In brief: foreign investment review procedure in Canada

Procedure

What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?

After concluding that the Investment Canada Act applies to an invest­ment, the next step is to determine the appropriate screening proce­dure. Where a new Canadian business is established or an investment below the applicable review threshold is made, an administrative notification form must be filed. Whereas higher financial value acquisitions (and acquisitions of cultural businesses) require a more onerous review procedure. To determine whether a review is required (versus an administrative notification form), one must examine the size of investment, whether the investor or the vendor is controlled in one or more countries that are members of the World Trade Organization (WTO), whether the investment is a private sector trade agree­ment investment, whether the investor is a state-owned enterprise (SOE), whether the acquisi­tion is direct or indirect, and whether the target’s business is cultural or gives rise to national security concerns.

Higher review thresholds for private sector trade agreement and WTO investors

One of following two thresholds will apply to most direct acquisitions of control of Canadian businesses by non-Canadian, non-SOE investors from WTO member states:

• C$1.711 billion (2022) in enterprise value of the Canadian target for private sector trade agreement investors, or
• C$1.141 billion (2022) in enterprise value of the target for other non-SOE investors from WTO member states.

The higher trade agreement investor review threshold came into place in 2017 as a result of the Canada–European Union Comprehensive Economic and Trade Agreement Implementation Act, and currently applies to non-SOE investors ultimately controlled in EU member states, the United States, the United Kingdom, Mexico, South Korea, Chile, Peru, Colombia, Honduras, Panama, as well as Australia, Japan, New Zealand, Singapore and Vietnam (under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership).

These two thresholds are adjusted annually to reflect the change in nominal gross domestic product in the previous year.

The Investment Canada Act provides for complex formulas for calculating the enterprise value of Canadian businesses acquired by way of share (public or non-public entities) or asset acquisition.

Lower review thresholds

The review threshold for investments by SOE WTO investors is C$454 million (2022) in asset book value.

For direct acquisitions (see ‘Indirect acquisitions’, below), if both the purchaser and target are each ultimately controlled in a non-WTO member state (or Canada in the case of the target), the review threshold is C$5 million in asset book value.

In addition, where the Canadian business being acquired is a cultural business and is directly acquired, the reviewable threshold is C$5 million in asset book value, regardless of whether the purchaser or vendor is ultimately controlled in a WTO member state. A ‘cultural business’ is a business that carries on any of the following activities:

• publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form;
• production, distribution, sale or exhibition of film or video products;
• production, distribution, sale or exhibition of audio or video music recordings; or
• publication, distribution or sale of music in print or machine-readable form.

Even if an acquisition by a non-Canadian of a cultural business does not trigger the statutory review threshold, a review may, nonetheless, be ordered where the ‘Governor in Council considers it in the public interest’.

Indirect acquisitions

The above thresholds relate to direct acquisitions. If the investment is an indirect acquisition (acquisition of control of a corporation outside Canada that controls an entity carrying on a Canadian business) the following thresholds apply if the target is a cultural business or if purchaser and target are each ultimately controlled in a non-WTO member state (or Canada in the case of the target), the threshold for review is C$50 million in asset book value. However, if the Canadian assets being acquired comprise more than 50 per cent of all of the assets being acquired, the threshold for review is C$5 million in asset book value.

As a result, if the purchaser or target is from a WTO member state and the target is not a cultural business, an indirect acquisition of control of a Canadian business is not reviewable. Instead, only notice of the investment must be given to the Canadian government (see ‘Notification under the Investment Canada Act’, below).

Transactions that could be ‘injurious to national security’

The Canadian government has the power to review all proposed investments where the relevant minister (Minister of Innovation, Science and Industry or, for cultural transactions, Minister of Canadian Heritage) has ‘reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security’. There is no statutory definition of ‘national security’. No financial threshold applies to a national security review. A national security review can also apply to minority investments. This means that any equity transaction that involves a non-Canadian is potentially subject to a national security review. After a national security review, the Minister may deny the investment, ask for undertakings, provide terms or conditions for the investment or, where the investment has already been made, require divestment. A national security review can occur before or after closing.

