Last December, the Canadian government announced that the review threshold under the Investment Canada Act (Act) for investments by state-owned enterprises (SOEs) would be amended and, as a result, would not increase in the same way that non-SOE investments would.1 At that time, the government also introduced revised guidelines for the review of SOE investments, including its position that acquisitions of control by SOEs of a Canadian oil sands business will be found to be of "net benefit to Canada" on an exceptional basis only. These new SOE specific measures necessitate a change in the law to allow foreign investors to determine whether they are SOEs for purposes of the Act and therefore, whether and how their investments will be treated under the Act.
Consistent with its message that investments by SOEs are not the same as other investments, the Canadian government introduced a federal budget bill (Bill C-60)2 containing proposed amendments to the Act that will significantly impact foreign investors whom the Canadian government considers as SOEs. Among other things, these amendments introduce a statutory definition of "SOE" that includes the potentially broad concept of foreign government "influence." Furthermore, the Minister of Industry will be given 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. The impact of these amendments is that if the Minister determines that an investor is an SOE and it is acquiring control of a Canadian business, then the applicable review threshold is the lower SOE-specific threshold and not the significantly higher threshold for non-SOE investments.
Guidance in this area is welcome and necessary. However, the proposed amendments introduce potentially broad concepts and elements of uncertainty that will likely, without further clarity from the government, place a heavy burden on parties assessing and addressing regulatory risk should these amendments become law. Below we outline the proposed amendments and their impact on the foreign investors that may be caught by the new SOE regime.
Lower review threshold for investments by SOEs
Last December, the government announced that the review threshold under the Act for investments by SOEs would be amended and, as a result, would not increase in the same way that non-SOE investments would. The proposed amendments contained in Bill C-60 include the increased review threshold from the current asset value-based threshold to, initially, $600 million "enterprise value" for investors from World Trade Organization member nations. Thereafter, it is proposed that the threshold be increased to $800 million and $1 billion.3 For SOE investments, the existing $344 million threshold in asset value would apply.4
Broad definition of "state-owned enterprise"
The proposed amendments define "state-owned enterprise" as:
- the government of a foreign state, whether federal, state or local, or an agency of such a government;
- an entity that is controlled or influenced, directly or indirectly, by a government or agency referred to in paragraph (a); or
- an individual who is acting under the direction of a government or agency referred to in paragraph (a) or who is acting under the influence, directly or indirectly, of such a government or agency.
No guidance is provided as to the meaning or breadth of the concept of direct or indirect influence.
Minister has (retroactive) power to determine that an entity is controlled in fact by a SOE
The Act applies when a "non-Canadian" establishes a new Canadian business or acquires control of an existing Canadian business.5 It contains a number of tests and presumptions to determine whether an entity is a "Canadian" (and therefore not a "non-Canadian"). The proposed amendments in Bill C-60 provide that, even if an entity qualifies as a "Canadian" by virtue of the Act’s rules to determine "Canadian" status, the Minister may nevertheless determine that the entity is not "Canadian" if he determines that the entity is controlled in fact by a SOE. The impact of this amendment is that it broadens the reach of the Act where a foreign state is involved.
Similarly, the Minister can make a determination that a foreign investor is controlled in fact by a SOE. The impact of this amendment is that where the Minister determines that a foreign investor is controlled by a SOE and the investor is making an acquisition of control of a Canadian business, then the applicable review threshold is the lower SOE-specific threshold and not the significantly higher threshold for non-SOE investments.
The proposed amendments allow the Minister to make the above determinations based on "any information…made available to the Minister." Further, if the entity does not provide information that the Minister has requested and considers necessary to make the determination, the Minister "may declare" that the entity is controlled in fact by a SOE. Finally, the Minister’s determinations may be made retroactively.
This power that will be provided to the Minister of Industry (and that is similar to the power given to the Minister of Canadian Heritage in respect of cultural businesses) will give rise to considerable uncertainty for any transaction where a foreign state is involved, however indirect and tangential such involvement may be.
Minister has (retroactive) power to determine whether there has been an acquisition of control in fact by a SOE
Subject to certain exemptions, where a transaction involves the "acquisition of control" of a Canadian business by a non-Canadian and the acquired business exceeds certain financial thresholds, the transaction may be reviewable by Industry Canada. The Act contains detailed deeming and presumption provisions to determine "acquisition of control." Generally speaking, a minority investment is not an "acquisition of control" under these provisions and, as such, the investment would not be reviewable under the Act. However, notwithstanding these provisions, Bill C-60 will allow the Minister to make a determination that there has been an "acquisition of control in fact" by a SOE. The impact of this is that an otherwise non-reviewable type of acquisition may be subject to review where it is made by a SOE and the lower SOE-specific review threshold is met.
In determining whether a SOE has made an "acquisition of control in fact", the Minister can consider "any information…made available" to him and if the SOE does not provide the information that he has requested to make the determination, the Minister "may declare" that there has been an acquisition of control in fact by a SOE. The Minister’s determination may be made retroactively.
Again, any indirect or tangential involvement by a foreign state will potentially give rise to uncertainty. Because of the retroactive powers that the Minister of Industry will have to review transactions, parties will be well advised to consider the feasibility of pre-emptive consultation with the Minister and his staff.
Extension of time for national security reviews
The Canadian government has the power to review all investments by non-Canadians on national security grounds. In addition to the SOE-specific amendments discussed above, the proposed amendments in Bill C-60 extend the time in which the Minister of Industry conducts national security reviews of proposed foreign investments.