland in particular, known as "friend-shoring," which calls for shifting trade and investments to friendly partners and likeminded democracies while curbing commercial relations with autocracies and non-democratic countries. This echoes calls from other Canadian government officials, as well as allies, such as U.S. Treasury Secretary Janet Yellen who has called for countries that espouse a common set of values on international trade to trade primarily with each other. Indeed, in its statement accompanying the release of the new guidelines, the government acknowledged that the guidelines are intended to help "build strategic resilience in the North American critical minerals supply chain with likeminded partners at home, within North America, and around the world."
Lastly, the new policy appears to build on lessons learned by Canada and its allies from Russia's invasion of Ukraine and the ensuing instability created in Europe due to its reliance on Russia for oil and gas, which underscored the need to ensure reliable supply chains.
Given the broad powers under the ICA to impose significant remedies, the new policy underscores the need for investors to identify early on any potential connections between the buyer and state owned enterprises or entities linked to or subject to influence by foreign states, even if those links may seem indirect, remote, tangential or minor, and particularly in situations where the link is to states that are "hostile" or governed by "non-likeminded regimes."