Last week, the federal government adopted regulations implementing long-awaited changes to the Investment Canada Act (ICA) which include:
- Financial review thresholds to be based on “enterprise value”;
- Additional requirements for information in ICA notifications and application forms;
- Extension of the applicable time periods for national security reviews under the ICA.
Enterprise Value Thresholds
Effective April 24, 2015, the monetary threshold for pre-closing review of foreign investments will be based on an “enterprise value” of $600 million (as opposed to the current $369 million in “asset book” value), which will increase to $800 million in two years and $1 billion in four years. The monetary thresholds will be subject to annual indexation thereafter.
“Enterprise value” for public and private entities will be determined as follows:
- For acquisitions of control of publicly traded entities, the enterprise value of the assets of the Canadian business is equal to the market capitalization of the entity plus liabilities, minus cash and cash equivalents.
- For acquisitions of control of private companies and for asset acquisitions, the enterprise value is the purchase price, plus liabilities, minus cash and cash equivalents
The “enterprise value” threshold will not apply to investments by state-owned enterprises which will continue to be subject to the current “book value” threshold. The thresholds applicable to investments by non-WTO investors and acquisitions of cultural businesses remain unchanged.
Additional Information Requirements
Going forward, foreign investors will now be required to provide more disclosure in their ICA filings. A key change is that foreign investors will be required to provide more detailed information regarding their governance, management and ownership, as well as contact details for relevant entities/individuals and birth dates for relevant individuals.
These amendments formalize the current practice of collecting information relevant to the national security and net benefit review processes, in particular with regard to involvement by state-owned enterprises. These additional information requirements may be particularly relevant where one or more parties to the investment have concerns regarding the degree of disclosure of information regarding their control structure.
Despite the additional information requirements for ICA filings, information provided will continue to have significant confidentiality protection and it is not likely that this will result in additional public disclosure in terms of what is published in Industry Canada’s listing of completed reviews.
National Security Review Timing Extended
The federal government also announced plans to lengthen the timelines for national security reviews – the associated amendments to the National Security Review of Investments Regulations came into force on March 25, 2015. Under the revised regulations, it can now take up to 200 days (or longer based on the consent of the investor) to complete a national security review (up from 130 days).
These changes are significant for several reasons:
- The move to “enterprise value” may result in more investments being subject to review under the ICA (for example, in the technology and mining sectors where companies often have a market capitalization [or “enterprise value”] that significantly exceeds the book value of their assets).
- For any pending transactions that are not completed/scheduled to be completed by April 24, 2015, the parties may have to revisit whether the transaction may now be to a pre-closing approval requirement (which typically takes 75 calendar days, and possibly longer) as soon as possible and modify the transaction timeline and pre-closing conditions as necessary.
- The changes to the national security review timeline will, where applicable, have an impact on deal timing.
For a link of the amendment press release, please click here.