On April 18, 2020, the Minister of Innovation, Science and Industry (the “Minister”) issued a new policy statement relating to foreign investment screening in the circumstances of COVID-19, available here: policy statement.
Under the new policy, the Government of Canada (“Government”) will subject certain investments by non-Canadians in Canadian businesses and entities, and the establishment of new Canadian businesses and entities, to enhanced scrutiny under the Investment Canada Act (“ICA”). The policy purports to apply to investments in Canadian businesses “related to public health or involved in the supply of critical goods and services to Canadians or to the Government”, but does not define or describe what businesses fall under the scope of “public health” or “critical goods and services”. In this respect, the policy (intentionally) applies broadly. The policy also sets out enhanced measures applicable to investments made by state-owned enterprises (“SOEs”) or investors working under the influence or direction of a foreign government. The Government’s enhanced scrutiny is in line with similar approaches to foreign investment taken by a number of other countries.
The Standard Review Procedure
Under the ICA, the direct acquisition of control of a Canadian business by a non-Canadian is subject to a pre-closing filing and approval from the Minister where a specified monetary threshold is exceeded. For direct investments that do not involve an SOE investor or where the Canadian business is not a cultural business, the thresholds are based on the enterprise value of the Canadian business and, owing to amendments to the ICA over the past decade, are very high and catch relatively few acquisitions each year. In the case of an investment by an SOE investor or involving a Canadian cultural business, the threshold is based on the asset value of the Canadian business and is lower than the enterprise value test that applies to all other transactions. Subject to limited exceptions, indirect acquisitions of control of Canadian businesses are not subject to approval and require only the filing of a simple post-closing notice.
A direct acquisition of control of a Canadian business that exceeds the applicable monetary threshold cannot be completed until an application has been submitted to the Director of Investments and the Minister has determined, or is deemed to have determined, that the investment is “likely to be of net benefit to Canada”. The Minister has an initial period of up to 45 calendar days in which to complete his assessment, which period the Minister can unilaterally extend for an additional 30 calendar days, after which time the period can be extended further only with the consent of the investor. In connection with making his assessment, in almost every case the investor will need to provide binding undertakings to the Minister.
Direct acquisitions of control below the monetary threshold, indirect acquisitions of control (other in certain circumstances where the Canadian business qualifies as a cultural business) and the establishment of a new Canadian business require the filing of a notice to the Director of Investments at any time before closing or within 30 days after closing. These investments are not otherwise subject to a Ministerial approval requirement.
Separate from the review process for direct acquisitions of control noted above, the ICA also prescribes a national security review process. This process allows the Minister to review, on national security grounds, any direct or indirect equity or asset investment (including minority investments) involving a Canadian business or entity, or the establishment of a new Canadian business or entity, by a non-Canadian. If it finds that it is advisable to protect national security, the Government may block a proposed investment, allow an investment with conditions, or order the divestiture of an implemented investment. The Minister’s right to order a national security review applies from when he becomes aware of a transaction until 45 days after the application or notification filing noted above is made. Where a transaction is not subject to a filing requirement (i.e., because the investment does not involve an acquisition of control or establishment of a new Canadian business), the Minister can order a national security review at any time from when he becomes aware of the transaction until 45 days after closing. An investor is not under any obligation to otherwise notify the Minister about such an investment, and this is not changed by the new policy.
Importantly, the ICA does not apply to all types of investments by non-Canadians in Canadian businesses. In particular, under both the general provisions and the national security provisions of the ICA, the types of investments that are subject to the ICA are defined exhaustively to comprise an acquisition of assets or equity or the establishment of a new Canadian business. Other investments, such as by way of debt, are not subject to the ICA, and are unaffected by the new policy. Thus, while section 28 of the ICA provides that the Minister can consider whether control in fact has been acquired, irrespective of the percentage investment, by a non-Canadian in the case of an investment by an SOE that may be injurious to national security, the Minister’s ability to determine that control has been acquired is nonetheless limited to the classes of transactions prescribed by the ICA.
The Enhanced Review Measures
Given the decline in value of many Canadian businesses since March, along with the newly-recognized importance of certain businesses to Canada’s ability to combat the pandemic and to ensure a continued supply of products and services essential to Canadians and the Government, the Minister determined that enhanced review measures under the ICA are necessary to guard against potentially harmful or opportunistic foreign investments, especially in critical industries. Under the new measures, all foreign investments in Canadian businesses related “to public health or […] the supply of critical goods and services to Canadians or to the Government” will now be “scrutinize[d] with particular attention”.
