On August 4, 2016, as part of its annual report on the Investment Canada Act for fiscal year 2015–16, the Canadian government disclosed, for the first time, high level information on its use of the Act’s national security review powers. Specifically, the government has disclosed the number of national security reviews that have been conducted, broken down by year, and the outcome of these reviews. Notably, the government did not disclose the industries in which the relevant Canadian businesses operated, the country of origin of the relevant foreign investors, or whether the relevant foreign investors were state-owned enterprises.
Eight national security reviews have been conducted since the powers were introduced in 2009. In three of these cases, the Canadian government prohibited the foreign investor from completing the transaction (i.e., where the government conducted its review before the closing of the transaction). In two cases, the government required the foreign investor to divest the Canadian business (i.e., where the government conducted its review after the closing of the transaction). In two cases, it allowed the transaction to close subject to conditions (which the government has not disclosed). In one case, the parties abandoned the transaction. Most importantly, in none of the cases where the government conducted a national security review did it allow the foreign investor to complete the transaction and own the Canadian business condition free.
The national security review provisions provide the government with broad discretionary powers to review any foreign investment that could be injurious to Canada’s national security, including non-control level acquisitions, and to prohibit any proposed investment, impose conditions on its completion, or require divestiture of a completed investment. Additional background on the national security review powers is available in our Gowling WLG Guide to Doing Business in Canada: Regulation of foreign investment.
Almost immediately after the national security review powers were introduced in 2009, stakeholders, including potential foreign investors and members of the foreign investment review bar, pressed the Canadian government for some degree of guidance on when the provisions might come into play. In recent years, the level of intensity and frustration in this regard increased, with stakeholders explaining that: (i) the “black box” approach to the use of the powers can make it extremely difficult/almost impossible to assess, before incurring potentially significant pursuit costs for a transaction, the national security review risks associated with the transaction; and (ii) the government should be able to disclose some information without compromising either national security or the confidentiality of the parties involved in a national security review.
While helpful, the information that the Canadian government disclosed in the recently released annual report is less than what many stakeholders had hoped for. Unrelated to this disclosure, fragments of information about some of the individual national security reviews that have been conducted have become public, some in the form of unconfirmed (by the government) media reports. Based on these two sets of data, we have the following observations:
- When considered in the context of all transactions that could have been reviewed under the national security powers, the percentage that have actually been reviewed under the national security powers is negligible, less than 0.18%. 4,471 transactions have been brought to the government’s attention in the form of an Investment Canada Act notification form or (normal course, non-national security) review form since the national security review powers were enacted in 2009. Further, 4,471 transactions is an artificially low denominator for the calculation because it only covers control level acquisitions. The national security review powers can be applied to the acquisition of any interest in a Canadian business, including non-control level acquisitions. Statistics on non-control level acquisitions are not available.
- If a national security review is conducted, there is a good chance that the result will be catastrophic to the transaction. In five of the eight reviews, closing was either prohibited or divestiture was required. In one of the eight transactions, the transaction was abandoned, possibly because the parties had reason to believe that it was going to be prohibited. The Canadian government allowing a transaction to proceed, condition free, after a national security review is an available option, but based on the information provided by the government, this has never happened. Of course, eight is a very small sample size, so it is important to not overstate the significance of the outcomes, but in our view there clearly does appear to be a pattern.
- While full information is not available, national security reviews have been conducted where the target Canadian business has military contracts or applications or handles government communications and/or where the buyer is controlled by a state-owned enterprise or a high net worth individual from a non-democratic country. As “military” is a very broad category, a judgement call as to the sensitivity of the military aspect will be required when assessing the risk.
One of the biggest risks to foreign investors posed by the national security review powers relates to transactions that do not exceed the applicable mandatory review threshold and can therefore be completed before being notified, as it is possible that the government could conduct a review and order divestiture after closing, as we now know has happened in two cases. The government may not commence a national security-related review more than 50 days after receiving an investor’s notification — 45 days plus a five-day notice period.
To address this risk in the context of transactions that could possibly raise national security review concerns due to the nature of the acquired Canadian business and/or the foreign investor, the investor can submit a notification more than 50 days before closing, and include a closing condition in the purchase agreement that either no national security review shall have been commenced, or any such review that is commenced shall have been concluded on terms satisfactory to the investor.