The Canadian government has adopted new regulations and implementing orders that:
- significantly alter the existing review thresholds under the Investment Canada Act (ICA) for most investors
- require additional information in ICA notification and application forms
- extend the potential time periods for a national security review under the ICA.
The first two noted amendments will come into effect on April 24, 2015, while the last noted amendment is now in force.
Among other things, the amendments implement the anticipated “enterprise value” review thresholds for all WTO investors, other than state-owned enterprises (SOEs) or where the Canadian business involves a cultural business, and will increase the review threshold under the ICA initially to C$600 million and ultimately to C$1 billion over the next four years. See our May 2012 Blakes Bulletin: Investment Canada Update: Changes to Foreign Investment Review Threshold and New Mediation Guidelines and our March 2009 Blakes Bulletin: Significant Amendments to Canada’s Competition Act and Investment Canada Act Now in Force for additional information about these amendments. The new regulations will also allow the government to take more time conducting national security reviews under the ICA and implement significant additional information requirements for ICA notifications and applications for review.
INCREASED ‘ENTERPRISE VALUE’ REVIEW THRESHOLDS IMPLEMENTED
As of April 24, 2015, the monetary threshold for pre-closing review of direct acquisitions of Canadian businesses by non-Canadians will be based on an “enterprise value” of C$600 million, which will increase to C$800 million in two years and C$1 billion in four years (and thereafter will be subject to an indexation). The amendments to the ICA regulations describe how investors are to calculate the “enterprise value” relevant to the review determination. While the regulations set out the precise manner in which the enterprise value is to be calculated, in general terms:
- 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.
Importantly, these changes do not apply to investments by SOEs, non-WTO investors (unless the Canadian business is controlled by a non-Canadian WTO investor immediately prior to the investment) or investments in cultural businesses, which will remain subject to the threshold that is based on the book value of assets of the Canadian business.
A key consideration for investors will be when to submit their required filings, since it can have implications for both determining enterprise value, and thus whether the investment is subject to pre-closing review or a post-closing notice, and national security. For example, where a target Canadian business is close but under the relevant review threshold, a non-Canadian investor may elect to file its notification as early as possible in order to “lock in” the enterprise value since the enterprise value is determined based on the date of the filing. However, to the extent that the investment could raise national security issues, filing before closing would also start the responsible minister’s time period for deciding whether to order a national security review. Accordingly, the timing for filing a notification will become an important strategic decision for investors and their Canadian targets.
NATIONAL SECURITY REVIEW TIMELINES EXTENDED
Under the ICA, special review requirements apply to transactions that potentially raise national security concerns. Where the Minister of Industry (Minister) has reasonable grounds to believe that an investment by a non-Canadian raises national security concerns, the Minister may notify the non-Canadian that the investment may be reviewed for national security concerns. If the Governor in Council (GIC) orders a review, the Minister will conduct the review and submit a report to the GIC with recommendations. The GIC has the authority to take any measures in respect of the investment that it considers advisable to protect national security. The ICA provides that each step of the review process is to occur within certain time periods. The newly adopted regulations, which are now in force, have extended the time periods under which the above steps need to occur:
- The period for the Minister to recommend whether to review the investment after notice is given to the non-Canadian was extended to 45 days from 25 days.
- If the GIC orders a review but the Minister is unable to complete his review within the prescribed 45 days, the Minister may now take an additional 45 days to complete the review (or a longer period on consent of the investor).
- If an investment is referred to the GIC because the Minister is satisfied that the investment would be injurious to national security, the GIC now has 20 days (up from 15) to make a decision regarding the investment.
The new time periods potentially bring the national security review process to up to 200 days from 130 days, or longer on the consent of the investor.
Moreover, if a net benefit review is concurrently underway, the Minister will have up to an additional 30 days to complete that review once the GIC has cleared the investment on national security grounds. These amendments provide the Minister with additional flexibility to extend the time for national security review when needed, which the government has noted will occur only in “exceptional circumstances.”
These amendments highlight the importance of carefully considering the application of the ICA in transaction planning when the transaction may raise national security concerns.
ADDITIONAL INFORMATION REQUIRED IN NOTIFICATION FILINGS AND APPLICATIONS FOR REVIEW
The new regulations also prescribe—as of April 24, 2015—additional information requirements for both notification filings and applications for review, including more detailed information about the investor, the investor’s board of directors and officers, the business activities carried out by the investor and its ultimate controller, whether a foreign state has any ownership interest or decision-making rights in the investor, the vendor, the sources of funding and the value of assets or market capitalization of the investment. These amendments are meant to formalize the process for collecting information relevant to the national security and net benefit review processes, in particular with regard to state-owned enterprises.