As reported in earlier Bulletins1, significant amendments were made to the Investment Canada Act (the “Act”) on March 12, 2009 including the introduction of a review process for foreign investments impacting on Canada’s national security. The Governor in Council, essentially the Federal Cabinet, has been empowered to block and unwind investments that it considers “injurious to the national security” with effect from February 6, 2009.
How this new power will be exercised in practice remains unclear at this date. Because of the speed at which these amendments were passed – they formed part of the Conservative government’s 2009 economic stimulus budget bill - they were not subjected to the level of Parliamentary scrutiny that might have given non-Canadians a better 1 Substantial Changes to the Competition Act and Investment Canada Act Enacted – Businesses Must React, Antitrust/Competition & Marketing Bulletin, March 2009 and Dramatic Changes to Canada’s Competition and Foreign Investment Review Laws Proposed in Bill C-10, Antitrust/Competition & Marketing Bulletin, February 2009 understanding as to the focus of this new provision.
No definition has been provided in the Act as to what is meant by the phrase “injurious to national security” and it is our understanding that Canada does not have any current intention to pass regulations or issue guidelines to clarify what is meant by this phrase. This is unlike the United States where written guidance on the circumstances in which foreign investments could give rise to national security reviews in that country has been provided.
The range of investments covered by the new national security review process goes well beyond that which is subject to the Act’s general review provisions. In addition, a number of investment categories that have historically been exempt from review under the Act, such as, for example, acquisitions of operating farms, are now subject to potential review under the new national security powers without any explanation as to why this was considered necessary from a national security perspective.
As such, foreigners contemplating Canadian investments are currently left with little guidance as to who the investors and what the areas of investment are that are intended to be the targets of this new review mechanism. Coming on the heels of the issuance by Industry Canada of guidelines dealing with how the review and monitoring provisions of the Act will be applied in the case of foreign investors who are enterprises that are owned or controlled, directly or indirectly, by foreign governments, this new review process could well be interpreted as a further signal by Canada that foreign investment is not wanted from certain unidentified investors for certain unidentified investment targets.
The Canadian Bar Association in its May 13, 2009 submission to the Senate Committee on Banking, Trade and Commerce noted that “this uncertainty may discourage needed foreign investment” and recommended that guidelines should be issued on the definition of what is meant by the term “national security” and that a process should be added to the Act to permit the voluntary submission of investments for pre-clearance.
While government officials have indicated that they believe that this new power will be exercised infrequently, foreign investors contemplating Canadian acquisitions would be well advised to be especially thorough during their due diligence processes to identify any potential factors that might trigger such a review and to build in suitable conditions and covenants to purchase agreements to deal with this new review process in the event that it is triggered by Industry Canada.