What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?
After concluding that the Investment Canada Act applies to an investment, the next step is to determine the appropriate screening procedure. As discussed in question 3, where a new Canadian business is established or an investment below the applicable review threshold is made, an administrative notification form must be filed. Whereas higher financial value acquisitions (and acquisitions of cultural businesses) require a more onerous review procedure. To determine whether a review is required (versus an administrative notification form), one must examine the size of investment, whether the investor or the vendor is controlled in one or more countries that are members of the WTO, whether the investment is a private sector trade agreement investment, whether the investor is an SOE, whether the acquisition is direct or indirect, and whether the target’s business is cultural or gives rise to national security concerns.
Review under the Investment Canada Act
Subject to certain exemptions, where a transaction involves the acquisition of control of a Canadian business by an acquirer controlled, directly or indirectly, by non-Canadians (see question 4) and the enterprise value (for WTO investments by non-SOE investors) or the gross book value of the assets (for SOE investors, Canadian cultural businesses or non-WTO investments) of the acquired business exceeds certain threshold amounts, the transaction may be reviewable by Industry Canada pursuant to the Investment Canada Act. The Act sets out an extensive list of activities that are exempt from the operation of the statute, including ordinary course acquisition of voting shares by a trader in securities, acquisition in the course of realising on security for a loan, and corporate reorganisation where the ultimate control does not change. Exempt transactions, of course, do not incur any review or notice obligations.
If a direct acquisition is reviewable, it cannot be completed without the approval of the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions).
Acquisition of control
The acquisition of control of a Canadian business is effected by acquiring:
- substantially all of the assets of a Canadian business; or
- the majority of the voting interests in an entity such as a corporation, partnership, joint venture or trust that carries on, or controls, a Canadian business.
The acquisition of a third or more of the voting shares of a corporation that controls, or carries on, a Canadian business will give rise to a rebuttable presumption that control has been acquired. The acquisition of less than a third of the voting shares of such a corporation is deemed not to be an acquisition of control. For any entity (whether a corporation, partnership, joint venture or trust) the acquisition of a majority of the ownership interests is deemed to be the acquisition of control. Notwithstanding these deeming and presumption provisions, in the case of cultural industries, the minister can look at control-in-fact evidence and make a determination that an acquisition of control has taken place.
Thresholds for review
Generally, one of two thresholds will apply to most direct acquisitions of control of Canadian businesses by non-Canadian, non-SOE investors from WTO member states: C$1.5 billion in enterprise value of the target for private sector trade agreement investors under the Canada-EU Comprehensive Economic and Trade Agreement or C$1 billion in enterprise value of the target for other non-SOE investors from WTO member states. The Investment Canada Act provides for complex formulas for calculating the enterprise value of Canadian businesses acquired by way of share (public or non-public entities) or asset acquisition. As discussed in question 4, a non-Canadian includes a Canadian-incorporated entity that is ultimately controlled from outside Canada.
Higher reviewable thresholds
Canada-EU Comprehensive Economic and Trade Agreement
As mentioned, pursuant to the Canada-EU Comprehensive Economic and Trade Agreement, the threshold for review of acquisitions of Canadian businesses by non-state owned investors from EU member states, the United States, Mexico, South Korea, Chile, Peru, Columbia, Honduras and Panama is C$1.5 billion.
Comprehensive and Progressive Agreement for Trans-Pacific Partnership
In 2018, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, formerly known as the Trans-Pacific Partnership prior to the United States pulling out). Among other things, the CPTPP agreement contemplates that investors from CPTPP countries (other than state-owned enterprises) will benefit from a higher review threshold of C$1.5 billion under the Investment Canada Act.
The CPTPP comes into force on 30 December 2018 after six countries (Australia, Canada, Japan, Mexico, New Zealand and Singapore) ratified the agreement. The CPTPP will come into force for the remaining five countries when they ratify.
Lower reviewable thresholds
Lower reviewable thresholds apply for certain investments. For direct acquisitions (see ‘Indirect acquisitions’, below), if both the purchaser and vendor are each ultimately controlled in a non-WTO member state, the review threshold is C$5 million in asset value.
