Earlier today, the Canadian government published changes to the Investment Canada Act regulations that will - when they become effective in 30 days (on April 24) - make it significantly easier for many transactions to escape a lengthy review process, while at the same time increasing the disclosure burden for the routine notifications required of all foreign investors in Canada and – effective March 13, 2015 lengthening the timelines for national security reviews.
The “net benefit” review threshold will be changed from an asset value test to an enterprise value test, and will be increased from C$369 million to C$600 million, for most investors. At the same time, the revised regulations impose invasive and burdensome new disclosure obligations for investments that fall short of the review threshold. These new disclosure obligations will require purchasers to provide, among other things, personal information about their directors, highest-paid officers and significant investors. National security review timelines have been extended, and made subject to potential further extension at the government’s discretion.
Part One: New Threshold for Investment Canada Act Review
Under the ICA, all acquisitions of control of Canadian businesses by non-Canadian investors are subject to either review (a burdensome and lengthy process, usually pre-closing) or notification (a more straightforward, largely administrative process). Once the new regulations take effect on April 24, acquisitions will be subject to review where the enterprise value of the acquired Canadian business exceeds C$600 million. This threshold will remain at C$600 million for two years, then increase to C$800 million for two years, and then to C$1 billion (indexed annually to inflation) thereafter.
The calculation of enterprise value depends on the structure of the acquisition:
- Acquisitions of Shares of Publicly-Traded Entities: Enterprise value is equal to (market capitalization) + (liabilities) – (cash and cash equivalents).
- Acquisitions of Shares of Non-Publicly-Traded Businesses: Enterprise value is equal to (acquisition value) + (liabilities) – (cash and cash equivalents).
- Acquisitions of Assets: Enterprise value is equal to (acquisition value) + (assumed liabilities) – (cash and cash equivalents).
However, the new enterprise value threshold is subject to a patchwork of exceptions, most notably:
- Acquisitions by Canadian-controlled purchasers: These acquisitions are exempt from the ICA.
- Acquisitions of Canadian cultural businesses: These acquisitions are to remain subject to the currentbook value test. Indirect acquisitions of control of cultural businesses are subject to review where the book value of their assets exceeds C$50 million; and direct acquisitions of control are subject to review where the book value of assets exceeds C$5 million.
- Acquisitions by non-WTO-controlled purchasers (and from non-WTO non-Canadian sellers): These acquisitions are generally subject to the same book value thresholds noted above: indirect acquisitions are reviewable if the book value of the assets of the acquired Canadian business exceeds C$50 million; and direct acquisitions are reviewable if the book value of assets exceeds C$5 million.
- Acquisitions by state-owned enterprises (SOEs): These acquisitions also remain subject to the currentbook value test. Direct acquisitions of control by state-owned enterprises who are WTO investors (including entities which are influenced by a foreign state) of non-cultural businesses are subject to review where the book value the assets of the acquired business exceeds C$369 million (for transactions closing in 2015, indexed annually for inflation); and indirect acquisitions of control remain exempt from review (unless the business being acquired is a “cultural business”; if so, see above). For non WTO-investors who are SOEs (and purchasing from non-Canadian and non-WTO investors), the thresholds remain set at C$5 million for direct acquisitions of control, and C$50 million for indirect.
- Indirect acquisitions by WTO-controlled purchasers: These acquisitions are exempt from review, unless the business being acquired is a “cultural business” (if so, see above). Cultural businesses which fall below the thresholds can also still be subjected to a review, if so ordered by the federal Cabinet.
Notably, in the Canadian government’s technical summary of the final negotiated outcomes of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU, it was contemplated EU investors (other than state-owned enterprises) would benefit from a higher, C$1.5 billion threshold. The revised amendments do not contemplate different thresholds for EU investors, but CETA has yet to be ratified.
Part Two: More Burdensome Notification Process for Non-Reviewable Investments
For investments that are not subject to review, the notification process has historically been a relatively pain-free exercise: a straightforward notification form (setting out basic information about the investor and the acquired business), that can be submitted any time up to 30 days after the investment is completed.
The new regulations will significantly increase the disclosure requirements of the notification form, which is required to be filed in respect of all acquisitions of control by a non-Canadian investor (unless subject to review). In particular, the new notification form will require:
- The legal names of the members of the investor’s board of directors, its five highest-paid officers and any person that owns 10% or more of its equity or voting interests. For each such person, a local mailing address must be provide along with telephone number, fax number, e-mail address, nationality (i.e., WTO or NAFTA), date of birth, and whether they own any interest in the acquired Canadian business.
- An indication of whether a foreign state owns a controlling or minority interest in the investor, and whether it has any special veto power or power to appoint directors or officers or direct strategic decision-making.
- A copy of the purchase and sale agreement, together with the sources of funding for the investment.
The government’s “regulatory impact statement” notes that this additional information is “required so that effective and efficient national security reviews of potential foreign investments” can be made. The ICA applies to allacquisitions of control of Canadian businesses by non-Canadian investors (from the acquisition of Tim Horton’s down to the acquisition of a single independent donut shop with annual profits of $25,000).
Part Three: More Time for National Security Reviews
Separate from the notification and review process described above, any investment in Canada by a non-Canadian investor (it need not constitute the acquisition of control, and the object of the investment need not qualify as an operating business in Canada) can be subject to a national security review if the Canadian government believes that it may be injurious to Canadian national security.
Changes to the ICA’s national security regulations – which came into effect as of March 13, 2015 – extend various national security timelines, allowing the government more time to decide whether to initiate a national security review, and more time to complete national security reviews.