On March 25, 2015, the federal government published long-awaited regulations as a result of which, effective April 24, 2015, the threshold for determining whether net benefit review under the Investment Canada Act (ICA) is required for WTO private sector investment will be $600 million based on “enterprise value” rather than $369 million in asset book value as is currently the case.  The threshold will increase to $800 million in 2017, then to $1 billion in 2019, after which it will be indexed annually. The net benefit review threshold for non-WTO acquisitions, acquisitions involving state-owned enterprises (SOEs) and acquisitions of cultural businesses will continue to be based on asset book value.  The review threshold amendments have a long history; for further information refer to our March 12, 2009 Osler Update, June 14, 2012 Osler Update, December 9, 2012 Osler Update and May 2, 2013 Osler Update.

The change from an asset-based threshold to an enterprise value threshold will have a number of important implications for foreign investments in Canada including increased complexity in determining whether a transaction is subject to ICA net benefit review, and a greater potential for the ICA process to provide advantages to certain bidders over others for the same target.  In addition, while the government is raising the threshold for foreign investment review, it is not clear that the burden on foreign investors will actually decrease as a result of the changes.  Certainly, there will be some transactions that would not be subject to review based on the current threshold of $369 million in book value of assets that will exceed the $600 million enterprise value threshold.  It remains to be seen more generally whether, particularly at the $600 million level, more transactions will be subject to ICA review than would have been the case if the current threshold continued to apply.

In addition to changes to the review thresholds, the regulations impose new disclosure requirements which will result in a foreign investor having to provide significantly more information to the federal government regarding the investor, its business activities and shareholders than is currently the case, including in notifications required to be filed for all acquisitions of control of Canadian businesses by non-Canadians that fall below the thresholds for review. 

The new regulations also extend the timeline for national security reviews by up to 70 days.  This change is effective immediately.

Revised Thresholds for Review

As of April 24, 2015, there will be six different ICA thresholds for review for direct acquisitions of control:

  1. Direct acquisition of a publicly-traded entity – $600 million or more in enterprise value, based on the target’s market capitalization, plus its total liabilities excluding its operating liabilities, minus its cash and cash equivalents.
    • Market capitalization will be calculated by using the average daily closing price of the target’s quoted equity securities on the entity’s principal market (i.e., where the greatest volume of trading occurred during the trading period) over the most recent 20 days of trading ending before the first day of the month that immediately precedes the month in which the application for review or notification is filed.
    • If there are unlisted equity securities, the fair market value of such securities, as determined by the board of directors or other person authorized to make that determination, is to be included.
    • Total liabilities, excluding operating liabilities, cash and cash equivalents are determined based on the most recent quarterly financial statements.
  2. Direct acquisition of a privately-held entity – $600 million or more in enterprise value, based on the total acquisition value, plus its total liabilities, excluding its operating liabilities, minus its cash and cash equivalents.
    • Where the investor is acquiring 100% of the voting interests, total acquisition value is the total consideration payable.  Where the investor is acquiring less than 100% of the voting interests, total acquisition value is the aggregate of the consideration payable by the investor, the consideration payable by any other investors, and the fair market value of any portion of the voting interests that are not being acquired.
    • In circumstances where the parties are non-arm’s length, or consideration is nominal or zero, total consideration payable is fair market value.
    • Total liabilities, excluding operating liabilities, cash and cash equivalents are determined based on the most recent quarterly financial statements.
  3. Acquisition of assets – $600 million or more in enterprise value, based on the total consideration payable, plus the liabilities that are assumed by the investor (other than operating liabilities), minus the cash and cash equivalents that are transferred to the investor.
    • In circumstances where the parties are non-arm’s length, or consideration is nominal or zero, total consideration payable is fair market value.
  4. Direct acquisition of a cultural business – book value of assets of the Canadian business is $5 million or more.
  5. Direct acquisition by a non-WTO investor of a non-WTO controlled target – book value of assets of the Canadian business is $5 million or more.
  6. Direct acquisition by an SOE investor – book value of assets of the Canadian business is $369 million or more (indexed annually).

