The Canadian federal government has reversed a cabinet order issued by the previous Conservative government in July 2015 that sought to unwind a transaction deemed injurious to Canada’s national security. The order to unwind the acquisition of Montréal-based ITF Technologies (formerly Avensys Inc.) (ITF) by Hong Kong-based electronics company O-Net Communications (O-Net) was challenged by O-Net before the Federal Court in 2015. That challenge was ultimately successful, as the order has been set aside on consent and a new review will be undertaken, a decision that appears to align with the Liberal government’s goals of strengthening trade relations with, and attracting increased foreign investment from, China. The decision is also consistent with the government’s commitment to increased transparency in the national security review regime under the Investment Canada Act (ICA).
In July 2015, the Conservative government issued an Order-in-Council (the Order) that required the unwinding of O-Net’s acquisition of ITF, on the basis that the $5-million deal was potentially injurious to Canada’s national security. ITF’s operations include the manufacturing and distribution of optical components and modules for the telecommunications market, as well as the production of high-power devices and sub-assemblies for the telecommunications and data-communications industrial markets. ITF’s products have applications across various industries, including some that may be considered part of Canada’s critical infrastructure, such as the medical, scientific, telecommunications, data communications and defence/security sectors. It has also recently been reported that ITF had previously undertaken university-level research in respect of hack-resistant messaging technology in collaboration with various arms of Canada’s national security apparatus, including the Communications Security Establishment and the Department of National Defence (DND). ITF also appears to have had some dealings with governmental entities, including selling high-tech equipment to the DND and receiving research and development funding from the National Research Council.
O-Net applied for judicial review of the Order on the grounds that ITF had been under foreign control for more than a decade prior to being purchased by O-Net in early 2015, and that it did not possess any technologies that were not otherwise readily available in the marketplace. O-Net’s application also challenged the Order on the grounds that its “rights to procedural fairness were breached when…the Order was made without providing O-Net Communications with any consequential details or insight concerning the Minister’s concerns or providing O-Net Communications with the basis upon which the investment would be injurious to national security and giving O-Net Communications a meaningful opportunity to respond in that regard.”
In November 2016, the Federal Court set aside the Order and remitted the matter to the Minister of Innovation, Science and Economic Development to undertake a new review of the investment. This is the first time an Order-in-Council made pursuant to a national security review has been set aside, on consent of the government or otherwise. That said, no final determination has necessarily yet been reached in regard to the fresh review.
According to Innovation, Science and Economic Development Canada’s Annual Report released in August 2016, there have been eight investments subjected to national security reviews in Canada since the regime was introduced in 2009. Of these eight investments, three were ultimately prohibited, two required a divestiture and two were conditionally allowed, subject to the implementation of measures to mitigate the relevant national security risks. The final investment was withdrawn before the review reached its conclusion.
Although details of discussions between O-Net and the government are confidential, the government’s willingness to reverse the original decision and undertake a new review demonstrates a new measure of flexibility in the current federal government’s approach to the review of investments that may raise national security concerns.
In particular, the decision to revisit the O-Net-ITF review with fresh eyes may serve as a signal to Chinese and other non-Canadian investors that Canada is increasingly open to their investments. This apparent openness is consistent with the recently released National Security Guidelines (the Guidelines) (discussed by Osler here), in which the investor’s country of origin was omitted from a (non-exhaustive) list of factors to be considered by the government when assessing the national security risks associated with an investment. Although investors from specific countries will not automatically be presumed to be national security threats, the Guidelines do state that the identity and business activities of an investor remain relevant to national security issues.
The Guidelines also provide for the consideration of potential third-party influence over an investor (an issue which is particularly relevant for Chinese investors); the Chinese government’s possible connection with, or influence over, an investor may complicate the national security analysis pertaining to an otherwise apparently benign investment.
While this decision can be viewed as a positive development, it should not be taken as an indication that Chinese (and other non-Canadian) investors — and particularly those controlled by state-owned enterprises — will be free from scrutiny under the national security regime of the ICA. It does, however, suggest that the government’s commitment to fostering Chinese investment in Canada may become an increasingly relevant consideration in the application of the national security review process. The recent appointment of John McCallum — one of Prime Minister Trudeau’s most experienced and respected Ministers — as Canada’s ambassador to China is further evidence of the importance attached by the government to Sino-Canadian relations. This development is particularly timely given the hostility towards China that has been expressed by the U.S. president-elect Trump.