On November 2, 2022, Minister of Innovation, Science and Industry François-Philippe Champagne issued a statement indicating that the Government of Canada had ordered divestitures of three recent investments in Canadian mining companies under the national security review provisions of the Investment Canada Act (ICA). In his statement, Minister Champagne noted that:
While Canada continues to welcome foreign direct investment, we will act decisively when investments threaten our national security and our critical minerals supply chains, both at home and abroad. In accordance with the ICA, foreign investments are subject to review for national security concerns, and certain types of investment—such as those in the critical minerals sectors—receive enhanced scrutiny.
The highlights from Minister Champagne’s statement included:
- The Government of Canada ordered three Chinese investors to divest themselves of their minority holdings in publicly traded Canadian lithium mining companies;
- Going forward, the outcome of national security reviews will be made public;
- The Government of Canada will work to “attract foreign direct investments from partners who share our interests and values”; and
- The government’s Critical Minerals Strategy is intended to position Canada as “the global supplier of choice for critical minerals.”
The Ministerial statement concerned the following divestitures:
- Sinomine (Hong Kong) Rare Metals Resources Co., Limited (Sinomine) was required to divest its interests in Power Metals Corp (Power Metals).
- Chengze Lithium International Limited (Chengze) was required to divest its interests Lithium Chile Inc (Lithium Chile).
- Zangge Mining Investment (Chengdu) Co., Ltd. (Zangge) was required to divest its interests Ultra Lithium Inc (Ultra Lithium).
A departure from the government’s prior approach
The statement is an apparent departure from the government’s previously announced approach to transactions in which “critical mineral” assets were located outside of Canada. In January 2022, a Chinese state-owned enterprise (SOE) acquired a Canadian mining company with mining operations in Argentina. The Government of Canada did not commence a national security review regarding this acquisition, at least in part, on the basis that the lithium mining assets in that transaction were located outside of Canada.
In the wake of that prior transaction, the House of Commons Standing Committee on Industry and Technology (INDU) issued a report calling for more transparency regarding the foreign investment review process. On June 22, 2022, the government responded acknowledging the need to find a balance between maintaining Canada’s reputation as a destination for foreign capital while protecting national security. This response coincided with the introduction of a voluntary notification process for investments that are not otherwise subject to notification, such as minority investments.
New critical minerals policy
The announcement of the three required divestitures came only a few days after the Government of Canada released its Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act on October 28, 2022 (the Policy), in which the government stated that investments by SOEs and foreign-influenced private investors in Canadian entities in the Critical Minerals sectors would be scrutinized more closely.
The Policy set out a series of factors that the government will consider when assessing a proposed investment in the critical minerals sector by an SOE would be of “net benefit to Canada” (which applies to larger transactions), and when an investment by an SOE in the critical minerals sector would be injurious to national security. The Policy applies to state-owned and controlled investors as well as “investments from private investors assessed as being closely tied to, subject to influence from, or who could be compelled to comply with extrajudicial direction from foreign governments, particularly non-likeminded governments.”
The Policy builds on the Guidelines on the National Security Review of Investments (the National Security Guidelines) as well as Canada’s Critical Minerals Strategy. The government’s Critical Minerals List outlines the Canadian Government’s position that the 31 minerals on the list are critical for the sustained economic success of Canada and its allies and that the country’s future prosperity and global leadership in emerging low-carbon and other technology sector requires reliable market-based access to critical minerals across the value chain. The government also considers critical minerals strategic assets that contribute to Canada’s national security as inputs in defence and high technology.
ICA review processes
There are two foreign investment review processes available to the Government of Canada in relation to the acquisition or establishment of a Canadian critical minerals business: net benefit to Canada review and national security review.
Net benefit to Canada review
Under the ICA, foreign acquisitions of Canadian businesses that meet certain financial thresholds must obtain government approval before closing on a “net benefit” to Canada basis. The thresholds for “net benefit” review vary based on investor- and transaction-specific criteria, and some are adjusted annually. At present, a threshold of CA$1.711 billion in enterprise value applies to investors from certain countries with trade agreements with Canada, including the United States, Mexico, EU member states, and the United Kingdom, among others. The relevant threshold for investors from other WTO member countries is currently CA$1.141 billion. Lower thresholds apply in other circumstances, such as a CA$454 million assets value threshold for SOE investments.
Transactions subject to “net benefit” review are few in number (eight in the 2021-2022 fiscal year) and are rarely denied approval. However, the Policy provides that applications for acquisitions of control of Canadian business involving “critical minerals” by a foreign SOE “will only be approved on an exceptional basis.” The Policy also lists factors that can be considered to determine whether a proposed investment would be of net benefit to Canada is also provided:
- Operational and strategic control over the Canadian business by a foreign state;
- Competition in the sector and the potential for significant concentration of foreign ownership;
- Corporate governance of the foreign SOE; and
- The likelihood that the Canadian will continue to operate on a commercial basis.
