On March 25, 2015, the Government of Canada announced significant amendments to the Investment Canada Act, including changes to the thresholds for review, to the disclosure requirements associated with notification and review filings, and to the timeline for reviews of investments that may be injurious to national security.
The Investment Canada Act is Canada’s foreign investment review legislation, which applies to the acquisition of control of a Canadian business by a non-Canadian and the establishment of a new Canadian business by a non-Canadian. Acquisitions of control of Canadian businesses by non-Canadians that exceed certain monetary thresholds require approval by the Minister of Industry (or the Minister of Canadian Heritage where the investment concerns a cultural business) on a “net benefit” to Canada basis prior to implementation. Investments that are not subject to Ministerial review pre-closing are subject to a notification filing within 30 days of closing. The Investment Canada Act also provides for the possibility of a Government-initiated review of foreign investments that may be injurious to national security.
Set out below is a summary of the key changes to the Investment Canada Act recently announced by the Government of Canada:
The thresholds for review will be changing
Effective April 24, 2015, the threshold triggering the requirement for a non-Canadian investor from a WTO member state to submit an application for review and obtain ministerial approval when acquiring control of a Canadian business will change from CA$369 million in asset value to CA$600 million in “enterprise value” of the Canadian business.
- For public companies, enterprise value is market capitalization plus liabilities less cash and cash equivalents.
- For private companies, enterprise value is acquisition value plus liabilities less cash and cash equivalents.
- For asset acquisitions, enterprise value is the purchase price plus liabilities assumed by the purchaser less cash and cash equivalents that are transferred to the purchaser.
The CA$600 million threshold will rise to CA$800 million in two years and CA$1 billion in four years and thereafter be indexed by an inflation factor.
For state-owned enterprises, non-WTO investors and acquisitions of cultural businesses the current asset value thresholds continue to apply: CA$369 million for SOE investments; CA$50 million for indirect acquisitions of control by non-WTO investors and for indirect acquisitions of cultural businesses; and CA$5 million for direct acquisitions of control by non-WTO investors and for direct acquisitions of cultural businesses.
The amount of information required to be disclosed is increasing
Effective April 24, 2015, the Application for Review under the “net benefit” review process (pre-closing) and the Notification (due post-closing) will require significantly more information than currently required. In particular, the revised forms will require further information about the investor, its board of directors, senior officers and the Canadian business.
The national security review process timeline is extending
The maximum timeframe for a national security review increases from a total of 130 days to 200 days, absent the investor’s consent to extend the review process further. This change came into effect as of March 25, 2015.
Our preliminary views
The Government’s stated objective for the modified review threshold is to decrease the number of foreign investments that are subject to “net benefit” review. However, there is no fixed correlation between asset value and enterprise value and it is possible that a business with an enterprise value of CA$600 million or more could have an asset value below CA$369 million, paradoxically rendering a transaction that is currently below the threshold above the threshold on April 24, 2015. It is therefore too early to say whether the modified thresholds will result in fewer investments being subject to “net benefit” review. These changes will likely add to the complexity in determining when an acquisition by a non-Canadian investor will trigger a review. Moreover, the preparation of a Notification (due post-closing), which had previously been a relatively straightforward exercise, will require significantly more information to complete.