Also, where the Canadian business being acquired is a cultural business and is directly acquired, the reviewable threshold is C$5 million in asset value regardless of whether the purchaser or vendor is ultimately controlled in a WTO member state. A ‘cultural business’ is a business that carries on any of the following activities:
- publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form;
- production, distribution, sale or exhibition of film or video products;
- production, distribution, sale or exhibition of audio or video music recordings; or
- publication, distribution or sale of music in print or machine-readable form.
Even if an acquisition by a non-Canadian of a cultural business does not trigger the statutory reviewable threshold, a review may, nonetheless, be ordered where the ‘Governor in Council considers it in the public interest’.
The review threshold for investments by SOEs is C$398 million (2018) in asset value that will be adjusted annually to reflect the change in nominal gross domestic product in the previous year.
The above thresholds relate to direct acquisitions. If the investment is an indirect acquisition (acquisition of control of a corporation outside Canada that controls an entity carrying on a Canadian business) the following thresholds apply:
- if the target is a cultural business or if purchaser and target are each ultimately controlled in a non-WTO member state (or Canada in the case of the target), the threshold for review is C$50 million in asset value. However, if the Canadian assets being acquired comprise more than 50 per cent of all of the assets being acquired, the threshold for review is C$5 million in asset value; and
- if the purchaser or target is from a WTO member state and the target is not a cultural business, the investment is not reviewable. Instead, only notice of their proposed activities must be given to the Canadian government (see ‘Notification under the Investment Canada Act’, below).
Transactions that could be ‘injurious to national security’
The Canadian government has the power to review all proposed investments (including minority investments) where the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions) has ‘reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security’. There is no statutory definition of ‘national security’. No financial threshold will apply to a national security review. A national security review can also apply to minority investments. This means that any transaction that involves a non-Canadian is potentially subject to a national security review. After a review, the minister may deny the investment, ask for undertakings, provide terms or conditions for the investment or, where the investment has already been made, require divestment. A national security review can occur before or after closing and may apply to corporate reorganisations where there is no change in ultimate control. The major concern for foreign investors under a review for ‘national security reasons’ is that a number of important terms regarding the ‘national security’ review scheme have not been defined in the legislation. This lack of definition creates a wide discretion for the minister and some uncertainty for foreign investors. At the end of 2016, the Canadian government released its highly anticipated Guidelines on the National Security Review of Investments, which shed some light on circumstances that may draw investors and parties involved in the investment into the realm of a national security review. The guidelines provide a list of factors that the Canadian government considers when assessing whether an investment poses a national security risk. These factors focus on defence, technology and critical infrastructure and supply. The Canadian government may take into account:
- the potential effects of the investment on Canada’s defence capabilities and interests;
- involvement in the research, manufacture or sale of goods and technology identified in section 35 of the Defence Production Act;
- the potential of the investment to enable foreign surveillance or espionage;
- the potential of the investment to hinder current or future intelligence or law enforcement operations;
- the potential impact of the investment on Canada’s international interests, including foreign relationships;
- the potential of the investment to involve or facilitate the activities of terrorists, terrorist organisations or organised crime and other illicit actors;
- the potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
- the potential impact of the investment on the security of Canada’s critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government;
- the potential impact of the investment on the supply of critical goods and services to Canadians; and
- the potential impact of the investment on the supply of goods and services to the government of Canada.
Since the national security review process was introduced in March 2009, formal national security reviews have been ordered at least 13 times. The outcomes of these reviews include: investor was directed to not implement the proposed investment (three cases), investor was ordered to divest control of the Canadian business (five cases), investment was authorised with conditions that mitigated the identified national security risks (four cases) and, in one case, the investor withdrew its application prior to a final order being made. Many more investments have been the subject of informal national security review that, for the most part, resulted in clearance.