National security review
While the number of net benefit reviews has declined as thresholds have increased dramatically in recent years, national security reviews under the ICA have grown in number. As reported by the government in its annual report for the year ended March 31, 2022, half of the investments subject to national security reviews in that year were related to Chinese investors and a third to Russian investments.
The Policy states that all foreign SOE investment in the critical minerals sector, regardless of size or value, direct or indirect, controlling or non-controlling, will be subject to enhanced scrutiny under the discretionary national security review provisions going forward. In addition to the factors noted in the National Security Guidelines, the following factors could be considered in assessing whether a transaction involving critical minerals would be injurious to national security:
- The size, scope, and location of the Canadian business;
- The nature and strategic value to Canada of the mineral assets or supply chain Involved;
- The degree of control or influence an SOE would likely exert on the Canadian business, the supply chain, and the industry;
- The effect the transaction may have on the ability of Canadian supply chains to exploit The asset or access alternative sources (including domestic supply); and
- The current geopolitical circumstances and potential impact on allied relations.
As noted above, the Minister announced the divestiture orders concerning three separate investments in Canadian critical minerals companies, each involved in lithium mining activities in Canada and abroad. In this regard:
- Sinomine was required to divest its investment in Power Metals. Sinomine acquired a 5.7% interest in Power Metals for CA$1.5 million in January 2022 and entered into an offtake agreement in March 2022 for all of the lithium and tantalum produced at Power Metals’ Case Lake property in Ontario. Like lithium, tantalum is identified by the Government of Canada as a critical mineral.
- Chengze was required to divest its investment in Lithium Chile. Chengze acquired a 19.35% interest in Lithium Chile in May 2022 for CA$27.9 million, an increase from its previous holdings of 5.14%. Significantly, all of Lithium Chile’s properties are located outside of Canada, in Chile and Argentina.
- Zangge was required to divest its investment in Ultra Lithium. Zangge acquired a 14.17% interest in Ultra Lithium for CA$4.14 million in May 2022. It also entered into an agreement in June 2022 to pay US$10 million to Ultra Lithium and invest US$40 million in its lithium exploration project in Argentina for a 65% stake in its Argentinian subsidiary
In the wake of these divestiture orders and the recent Policy, SOE investors, state-influenced investors, and investors originating from certain countriesshould anticipate heightened scrutiny for any investment (controlling or minority), especially concerning investments into critical minerals, even when the Canadian critical minerals revenue-generating assets are located abroad.
Investment treaty considerations: limited recourse regarding decisions under the ICA
Canada has bilateral investment treaties, known as Foreign Investment and Promotion Agreements (FIPAs), with at least thirty-eight countries. In addition, several of its Free Trade Agreements include investment protection provisions, which provide similar protections to those in a FIPA. These agreements establish protection for investors and covered investments when the government of the other party does not accord to treatment consistent with a treaty’s obligations. Canada has a FIPA in place with both China and Hong Kong, which is applies to Chinese investments in Canada and Canadian investments in China.
Key provisions of these agreements typically include: treating foreign investors with the best treatment provided to nationals of the host state (national treatment), treating foreign investors of one country with the best treatment provided to other foreign nationals (most-favoured-nation treatment), protection against expropriation without compensation, and treating foreign investors according to a minimum standard of treatment in accordance with customary international law, including fair and equitable treatment and full protection and security (minimum standard of treatment).
A key consideration for foreign investors subject to regulatory restrictions or requirements is whether such measures are potentially in breach of the protections offered by a FIPA or investment protection provisions in an applicable Free Trade Agreement. As governments around the world seek to secure supply-chain access for strategic goods, including critical minerals, foreign investors should generally keep two primary questions in mind: 1) is the relevant investment covered by the investment protection provisions in a FIPA or investor protections in a Free Trade Agreement; and 2) if so, do you have a right to bring a claim for any losses under international arbitration.
Certain treaties, including the China and Hong Kong FIPAs, also provide certain exemptions. The China and Hong Kong FIPAs exclude from dispute resolution certain decisions made under the ICA. The question as to whether a divestment order falls within the scope of these exceptions has yet to be litigated.
Foreign investors in Canada, from China and elsewhere, who are considering investments in critical minerals should take note of recent developments, which signal an increasingly aggressive posture regarding investments by foreign state-owned and influenced investors into the critical minerals sector. It is clear that Canada is taking steps to restrict foreign investments into this sector to, in the words of Minister Champagne, “partners who share our interests and our values.”
The scope of the national security review process has extended in recent years beyond traditional defence and territorial integrity concerns and now encompasses strategic economic sectors, including critical minerals. Moreover, the process is being used for minority investments and affects mining assets outside of Canada held by Canadian companies. Foreign investors are well advised to assess at the earliest possible stage the foreign investment review risk presented by these developments when considering investments in Canada.