As set out in Section II, there are two separate interdependent regimes for review under the ICA – the net benefit review and the national security review.i Net benefit reviews
When a non-Canadian acquires control of an existing Canadian business, the investment is subject to a net benefit review if it exceeds certain prescribed financial thresholds; otherwise, a notification of the transaction must be filed with the Director of Investments within 30 days of closing.Key terms: non-Canadian, acquires control and Canadian business
The ICA provides a framework for determining whether an investor is non-Canadian, whether an investment is an acquisition of control by the non-Canadian, and whether the investment relates to a Canadian business.Non-Canadian
The ICA defines 'non-Canadian' as an individual, a government or an agency thereof, or an entity that is not Canadian.
An individual is a Canadian under the ICA if she or he is a Canadian citizen or a permanent resident 'who has been ordinarily resident in Canada for not more than one year after the time at which she or he first became eligible to apply for Canadian citizenship'.
An entity is Canadian if it is Canada-controlled. The determination of whether an entity is Canada-controlled is more complex and is determined by applying Part V of the ICA. Subject to additional rules applicable to SOEs, cultural businesses and investments that may be injurious to national security (discussed below), an entity is Canada-controlled if:
- one Canadian owns a majority of the voting interests of the entity;
- two or more members of a voting group who are Canadians own a majority of the voting interests of the entity; or
- a majority of the voting interests of an entity are owned by Canadians and it can be established that the entity is not controlled in fact through the ownership of its voting interests by non-Canadians.
An entity is also Canada-controlled when less than a majority of the voting interests of the entity are owned by Canadians, but it can be established that:
- the entity is controlled in fact through the ownership of its voting interests by one Canadian or by a voting group in which the Canadian members own a majority of those voting interests of the entity owned by the voting group; or
- in the case of an entity that is a corporation or limited partnership, the entity is not controlled in fact through the ownership of its voting interests and two-thirds of the members of its board of directors (or, in the case of a limited partnership, two-thirds of its general partners) are Canadians.
The manner of acquiring control varies under the ICA depending on the target entity. Generally, an acquisition of control occurs upon the acquisition of a majority of the voting shares or voting interests of an entity, either directly or indirectly, carrying on a Canadian business, or upon the acquisition of all or substantially all the assets used to carry on a Canadian business.
In the case of a corporation specifically:
- where fewer than one-third of voting shares of the target corporation are acquired, control of the corporation is deemed not to be acquired;
- where more than one-third but less than 50 per cent of voting shares of the target corporation are acquired, there is a rebuttable presumption that control has been acquired; and
- where more than 50 per cent of the voting shares of the target corporation are acquired, control of the corporation is deemed to be acquired.
In the case of a non-corporate entity, such as a trust, partnership or joint venture, the acquisition of less than 50 per cent of the voting interests of the entity is deemed not to be an acquisition of control.
When the foreign investor is an SOE, the acquisition is in respect of a cultural business or where a transaction may be injurious to national security, the Minister is given the flexibility to make a fact-specific determination as to whether an acquisition of control has occurred.Canadian business
A Canadian business is defined as 'a business carried on in Canada that has (1) a place of business in Canada, (2) an individual or individuals in Canada who are employed or self-employed in connection with the business, and (3) assets in Canada used in carrying on the business'. The ICA also contains provisions relating to businesses that are carried on only partially in Canada.Threshold requirements
Foreign investments are reviewable by the IRD (or the Cultural Sector Investment Review Division of the Department of Heritage Canada when the target engages in cultural business activities) if a foreign investor acquires control of a Canadian business and the value of the business exceeds certain statutory thresholds.Threshold factors
The applicable statutory threshold depends on a number of factors:
- whether the investor, or investors, is a World Trade Organization (WTO) investor or trade agreement investor, or the target Canadian business is controlled by such an investor. A 'WTO investor' generally refers to an individual who is a national of a WTO Member State, the government of a WTO Member State and a WTO-controlled entity. A 'trade agreement investor' refers to the subset of WTO Member States with which Canada executes a trade agreement, such as the North American Free Trade Agreement (NAFTA) or the Comprehensive Economic and Trade Agreement (CETA);
- whether the investor is an SOE;
- whether the target entity carries on a cultural business;
- whether the acquisition is direct or indirect. Pursuant to the ICA, an indirect acquisition is a transaction involving the acquisition of the shares of a company incorporated outside Canada, which owns subsidiaries in Canada; and
- whether the investment raises national security concerns.
In determining whether an applicable financial threshold has been met, either the book value or the enterprise value of the transaction must be determined, depending on the type of transaction. The book value is determined by the value of the assets acquired as reflected in the business's most recent annual audited financial statements. The calculation of enterprise value depends on the structure of the transaction:
- In the case of an acquisition of shares of a public entity, enterprise value is equal to the market capitalisation of the entity plus its liabilities (excluding operating liabilities), minus its cash and cash equivalents.
- In the case of an acquisition of shares of an entity that is not publicly traded, enterprise value is equal to the acquisition value plus the entity's total liabilities (excluding operating liabilities), minus cash and cash equivalents.
- In the case of an acquisition of assets, enterprise value is equal to acquisition value plus liabilities assumed by the investor (excluding operating liabilities), minus cash and cash equivalents.