The major concern for foreign investors under a review for national security reasons is that a number of important terms regarding the national security review scheme have not been defined in the legislation. This lack of defini­tion creates a wide discretion for the Minister and some uncertainty for foreign investors. At the end of 2016, the Canadian government released its highly anticipated Guidelines on the National Security Review of Investments, which sheds some light on circumstances that may draw investors and parties involved in the investment into the realm of a national security review. The guidelines provide a list of factors that the Canadian government considers when assessing whether an investment poses a national security risk. These factors focus on defence, technology and critical infrastructure and supply. The Canadian government may take into account:

• the potential effects of the investment on Canada’s defence capa­bilities and interests;
• involvement in the research, manufacture or sale of goods and technology identified in section 35 of the Defence Production Act (Canada);
• the potential of the investment to enable foreign surveillance or espionage;
• the potential of the investment to hinder current or future intelli­gence or law enforcement operations;
• the potential impact of the investment on Canada’s international interests, including foreign relationships;
• the potential of the investment to involve or facilitate the activities of terrorists, terrorist organisations or organised crime and other illicit actors;
• the potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
• the potential impact of the investment on the security of Canada’s critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government;
• the potential impact of the investment on the supply of critical goods and services to Canadians; and
• the potential impact of the investment on the supply of goods and services to the government of Canada.

In March 2021, revised guidelines were released that (1) confirmed that SOEs will receive enhanced scrutiny, (2) elaborated on existing national security factors (such as what may constitute sensitive technology) and (3) expanded the list of national security factors to include:

• the potential impact of the investment on critical minerals and critical mineral supply chains; and
• the potential of the investment to enable access to sensitive personal data that could be leveraged to harm Canadian national security through its exploitation.

Since the national security review process was introduced in March 2009, formal national security reviews have been ordered at least 52 times, with increasing frequency in recent years. The outcomes of these reviews include:

• the investor was directed to not implement the proposed investment (five cases);
• the investor was ordered to divest control of the Canadian business (twelve cases);
• the investment was authorised with conditions that mitigated the identi­fied national security risks (four cases); and
• in fifteen cases, the investor withdrew its application prior to a final order being made.

Many more investments have been the subject of informal national security scrutiny that, for the most part, resulted in clearance.

Notification under the Investment Canada Act

If the relevant financial thresholds for review under the Investment Canada Act are not met, an administrative notification form must be filed by the investor any time before the implementation of the invest­ment or within 30 days of the implementation.

Some of the more onerous reporting requirements include pro­viding information in respect of the investor’s board of directors, five highest paid officers and individuals or entities that own 10 per cent or more of the investor; whether the investor is influenced by a foreign state; and sources of funding for the investments.

Following receipt of the notice, the Investment Review Division (IRD) or the Cultural Sector Investment Review of Canadian Heritage, or both, as applicable, assess it for completeness and issue a receipt. Eventually, basic details identifying the investor, the target and the nature of the target’s busi­ness will be disclosed on the department’s website.

There are circumstances in which an investment that would not otherwise be reviewable (in other words, subject to notification) is subject to review under the Investment Canada Act.

Non-controlling investments in a Canadian businesses or establishments new Canadian entities (that do not qualify as Canadian businesses under the Investment Canada Act) may be notified voluntarily, either before or after closing, pursuant to amendments to the National Security Review of Investments Regulations.

What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?

Application for review

A filing is mandatory for those transactions that are reviewable under the Investment Canada Act. A review is commenced by the com­pletion and filing of an application for review. The purpose of a review is to satisfy the relevant minister (Minister of Innovation, Science and Industry or, for cul­tural transactions, Minister of Canadian Heritage) that the investment is likely to be of net benefit to Canada.

An application for review is a much more detailed document than the administrative notification form that must be filed where the applicable threshold is not met (or for the establishment of a new Canadian business), and requires much care in its preparation. A key element in the application for review is the require­ment to set out the investor’s plans for the Canadian business, includ­ing plans typically related to employment, participation of Canadians in the business, and capital investment.