Notification under the Investment Canada Act
If the relevant financial thresholds for review under the Investment Canada Act are not met, an administrative notification form must be filed by the investor any time before the implementation of the investment or within 30 days of the implementation.
Some of the more onerous reporting requirements include providing information in respect of the investor’s board of directors, five highest paid officers and individuals that own 10 per cent or more of the investor; whether the investor is influenced by a foreign state; and sources of funding for the investments.
Following receipt of the notice, the Investment Review Division, the Cultural Sector Investment Review of Canadian Heritage, or both, assess it for completeness and issue a receipt. Eventually, basic details identifying the investor, the target and the nature of the target’s business will be disclosed on the Ministry’s website.
There are circumstances in which an investment that would not otherwise be reviewable (in other words, subject to notification) is subject to review under the Investment Canada Act. See question 15.National interest clearance
What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees?
Application for review
For those transactions that are reviewable under the Investment Canada Act (see questions 3 and 8), a review is commenced by the completion and filing of an application for review. The purpose of a review is to satisfy the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions) that the investment ‘is likely to be of net benefit to Canada’ (see question 16).
An application for review is a much more detailed document than the administrative notification form, and requires much care in its preparation. A key element in the application for review is the requirement to set out the investor’s plans for the Canadian business, including plans typically related to employment, participation of Canadians in the business, and capital investment.
Form and content of the application for review
The preparation of the application for review (which includes the application form stipulated by government) typically focuses on four main components:
- collection of data that is specifically required for the application form. For example, the investor will be required to provide information relating to:
- its board of directors, five highest paid officers and individuals that own 10 per cent or more of the investor;
- whether it is influenced by a foreign state; and
- sources of funding for the investments;
- collection of supplementary information (the Investment Review Division sets out supplementary information that the officials strongly suggest be submitted with the application for review);
- preparation of the plans for the Canadian business; and
- in most cases, preparation of a submission that outlines why the proposed investment is likely to be of net benefit to Canada.
Plans for the Canadian business
The most important element of any application for review is the articulation of the investor’s plans for the target following the acquisition. These plans are the key source of information upon which the relevant minister assesses whether the proposed investment is likely to be of net benefit to Canada. Further, the plans are the primary input for the development of the undertakings that the investor is usually required to provide in order to secure approval. The application for review form requests a detailed description of the investor’s plans for the Canadian business with specific reference to net benefit factors (see question 16) and the current operations of the Canadian business. The Investment Review Division suggests the following list of subjects for the plans:
- employment (number and type of jobs created or lost);
- additional investment (increased working capital provisions, expansion);
- resource processing (value added, extent of processing);
- utilisation of parts, components and services (requirements of the Canadian business and opportunity for Canadian suppliers to compete in supplying them);
- exports (percentage of exports compared with total sales, markets served, types of products or services exported);
- Canadian participation (number of Canadians as employees, managers, directors and owners);
- productivity and efficiency (new or expanded plant, new equipment, rationalisation of activities, training);
- technological development (nature of research and development (R&D), R&D expenditures and timing, R&D facility, R&D contract in Canada, use and terms and conditions to use licences, patents, etc);
- product innovation or variety (different or complementary product lines, state-of-the-art products); and
- international competitiveness (world product mandate, access to international distribution networks).
There are no filing fees under the Investment Canada Act.
Statutory timelines for review
Once the application for review is filed and certified as complete, the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions) has 45 days within which to decide whether or not the proposed acquisition is likely to be of ‘net benefit to Canada’. Depending on the nature of the Canadian business, the review is carried out by the Investment Review Division of Industry Canada, the Cultural Sector Investment Review of Canadian Heritage (with respect to ‘cultural’ matters), or both, which make a recommendation to the relevant minister. Other government bodies, such as provinces where the Canadian business operates and government agencies, such as the Competition Bureau, may be consulted in this process. The review process often includes negotiating undertakings that are requested by the reviewing authority, for instance, as to employment levels and location of important offices and facilities. This can lead to intensive negotiations between the investor and the government. When finalised, these undertakings are legally enforceable by the government.