As is currently the case, direct acquisitions of Canadian businesses where the thresholds are not met, and indirect WTO investments, including by SOEs, are subject to notification only and are not subject to review.  Such transactions may still be subject to review on national security grounds.  Indirect investments by non-WTO investors in non-WTO controlled targets or indirect acquisitions of cultural businesses by any investor are subject to review where the book value of assets is $50 million or more (or $5 million in certain cases).

Implications

The amendments raise several important issues for foreign investors contemplating direct acquisitions of control of Canadian businesses:

  • There will be some transactions that would not be subject to review based on the current threshold of $369 million in book value of assets but will exceed the $600 million enterprise value threshold.  It remains to be seen whether, particularly at the $600 million level, more transactions will be subject to review than would have been the case if the current threshold continued to apply.
  • The amendments come into effect April 24, 2015 and so will impact acquisitions of control currently being contemplated.  The non-reviewable status can be “crystallized” for a transaction that is not reviewable under the current thresholds but would be reviewable under the new rules by filing a notification prior to April 24.
  • For public bids, there will be a greater element of strategy in deciding when to make an ICA filing.  The time period for calculating the average share price used to calculate enterprise value will be determined with reference to the point in time at which an ICA filing is made rather than when the transaction closes.  In other words, the amendments permit an investor to file a notification if at that time the enterprise value is below the threshold, thereby “freezing” the non-reviewable status of the transaction for that investor.
  • In some cases, there may be a “first mover / first to file” advantage in an auction scenario.  This could have important implications for public company auction scenarios with multiple bidders.  The amendments permit the first bidder to file a notification based on enterprise value which is below the threshold (i.e., no ICA review would be required for that bidder), thereby “freezing” the enterprise value of the target but only for purposes of its own bid.  Where the announcement of this first bid has the effect of increasing the target’s share price, this has the potential to result in an uneven playing field amongst foreign bidders.  While the first bidder would not be subject to ICA review, if there is a significant time gap in between bids such that enterprise value has increased as a result of the first offer, the subsequent bidders may be subject to ICA review if the enterprise value threshold is exceeded. 
  • While investments by SOEs have for some time been subject to more vigorous review, the new rules will for the first time result in SOE and private sector investment being subject to different thresholds.  As a result, it is possible that a private sector investment may trigger a review as a result of the target’s enterprise value exceeding the $600 million threshold, while that same investment by a foreign SOE would not trigger a review if the book value of the target’s assets is below the $369 million asset value threshold (although the federal government could turn to the national security regime to review the investment if it had concerns).
  • ICA filing implications may now be a factor when determining purchase price for private companies.

More Onerous Disclosure Requirements

The amendments will also significantly increase the disclosure requirements for investors.  Among other things, investors will now need to provide detailed information regarding their governance, management and ownership, birth dates and contact details for all individuals identified, and contact details for all entities identified. Investors will also be required to disclose whether an SOE has a direct or indirect ownership interest in the investor and whether the SOE has certain veto rights or rights regarding the appointment of officers and directors or strategic decision-making.  These amendments come into force on April 24, 2015.

Extended Timeline for National Security Reviews

Independent of the ICA net benefit review process, the ICA national security regime allows the federal government to review a broad range of foreign investments, including minority investments, on the basis that such investments could be “injurious to national security.”  The revised regulations extend as of March 25, 2015 the government’s maximum review period from 130 days to 200 days (or possibly longer upon the consent of the investor).  A statement released with the amendments indicates that the objective is to provide the federal government with the time it needs to conduct a thorough analysis of investments which potentially raise national security concerns.

There are no published criteria for what is “injurious to national security,” nor are there publicly-available statistics on enforcement of this aspect of the ICA.