In March 2009, the Canadian Parliament amended several laws that impact foreign investment in Canada. It both reduced and clarified some important foreign investment restrictions, while also imposing what could be significant new burdens on investors.
The Investment Canada Act authorizes the Canadian government to screen foreign investment to determine if it is likely to be of "net benefit" to Canada. Foreign direct acquisitions of Canadian businesses with assets that exceed $312 million, for most industries, and $5 million, for certain sensitive sectors of the economy, must endure a "review" by one of the two government departments that deal with such matters. Often the review will lead to the foreign investor giving undertakings relating to employment, future investment and other commitments considered beneficial to Canada.
The March 2009 amendments to the Investment Canada Act are intended to make it easier for foreign investors seeking to acquire Canadian companies, as fewer acquisitions will have to endure the Investment Canada review process. The list of sensitive sectors has been narrowed to only include certain cultural industries. Thus, acquisitions in the uranium mining, financial services, and transportation services sectors will no longer be subject to the low $5-million review threshold.
As well, the formula for calculating the higher review threshold will be changed and the threshold number will increase. The threshold moves from a test based on the book value of the assets of the target company to a test based on its "enterprise value." The definition of this term has been set out in proposed regulations published for comment on July 11, 2009. For a publicly listed company, enterprise value means market capitalization plus debt less cash. For non-publicly traded companies, or for asset sales, enterprise value will be calculated using the value-of-assets formula currently applied. The new enterprise value threshold will be set at $600 million initially and will increase in stages to $1 billion in four years’ time.
An important addition to the Investment Canada Act is the new power given to the federal government to vet investments by non-Canadians on national security grounds. Canada joins the United States, Australia, and most recently, Germany, with explicit procedures to review, adjust, and if necessary, reject, foreign investments that are perceived to be injurious to national security.
The scope of the review is potentially very broad. There is no minimum investment threshold. A review can be undertaken for a takeover of an existing business or the start-up of a new business. To date, there is no list of sensitive sectors, where a review is more likely; nor is there a procedure to voluntarily pre-clear potentially sensitive transactions. The proposed regulations set out time frames for the government to invoke the national security screening process. They also require foreign investors to disclose more information than previously about the foreign investor — a requirement that applies both to reviewable transactions and to transactions that are merely notifiable.
The March 2009 amendments to the Competition Act that bear most notably on foreign investment decisions concern the Canadian pre-merger notification procedures. These have now been substantially aligned with the equivalent US procedures under the Hart-Scott-Rodino Act. No change has been made to the substantive test for prohibiting anti-competitive mergers.
Under the new procedures, parties to a notifiable merger must file the requisite information, and then wait 30 days. By the end of the 30-day period, either the Competition Bureau will issue a second request for additional information or, if no such second request is made, the parties are free to close the transaction. If the parties receive a second request, it will set out the further information that must be submitted. The parties must assemble the requested information, submit it to the Competition Bureau, and then wait a further 30 days before closing their transaction — unless the Competition Tribunal blocks the closing upon application by the Bureau.
The 2009 amendments do not materially change Canada’s ownership and control rules that apply in certain targeted industries, such as telecommunications and broadcasting. Nor do they alter merger approval rules that can apply to other industries such as large transportation undertakings. All of these rules continue to be relevant to a potential foreign investor. See the related article in this issue.