Form and content of the application for review

The preparation of the application for review (which includes the appli­cation form stipulated by government) typically focuses on four main components:

• collection of data that is specifically required for the application form; for example, the investor will be required to provide infor­mation relating to:
  • its board of directors, five highest paid officers and individuals that own 10 per cent or more of the investor;
  • whether it is influenced by a foreign state; and
  • sources of funding for the investments;
• collection of supplementary information (the IRD sets out supplementary information that the officials strongly suggest be submitted with the application for review);
• preparation of the plans for the Canadian business; and
• in most cases, preparation of a submission that outlines why the proposed investment is likely to be of ‘net benefit’ to Canada.

Plans for the Canadian business

The most important element of any application for review is the articu­lation of the investor’s plans for the target following the acquisition. These plans are the key source of information upon which the relevant minister assesses whether the proposed investment is likely to be of net benefit to Canada. Further, the plans are the primary input for the development of the undertakings that the investor is usually required to provide in order to secure approval. The application for review form requests a detailed description of the investor’s plans for the Canadian business with specific reference to net benefit factors and the current operations of the Canadian business. The IRD suggests the following list of subjects for the plans:

• employment (number and type of jobs created or lost);
• additional investment (increased working capital provisions, expansion);
• resource processing (value added, extent of processing);
• utilisation of parts, components and services (requirements of the Canadian business and opportunity for Canadian suppliers to compete in supplying them);
• exports (percentage of exports compared with total sales, markets served, types of products or services exported);
• Canadian participation (number of Canadians as employees, managers, directors and owners);
• productivity and efficiency (new or expanded plant, new equip­ment, rationalisation of activities, training);
• technological development (nature of research and development (R&D), R&D expenditures and timing, R&D facilities, R&D contracts in Canada, use and terms and conditions to use licences, patents, etc.);
• product innovation or variety (different or complementary product lines, state-of-the-art products); and
• international competitiveness (world product mandate, access to international distribution networks).

Filing fee

There are no filing fees under the Investment Canada Act.

Statutory timelines for review

Once the application for review is filed and certified as complete, the relevant minister (Minister of Innovation, Science and Industry or, for cultural transac­tions, Minister of Canadian Heritage) initially has 45 days within which to decide whether or not the proposed acquisition is likely to be of net benefit to Canada. Depending on the nature of the Canadian business, the review is carried out by the IRD of the Department of Innovation, Science, and Economic Development or the Cultural Sector Investment Review of Canadian Heritage (with respect to cultural matters), or both, which make a recommendation to the relevant min­ister. Other government bodies, such as provinces where the Canadian business operates and government agencies, such as the Competition Bureau, may be consulted in this process. The review process often includes negotiating undertakings that are requested by the review­ing authority, for instance, as to employment levels and location of important offices and facilities. This can lead to intensive negotiations between the investor and the government. When finalised, these under­takings are legally enforceable by the government.

If the relevant minister is unable to reach a decision during the ini­tial 45-day period then he or she can unilaterally extend the period for a further 30 days or such longer period as may be agreed on consent. These time frames can be further extended if national security issues surface. Upon the expiry of this period, the Minister must render a deci­sion or he or she is deemed to be satisfied that the proposed acquisition is likely to be of net benefit to Canada.

If, at the end of the review period, the Minister sends a notice that he or she is not satisfied that the investment is likely to be of net benefit to Canada, the investor has the right, for 30 additional days (or such further period as may be mutually agreed), to make further representa­tions and submit undertakings to the Minister. Upon the expiry of this additional period, the Minister will, in light of further undertakings or representations, either confirm the original conclusion or advise the applicant that the proposed transaction is approved.

