A recent government order pursuant to emergency COVID-19 legislation has temporarily extended the time periods within which the government may order national security reviews under the Investment Canada Act (ICA) in respect of foreign acquisitions. These extended time periods have implications for foreign purchasers making investments in Canada – particularly those that may be related to defence, infrastructure, public health and critical goods and services.
Law and Practice Prior to Recent Temporary Order
Under the ICA, all foreign acquisitions of control of Canadian businesses are either subject to a simple notification obligation or a more complex review process, generally dependent on the size of the investment. The ICA contains provisions which enable the Canadian government to begin a national security process for investments that may be “injurious to national security”.
Prior to the new temporary order, the submission of an ICA filing triggered a 45-day window within which the government may carry-out an initial review of any national security risks raised by a transaction. If after 45 days, the government does not issue the purchaser a notice related to a potential national security review of the transaction, it is time-barred from subjecting the transaction to any further review.
Accordingly, in many cases purchasers making investments in sensitive industries have made ICA filings prior to closing to allow the 45-day period to expire, so that they have certainty that their acquisition cannot be potentially unwound over national security concerns. It is generally agreed that, prior to COVID-19, the government had been very judicious in subjecting only those transactions likely to raise national security concerns to a notice of potential review, such that in the overwhelming majority of cases, the 45 days passed without incident, with no further delay on closing.
Recent Temporary Order
In late July 2020, the Canadian government enacted the Time Limits and Other Periods Act (COVID-19), which suspended or extended certain time periods on account of COVID-19. Pursuant to this legislation, an order was issued by the government on July 31, 2020 which extended the initial period under the ICA during which the government must decide whether to issue a notice of a potential national security review from 45 days to 60 days. The order also extended the subsequent period during which the government may decide whether to order a formal national security review from 45 days to 90 days.
Taken together, these two extended time periods mean that the government now has 150 days (60 days + 90 days) to decide whether to order a national security review in respect of a transaction. While, as a practical matter, the government would make very substantial progress during these 150 days, it does bear noting that – even if only a temporary basis – the government can now delay closing of a transaction by some five months and at the end of this period may simply conclude that a formal review is necessary. This in some respects mirrors how certain jurisdictions approach merger control, pursuant to which a so-called “Phase 1” review can last several months and in some cases much of the work that would arguably be more appropriately done in “Phase 2” is in fact accomplished in “Phase 1”.
The temporary order comes several months after the government issued a policy stating that it would be increasing national security scrutiny of foreign investments related to public health or the supply of critical goods and services to Canadians or to the government. We have since observed that the government has taken a highly cautious approach towards investments in a range of industries, subjecting an unusual degree of national security scrutiny to transactions that would not have raised any national security concerns prior to COVID-19, issuing national security notices with notably greater frequency.
Implications of Temporary Order for Foreign Purchasers
The extended time periods have two important implications for foreign purchasers making investments in potentially sensitive sectors. First, the extended time periods potentially give rise to unintended disincentives to make ICA filings on a pre-closing basis rather than on a post-closing basis. Second, foreign purchasers should plan for potentially long reviews.
Potential disincentive to make pre-closing filings
The decision to be made by foreign purchasers as to whether to submit their required ICA filing on a pre-closing or a post-closing basis is likely to be become more important, with greater judgment to be exercised in making this decision. While the government has long encouraged foreign purchasers investing in potentially sensitive sectors to submit their ICA filings on a pre-closing basis – a position the government has emphatically reiterated in April 2020 in response to the COVID-19 pandemic – the unintended consequence of the temporary extension is that it provides a strong disincentive to do the very thing that the government desires: file early.
This disincentive arises because while historically foreign purchasers have had reasonable certainty that they will know exactly how the government intends to approach their transaction within 45 days of submitting the required ICA filing, this 45 day period has become a 60 day period and indeed can very easily become a 150 day period. As noted above, the government can now spend up to a total of 150 days deciding whether to order a formal national security review in respect of an investment, rather than a total of 90 days previously.
This much longer period, combined with a notably greater willingness since the onset of COVID-19 on the part of the government to commence the national security review process, means that foreign purchasers will have to decide whether to hold-up closing of their transactions potentially for many months or whether instead to bear the risk of post-closing review.
Where the ultimate outcome of a national security review is likely to be a clearance, foreign purchasers – and domestic vendors – may find the prospect of waiting many months only to learn that in fact the transaction may proceed to be a frustrating one. They may therefore decide to proceed to close, and thereby allow a months-long national security process to occur on a post-closing basis, potentially defeating the government’s policy objective of encouraging parties to file on pre-closing basis.
Planning for a potentially long review
Where a transaction clearly raises potential national security issues such that a pre-closing filing is clearly recommended, parties should anticipate a lengthy review and plan accordingly. The ability to meaningfully truncate the extended time periods appears to be limited and during much of the review period the status and direction of the review may not be apparent to the parties. Indeed, the opaque nature of national security reviews means that there may be long periods of silence or apparent inactivity during the months following filing.
With all of this said, we would note that it is contemplated that the temporary extensions will only last until December 31, 2020 (unless the emergency legislation is extended by amendment) such that the default scenario under the ICA is that the prior time periods will apply again in 2021 and beyond. Possibly if the government receives fewer pre-closing filings than desired, it may determine that in fact the pre-existing shorter periods are preferable from a policy perspective and that it is good policy to let the longer periods lapse.
For the remainder of 2020, foreign purchasers concerned about the possibility of a post-closing national security review should consider making ICA related filings 60 days in advance of closing, to gain comfort that the transaction will not be subject to review on a post-closing basis. However, in considering that decision, it may in fact be that a purchaser – acting upon the careful advice of counsel – elects not to file early.
While this may appear in some respects to be a somewhat counter-intuitive outcome, and a case-specific determination will always be appropriate, our “COVID-19 era” experience to date has been that, while the review periods have increased, the proportion of national security reviews that ultimately result in a clean clearance has also increased, thereby somewhat weakening the historically strong rationale for filing early. Nevertheless, the enhanced sensitivities in the national security realm mean that the judgment of experienced counsel has taken on greater importance.