If the relevant minister is unable to reach a decision during the initial 45-day period then he or she can unilaterally extend the period for a further 30 days or such longer period as may be agreed on consent. These time frames can be further extended if national security issues surface. Upon the expiry of this period, the minister must render a decision or he or she is deemed to be satisfied that the proposed acquisition is likely to be of net benefit to Canada.
If, at the end of the review period, the minister sends a notice that he or she is not satisfied that the investment is likely to be of net benefit to Canada, the investor has the right, for 30 additional days (or such further period as may be mutually agreed), to make further representations and submit undertakings to the minister. Upon the expiry of such additional period, the minister will, in light of further undertakings or representations, either confirm the original conclusion or advise the applicant that the proposed transaction is approved.
Reviews involving cultural businesses will take into account government policies that limit investment by non-Canadians in such businesses. These policies apply to the publication, distribution or sale of books, magazines and periodicals, and the production, distribution, sale or exhibition of film or video products, or audio or video music recordings. As a practical matter, a non-Canadian investor will find it difficult to obtain Investment Canada Act clearance to acquire or establish a Canadian business in a number of these sectors. In other cultural businesses as well, and notwithstanding the lack of a particular sector policy, a non-Canadian investor will often find it a challenge to gain Investment Canada Act clearance. The Ministry has issued guidelines with respect to the types of issues and undertakings that applicants should be prepared to address during the review process.
Transactions that could be ‘injurious to national security’
As discussed in question 8, the Canadian government has the power to review all investments by non-Canadians on national security grounds. The entry point for national security screening will, in most cases, be the notification and review processes under the Investment Canada Act. Under the applicable regulations, the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions) has 45 days after an application or notification has been certified, or after the implementation of an investment that does not require notification, to initiate action. An investment that is subject to a national security review after it has already been implemented can be unwound if the Governor in Council (ie, federal cabinet) makes an order directing the non-Canadian to divest itself of its investment or conditions could be imposed on it by order of the Governor in Council.
Where a transaction gives rise to national security risks, parties are advised to file notice of the transaction with the minister more than 50 days prior to the closing date in order to obtain a pre-clearance (assuming the minister does not order a further national security review).
The minister initiates a national security review by sending notice to the non-Canadian investor. The minister can, and likely will, also send a request for information. Following this preliminary procedure, the minister can either terminate screening or issue another notice, this time ordering a full national security review of the investment. A full national security review could take up to 200 days (or longer with the consent of the investor) from the date of the initial notice of the transaction sent to the minister.
The minister can request information from the non-Canadian or any other person involved. The investor will also be given the opportunity to make representations to the minister. The minister digests the information, consults the minister of Public Safety and Emergency Preparedness and other agencies and then sends a report to the Governor in Council (ie, the federal cabinet) with recommendations. The Governor in Council then makes a decision and issues an order that can block the investment, authorise the investment on conditions, or require divestiture (in the case of a completed investment).
Once the national security screening process begins, the deadlines for ministerial decision-making in an Investment Canada Act net benefit review are postponed. Thus, the two procedures become, in effect, merged and would presumably lead to a synchronised outcome.
Which party is responsible for securing approval?
The investor is responsible for filing an application for review. However, where the acquisition is friendly, it is common for the Canadian business or seller, or both, to assist the investor by providing supporting information regarding the Canadian business for the investor’s application for review.Review process
How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?
See question 9 for the statutory timelines for review. A very limited exception applies and would allow for an earlier closing where the minister has sent a notice to the investor stating that a delay in closing the transaction would result in ‘undue hardship’ to the investor or ‘would jeopardise the operations of the Canadian business’.
There are actions that the investor can take that may expedite the review process, including ensuring that the appropriate level of information is included in the application for review. The Investment Review Division has stated on its website that the most frequent cause of delays in the review of applications is the lack of adequate information on the investor’s plans for the Canadian business and suggests that plans be described in sufficient detail to enable the reviewing officer to obtain a clear understanding of their intentions. It is also typically helpful for applicants to provide three-year projections for the Canadian business for employment, sales, exports, capital expenditures and R&D expenditures, where relevant.