Cultural businesses

Reviews involving cultural businesses will take into account govern­ment policies that limit investment by non-Canadians in such busi­nesses. These policies apply to the publication, distribution or sale of books, magazines and periodicals; and the production, distribution, sale or exhibition of film or video products, or audio or video music recordings. As a practical matter, a non-Canadian investor will find it difficult to obtain Investment Canada Act clearance to acquire or estab­lish a Canadian business in a number of these sectors. In other cultural businesses as well, and notwithstanding the lack of a particular sector policy, a non-Canadian investor will often find it a challenge to gain Investment Canada Act clearance. The Ministry has issued guidelines with respect to the types of issues and undertakings that applicants should be prepared to address during the review process.

Transactions that could be ‘injurious to national security’

The Canadian government has the power to review all investments by non-Canadians on national security grounds. The entry point for national security screening will, in most cases, be the notification and review processes under the Investment Canada Act. Under the applicable regulations, the relevant minister (Minister of Innovation, Science and Industry or, for cultural transactions, Minister of Canadian Heritage) has 45 days after an appli­cation or notification has been certified. For non-notifiable investments for which no voluntary notification is filed, the government has five years following implementation to initiate action. A transaction that is subject to a national security review after it has already been implemented can be unwound if the Governor in Council (ie, federal cabinet) makes an order directing the non-Canadian to divest itself of its investment or conditions could be imposed by order of the Governor in Council.

Where a transaction gives rise to national security risks, parties are advised to file notice of the transaction with the Minister more than 50 days prior to the closing date in order to obtain a pre-clearance (assum­ing the Minister does not order a further national security review).

The Minister initiates a national security review by sending notice to the non-Canadian investor. The Minister can, and likely will, also send a request for information. Following this preliminary procedure, the Minister can either terminate screening or issue another notice, this time ordering a full national security review of the investment. A full national security review could take up to 200 days (or longer with the consent of the investor) from the date of the initial notice of the transaction sent to the Minister.

The Minister can request information from the non-Canadian or any other person involved. The investor will also be given the oppor­tunity to make representations to the Minister. The Minister considers the information, consults the Minister of Public Safety and Emergency Preparedness and other agencies and then sends a report to the Governor in Council with recommendations. The Governor in Council then makes a decision and can issue an order that blocks the investment, authorises the investment on conditions, or requires divestiture (in the case of a completed investment).

Once the national security screening process begins, the deadlines for ministerial decision-making in an Investment Canada Act ‘net ben­efit’ review are postponed. Thus, the two procedures become, in effect, merged and would presumably lead to a synchronised outcome.

Which party is responsible for securing approval?

The investor is responsible for filing an application for review or notification. However, where the acquisition is friendly, it is common for the Canadian business (ie, the target) or seller, or both, to assist the investor by providing supporting information regarding the Canadian business for the investor’s application for review.

How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?

The relevant minister (the Minister of Innovation, Science and Industry or, for cultural transac­tions, the Minister of Canadian Heritage) initially has 45 days within which to decide whether the proposed acquisition is likely to be of net benefit to Canada. If the relevant minister is unable to reach a decision during the ini­tial 45-day period then he or she can unilaterally extend the period for a further 30 days or a longer period as may be agreed on consent. A very limited exception applies and would allow for an earlier closing where the Minister has sent a notice to the investor stating that a delay in clos­ing the transaction would result in ‘undue hardship’ to the investor or ‘would jeopardize the operations of the Canadian business’.

With respect to review time in the past year, of the nine applications reviewed and approved under the net benefit provisions, it took an average of 77 days from certification to approval. The average period in 2019-20 was 87 days.

There are actions that the investor can take that may expedite the review process, including ensuring that the appropriate level of information is included in the application for review. The IRD has stated on its website that the most frequent cause of delays in the review of applications is the lack of adequate informa­tion on the investor’s plans for the Canadian business and suggests that plans be described in sufficient detail to enable the reviewing officer to obtain a clear understanding of their intentions. It is also typically help­ful for applicants to provide three-year projections for the Canadian business for employment, sales, exports, capital expenditures and R&D expenditures, where relevant.

