On October 7, 2013, the Minister of Industry announced that the proposed acquisition of Allstream, a division of MTS Telecom Services, by Accelero Capital Holdings Inc. had been blocked under the national security provisions of the Investment Canada Act. Accelero, which is owned by an Egyptian, had made an offer earlier this year to buy Allstream for $520 million. The Minister’s announcement provided little guidance on the nature of the national security concerns raised by the transaction, other than to state that “MTS Allstream operates a national fibre network that provides critical telecommunications services to businesses and governments, including the Government of Canada.”

This announcement follows on the heels of reports this summer that VimpelCom Ltd. withdrew a request to acquire a controlling interest in the Canadian new entrant wireless carrier, Wind Mobile, due to national security concerns expressed by the Government of Canada. VimpelCom is controlled by a Russian firm.

The national security review process was added to the Investment Canada Act in 2009. Under the review provisions, Cabinet can order a review of a transaction on recommendation of the Minister of Industry that there are “reasonable grounds to believe an investment by a non-Canadian could be injurious to national security.” Following a review by the Minister, Cabinet has broad discretion to take any measures it considers “advisable to protect national security”, including prohibiting the non-Canadian from implementing the investment. The term “national security” is not defined in the Act and no formal guidance on its interpretation has been provided.

To date, there have only been three transactions that have been publicly reported to have been withdrawn or blocked due to the national security review process under the Investment Canada Act, although other unreported withdrawals may have occurred. It is noteworthy that two of these three reported cases relate to operators of telecommunications network infrastructure, or carriers. Moreover, one of the rare denials under the “net benefit” provisions of the Investment Canada Act involved the Canadian satellite firm, Macdonald Dettwiler and Associates Ltd. This denial, which preceded enactment of the national security review process, was reportedly based on national security concerns.

The Government’s rejection of foreign investment in the Canadian telecommunications sector appears to be at odds with its liberalization of foreign ownership rules for telecommunications carriers. While carriers with less than a 10% share of Canadian telecommunications service revenues are no longer subject to caps on foreign direct or indirect investment under the Telecommunications Act and Radiocommunication Act, given the Minister of Industry’s denial of the Accelero investment and in light of the other transactions in which national security concerns have apparently played a role, a foreign investment in a Canadian telecommunications carrier may face impediments under the national security review provisions of the Investment Canada Act depending on the nationality of the foreign investor, especially if the carrier provides service to the Canadian government. The nature of the network infrastructure employed by the carrier may also be a factor in whether or not a national security review is likely to be triggered.

Relatedly, the Government has also imposed restrictions on entities that can bid on Government network contracts.

These recent actions by the Government of Canada underscore the need to consider national security issues not only in the context of acquisitions and mergers, but also in preparing and responding to RFPs and conducting other due diligence exercises. Canada, of course, is not unique in having a national security mechanism as many other countries, including the United States, also conduct this type of review.