Once the application for review has been submitted, it is helpful to consider the three key stages of the review period and possible actions that an investor may take at or prior to each stage to expedite the review:
- intergovernmental consultation: depending on the nature of the proposed investment, the officials will interact with the provincial or territorial jurisdiction that is affected by the transaction, other federal government departments, as well as federal and provincial agencies;
- provision of additional information to the government representatives: often the timing of review is affected by the time it takes the investor to prepare and submit information to the government. To the extent that the investor is able to anticipate information likely to be requested by the government, preparation of that material should begin as soon as possible; and
- negotiating the content and scope of written undertakings to be given to the government, if any (see question 20): to the extent that it is expected that undertakings will be required in support of a proposed transaction, this eventuality should be managed early on in the process. For example, draft undertakings should be prepared in anticipation of the minister’s request for undertakings so that once the request has been made, the negotiation of the undertakings can begin forthwith.
Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?
Subject to the limited exception described in question 11, if a direct acquisition is reviewable, it cannot be completed without the approval of the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions). If a direct transaction is implemented before clearance is obtained, the minister can seek a court order, which may require the investor to divest control of the Canadian business, dispose of any voting interests or assets acquired by the investor or pay a penalty of up to C$10,000 for each day that the investor is in contravention of the Investment Canada Act, or all of these. An indirect acquisition of control (acquisition of control of a corporation outside Canada that controls an entity carrying on a Canadian business) can be completed before the minister makes his or her decision.Involvement of authorities
Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?
Early in the evolution of a reviewable transaction, and certainly if a public announcement has been made, it is commonplace to make a courtesy call to the Investment Review Division, the Cultural Sector Investment Review (with respect to cultural matters), or both, in order to advise them of the proposed transaction. Generally, however, it is unusual for there to be any pre-filing dialogue or meetings between the investor and the reviewing agency.
With respect to investments that raise national security concerns, the Canadian government (in its Guidelines on the National Security Review of Investments) encourages investors to contact the Investment Review Division at the earliest stages of the development of their investment projects to discuss their investment. Such meetings may facilitate national security assessments and clarify information requirements that might be useful in the course of an assessment.
When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?
In most cases the investor will have legal and financial advisers engaged in respect of a proposed transaction. However, in some complex or sensitive cases, the contribution of public relations and government relations experts can be very valuable. Given the Canadian government’s power to undertake a review for ‘national security’ and its special treatment of investments by SOEs referred to in question 5, it is very important for investors that expect to be affected by these types of reviews to develop an appropriate government relations strategy early on when making an investment in Canada that may be reviewable (including considering pre-filing consultations with key government officials). The Canadian government’s recent rejections, based on national security grounds, of Beida Jade Bird’s proposal to build a new fire alarm systems factory in close proximity to Canadian Space Agency facilities, and Accelero Capital Holdings’s attempted acquisition of Allstream (see question 23) highlights the importance of early identification and careful management of sensitive issues. Careful consideration should be given, as soon as possible, to engaging experts whose experience can make the processing of a file much smoother for both investor and government alike.
What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?
Any transaction that involves a non-Canadian is potentially subject to a national security review, which can occur before or after closing. After the national security review, the minister may deny the investment, ask for undertakings, provide terms or conditions for the investment or, where the investment has already been made, require divestment. The minister has 45 days, after a notification has been certified, or after the implementation of an investment that does not require notification, to initiate a national security review (see question 9).
As discussed in question 5, there are provisions under the Investment Canada Act that significantly affect foreign investors whom the Canadian government considers SOEs. The minister has broad powers to declare an entity to be an SOE and to declare an otherwise non-reviewable acquisition by an SOE to be subject to review. Furthermore, the minister may make these determinations retroactively.
As discussed in question 8, even if an acquisition by a non-Canadian of a ‘cultural business’ does not trigger the statutory reviewable threshold, a review may, nonetheless, be ordered where the ‘governor in council considers it in the public interest’.