Once the application for review has been submitted, it is help­ful to consider the three key stages of the review period and possible actions that an investor may take at or prior to each stage to expedite the review:

• intergovernmental consultation: depending on the nature of the proposed investment, the officials will interact with the provincial or territorial jurisdiction that is affected by the transaction, other federal government departments, as well as federal and provincial agencies;
• provision of additional information to the government representa­tives: often the timing of review is affected by the time it takes the investor to prepare and submit information to the government. To the extent that the investor is able to anticipate information likely to be requested by the government, preparation of that material should begin as soon as possible; and
• negotiating the content and scope of written undertakings to be given to the government, if any. To the extent that it is expected that undertakings will be required in support of a proposed transaction, this eventuality should be managed early on in the process. For example, draft undertakings should be prepared in anticipation of the Minister’s request for undertakings so that once the request has been made, the negotiation of the undertak­ings can begin forthwith.

Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?

Subject to a limited exception (ie, the Minister has sent a notice to the investor stating that a delay in clos­ing the transaction would result in ‘undue hardship’ to the investor or ‘would jeopardize the operations of the Canadian business’), if a direct acquisition is reviewable, it cannot be completed without the approval of the relevant minister (the Minister of Innovation, Science and Industry or, for cultural trans­actions, Minister of Canadian Heritage).

If a direct transaction is implemented before clearance is obtained, the Minister can seek a court order, which may require the investor to divest control of the Canadian business, dispose of any voting interests or assets acquired by the investor or pay a penalty of up to C$10,000 for each day that the investor is in contravention of the Investment Canada Act, or all of these. An indirect acquisition of control (acquisition of control of a corporation outside Canada that controls an entity carrying on a Canadian business) can be completed before the Minister makes his or her decision.

Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?

Early in the evolution of a reviewable transaction, and certainly if a public announcement has been made, it is commonplace to make a courtesy call to the IRD or the Cultural Sector Investment Review (with respect to cultural matters), or both, to advise them of the proposed transaction. Generally, how­ever, it is unusual for there to be any pre-filing dialogue or meetings between the investor and the reviewing agency.

With respect to investments that raise national security con­cerns, the Canadian government (in its Guidelines on the National Security Review of Investments), encourages investors to contact the IRD at the earliest stages of the development of their investment projects to discuss their investment. These meetings may facilitate national security assessments and clarify information requirements that might be useful in the course of an assessment.

When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?

In most cases, the investor will have legal and financial advisers engaged in respect of a proposed transaction. However, in some complex or sensi­tive cases, the contribution of public relations and government relations experts can be very valuable. Given the Canadian government’s power to undertake a review for national security and its special treatment of investments by SOEs, it is very important for investors that expect to be affected by these types of reviews to develop an appropriate government relations strategy early on when making an investment in Canada that may be reviewable (including considering pre-filing consultations with key government officials). The Canadian government’s recent rejections of investments based on national security grounds highlight the importance of early identification and careful manage­ment of sensitive issues. Careful consideration should be given, as soon as possible, to engaging experts whose experience can make the pro­cessing of a file much smoother for both investor and government alike.

What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?

National security review

Any transaction that involves a non-Canadian is potentially subject to a national security review, which can occur before or after closing. After the national security review, the Minister may block the investment, ask for undertakings, provide terms or conditions for the investment or, where the investment has already been made, require divestment. The Minister has 45 days after an application for review or notification has been certified to initiate a national security review. For non-notifiable investments and establishments of new Canadian entities, the government has 45 days after a voluntary notification has been certified to initiate action and five years following implementation if no voluntary notification is filed.

SOEs

There are provisions under the Investment Canada Act that significantly affect foreign investors whom the Canadian government considers SOEs. The Minister has broad pow­ers to declare an investor to be an SOE and to declare an otherwise non-reviewable acquisition by an SOE to be subject to review. Furthermore, the Minister may make these determinations retroactively.

Cultural businesses

Even if an acquisition by a non-Canadian of a ‘cultural business’ does not trigger the statutory reviewable thresh­old, a review may, nonetheless, be ordered where the ‘Governor in Council considers it in the public interest’.