In 2007, the Competition Policy Review Panel was formed with the mandate to review Canada’s competition and foreign investment policies and to make recommendations aimed at increasing Canada’s competitiveness in the global marketplace. Earlier this year, the Panel released its much anticipated Report.
This abbreviated article focuses on the most significant recommendations made by the Panel with respect to the Investment Canada Act (the “Act”). In short, its intention is to increase Canada’s attractiveness as a destination for foreign investors. But a brief overview of the current scheme is helpful to appreciate the rationale for its recommendations.
Current Foreign Investment Restrictions Under the Act
Depending on the type and size of the transaction, investments by non-Canadians are subject to one of two procedures under the Act: (1) notification, or (2) application for review for “net-benefit.”
Notification is required any time that a non-Canadian creates a new Canadian business or acquires control of an existing Canadian business, unless the investment is subject to review and an application for review is filed.
Currently, acquisitions of a Canadian business by a foreign investor will be subject to review under the Act where the value of the assets of the Canadian business meets or exceeds certain monetary thresholds that are calculated yearly by the Minister of Industry. If the investor is from a member country of the World Trade Organization (“WTO”), the threshold for review in 2008 has been set at $295 million. For non-WTO investors, or for investors acquiring a Canadian business engaged in specified sensitive sectors (uranium production, financial services, transportation services), the threshold is much lower ($5 million for direct investments and $50 million for indirect transactions). Additionally, the Government may review certain transactions regardless of the thresholds if the investment falls within a type of specified business activity that is related to Canada’s cultural heritage or national identity.
When an application is under review, the relevant Minister will determine whether or not the investment is likely to be of “net benefit” to Canada. The factors that are taken into account generally relate to employment, productivity, industrial efficiency, competition and compatibility with national policies.
A very brief overview of some of the major recommendations made by the Panel can be summarized as follows:
1. Change of Monetary Thresholds for Review and Value Measurement standard
The Panel recommended an increase in the monetary thresholds which would trigger review by Industry Canada to $1 billion in enterprise value. This increased threshold would not apply to investment in “cultural businesses.” The Panel recommended a change from using “gross assets” as the measurement tool for an investment or acquisitions value to the use of “enterprise value.” Enterprise value is equal to price paid for the equity of an acquired business and the assumption of its liabilities on the balance sheet minus its current cash assets.
2. Shift of Burden Regarding the “Net-Benefit” Test
With respect to the net-benefit test, the recommendations are that the test no longer be one in which the applicant must prove a net benefit to Canada, but should be one in which the Minister is required to prove that the investment would be contrary to Canada’s interest.
3. Implementation of “National Security” Test
The Panel was in support of the implementation of a national security test which would allow the rejection of an investment/acquisition if it was found to be a risk to national security. A similar test is in place in the U.S.
4. Cultural Businesses and the de minimus Exemption
While many were hopeful for drastic changes with respect to “cultural business” industries, the Panel was hesitant to make any such recommendations. The Panel did take a few small steps towards liberalization. It called for a de minimus threshold which aims to exempt from review any business activities that are ancillary to the “cultural” industry. This threshold would apply when revenues from cultural business activities are “less than the lesser of $10 million or 10% of gross revenues of the overall business.” The Panel also recommended that Canadian Heritage, the ministry responsible for review of cultural business transactions, review its relevant policies every five years, including whether or not it should increase or revise the threshold.
5. Increased Transparency and Predictability
A common industry complaint addressed by the Panel was that the review process is neither transparent nor predictable. The Panel called for a requirement that Industry Canada report publicly the disallowance of any transaction under the Act along with reasons for doing so. Additionally, Industry Canada should be required to publish Annual Reports and improved Guidelines.
6. Two-Phased Liberalization in Telecommunications Sector
The Panel followed the recommendations made by the 2006 Telecommunications Policy Review Panel calling for a two-phased liberalization in the telecommunications sector. It also recommended that Industry Canada allow the establishment of new telecommunications businesses and the acquisition of companies by foreign investors with up to 10% market share.
7. Changes to Air Transportation Foreign Ownership Restrictions
The Panel recommended an increase in the foreign ownership limitations in the airline industry from 25% to 49% of voting equity, so long as it is done on a reciprocal basis. The Panel also emphasized that Canada needed to increase its “Open Skies” negotiations with other nations.
By and large, the Panel’s recommendations involve a scaling back of Canada’s foreign ownership restrictions. The question remains whether the Panel went far enough.
The likelihood that these recommendations would be followed is unclear. However, prior to the election, the Conservative Party did pledge to implement some of the changes discussed above. These include: the increase in thresholds for review; the use of enterprise value as a standard for assessment; the requirement for reasons for disallowances; the implementation of a national security test, and the increase to the allowed level of foreign ownership in the airline industry.