In addition, investments by SOEs or by private investors “assessed as being closely tied to or subject to direction from foreign governments” will be subject to enhanced scrutiny, regardless of the transaction value or the target’s industry, to determine whether they may be motivated by “non-commercial imperatives” that could harm Canada’s economic or national security interests. The policy provides that the enhanced scrutiny that such investors may receive could include, for example, the Minister requesting additional information or extensions of timelines for review “in order to ensure that the Government can fully assess these investments”.
The Government is not proposing to amend the ICA and, therefore, the policy must fit within the existing construct of the ICA. Since the Minister is only able to review investments by non-Canadians under the general “net benefit to Canada” provisions where they involve direct acquisitions of control and exceed a high monetary threshold, the only legal authority under the ICA for the Government to do so will be subjecting more investments to the national security review provisions which, as noted, neither require an acquisition of control nor prescribe a minimum monetary threshold. Since the ICA does not define the term “national security”, the Minister has wide latitude to determine the scope of that term, and, through the new policy, the Minister has now signaled national security includes Canadian businesses that relate to or are involved in “public health” or the supply of “critical goods and services”, however defined in the context of a particular investment.
The breadth of the Government’s “enhanced scrutiny” measures is outlined only at a high level in the policy statement. While it is likely to include requests for additional information and longer reviews, it is to be seen whether the new policy also will result in the Minister requiring certain classes of undertakings that have not been requested in the past.
Finally, the policy does not have a set end date, other than purporting to apply “until the economy recovers from the effects of the COVID-19 pandemic”. It remains to be seen whether the Minister ever formally repeals the enhanced measures or whether the policy portends a more restrictive environment for certain classes of investments by non-Canadians into Canadian businesses and entities in the future.
- Consistent with the global trend, the Minister intends to enhance his scrutiny of certain investments by non-Canadians into Canadian businesses and entities that relate to public health and the supply of critical goods and services. Which businesses and what commercial activities fall within this broad description remains to be seen. Similar to the Government’s approach in not defining the term “national security” under the ICA, the Minister has left himself broad discretion to determine which businesses and entities and what commercial activities will be caught by the policy. Certainly, it captures Canadian businesses involved in the production and supply of personal protective equipment and drugs, but could extend much more broadly, such as to food products, technology, and any number of manufactured goods and services.
- Given the Minister’s ability to apply the policy broadly, all foreign investors need to consider carefully whether they are investing in Canadian businesses and entities that relate to public health or the supply of critical goods and services – irrespective of whether it is a control investment and irrespective of the size of the Canadian business. If a Canadian business is not involved in those areas, then there is no change to the investment’s risk of scrutiny under the ICA. However, if the business does touch upon public health or a critical good or service supplied to Canadians or the Government (which undoubtedly applies to both the federal government and provincial governments), the foreign investor must reassess its risk for enhanced scrutiny by the Government as to whether its investment is likely to be injurious to national security. Parties should consult with counsel to revise their risk assessment and to help them navigate the review process.
- Separately, the Minister has signaled his clear desire to closely scrutinize investments by SOEs and by foreign investors that are closely tied to or subject to direction from foreign governments. In particular, the Minister will consider whether such investments are motivated by non-commercial factors which, depending on the activities of the target Canadian business or entity, or depending on the activities to be carried on by a new Canadian business or entity, could be harmful to Canada’s national security. At a minimum, going forward, SOEs and those considered to be acting at the behest of a foreign government should expect more thorough and longer reviews and also a greater risk that their investments will be examined under the national security provisions of the ICA.
- It follows that the enhanced review measures could have significant implications for transaction timelines where the non-Canadian investor is either investing in a Canadian business related to public health or the supply of critical goods or services, or qualifies as an SOE under the ICA. Strategic considerations in these circumstances include whether and how to discharge any risk of review, prohibition or divestment under the ICA, the contractual protections (e.g., through covenants and reverse termination fees) that may be warranted in the context of a foreign investment or acquisition agreement and the appropriate timeframe for the outside date (e.g., a national security review can take 200 days (or longer)).
- While the policy expressly is intended to apply to non-control acquisitions, it remains to be seen whether the Government will become aware of these investments before the 45 day post-closing limitation period for a national security review expires. As it stands, foreign investors are not required under the ICA to make a filing to the Government in respect of such investments and nothing changes in this regard through the policy.
- Finally, since the policy does not amend the ICA, investments that were not subject to the ICA, such as debt transactions, swaps, options, contractual joint ventures and so forth, continue not to be subject to the ICA. It remains to be seen whether this will prove to be a significant hole in the Government’s ability to review foreign investments into Canada that introduce “new risks to Canada's economy or national security, including the health and safety of Canadians”, which the Government’s new policy is intended to capture.