The 2019 reviewable threshold for direct private sector investments involving WTO investors either as purchaser or seller is C$1.045 billion in enterprise value. This threshold has more than doubled since 2013. Additionally, since 1 January 2019, this reviewable threshold is adjusted annually to reflect the change in Canada's nominal gross domestic product. The 2019 equivalent reviewable threshold for private sector investments involving trade agreement investors is C$1.568 billion in enterprise value. This threshold is also adjusted annually based on changes in nominal gross domestic product.
The reviewable threshold for direct acquisitions by investors not belonging to a WTO Member State, or for direct acquisitions of Canadian cultural businesses (irrespective of investor nationality), is only C$5 million. For direct acquisitions by SOEs from WTO Member States, the 2019 reviewable threshold is C$416 million (book value of assets).
Indirect acquisitions (in which a non-Canadian parent company that controls a Canadian subsidiary is being acquired) by investors from WTO Member States are not reviewable, unless the Canadian subsidiary of the target is a cultural business. Indirect acquisitions of cultural businesses are reviewable if the book value of the assets involved exceeds C$50 million, but this threshold is reduced to C$5 million if the asset value of the target exceeds 50 per cent of the asset value of the international transaction.Applicable time frames
When a transaction is reviewable, the investor must submit an application to the IRD to aid the Minister in determining whether the proposed transaction is likely to be of net benefit to Canada. The Minister has 45 days from the date of receiving a sufficient application to complete the net benefit review and issue an opinion. The Minister can (and typically does) unilaterally extend the review period by an additional 30 days. In practice, investors should therefore allow at least 75 days for the process. The review period cannot be unilaterally extended by the Minister beyond 75 days without the consent of the investor.
As previously noted, when a transaction is notifiable (i.e., not reviewable), the investor must file a completed notification of the transaction with the Director of Investments within 30 days of closing.Net benefit test
In determining whether the proposed transaction is of net benefit to Canada, the Minister considers a set of factors enumerated in the ICA, none of which is individually determinative. These include:
- the effect of the investment on the level and nature of economic activity in Canada, including employment, resource processing, and the utilisation of parts, components and services;
- the degree and significance of participation by Canadians in the business;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety;
- the effect of the investment on competition within any industry or between industries in Canada;
- the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and
- the contribution of the investment to Canada's ability to compete in world markets.
The broad language of the net benefit factors listed in the ICA (such as 'compatibility with industrial policies') provides the Minister with wide discretion to approve or reject proposed transactions. While ministerial decisions approving a proposed transaction are published (usually with a summary of the undertakings given by the acquirer unless competitively sensitive), the Minister may, but is not under a statutory obligation to, publicise his or her reasons for rejecting reviewable investments. Commentators have suggested that the Minister make available information concerning the net benefit determination and 'create a 'jurisprudence' of decisions that could inform future investors of the commitments that are likely to be required'.
In making an assessment under the net benefit test, the Minister will consider the investor's plans for the Canadian business and proposed undertakings, and may also consider representations made by other federal departments and agencies, any provinces likely to be significantly affected by the investment, and the Competition Bureau.
Although not mandatory under the ICA, in practice, the Minister requires undertakings from the investor regarding the acquired Canadian business (i.e., contractual commitments from the investor) in virtually all reviewable transactions. The undertakings, which are legally enforceable commitments to the Government of Canada, usually have a term of three years and address matters such as employment levels in Canada, Canadian participation in management and the board of directors, production targets, research and development, future capital expenditures and charitable contributions.
In the 2017–2018 fiscal year, 751 investment filings (both applications for review and notifications) were certified under the Act. These filings were categorised into five broad sectors, with 250 transactions in the business and services sector; 179 transactions in the manufacturing sector; 141 transactions in other services; 115 transactions in the wholesale and retail sector; and 66 transactions in the resources sector. More than 50 per cent of these filings were for companies worth C$10 million or less. Notably, only nine applications for net benefit review were approved in the 2017–2018 fiscal year. This is a significant decrease from the 22 net benefit review applications that were approved in the 2016–2017 fiscal year. The decrease in the number of net benefit review applications corresponds to the increase in the net benefit review financial threshold.ii National security reviews
Alongside the net benefit review regime is the national security review regime under the ICA. In 2009, the ICA was amended to give the Canadian government the explicit statutory power to review proposed investments on national security grounds. Investments may be reviewed where the Minister, after consultation with the Minister of Public Safety and Emergency Preparedness, considers that 'the investment could be injurious to national security' and the Governor in Council (i.e., the federal Cabinet) makes an order for review.
The national security review process runs on a different timeline from the net benefit review process, and can take up to 200 days under current regulations, or longer on consent. If the Minister believes that an investment could be injurious to national security, the Governor in Council, within 45 days of receipt of a notification or an application for review under the net benefit provisions, may order a formal national security review. Alternatively, the Minister may, within that same 45-day period, notify the investor that such a review may be commenced. If the transaction is not reviewable or notifiable, however (for example, because there is no acquisition of control), this same 45-day period only begins to run after the transaction closes. If during that 45-day period the Minister notifies the investor that the Minister is considering commencing a review, the Governor in Council has a further 45 days from the date of the notice to order the review.
When a formal national security review is ordered, the review itself may take 45 days to complete; this period may be unilaterally extended by a further 45 days. Following the review, unless the Minister sends a notice that no further action will be taken, she or he can refer the matter to the Governor in Council, who has 20 days in which to take any measures advisable to protect Canada's national security, including blocking the investment, allowing the transaction to close subject to undertakings by the investor or certain terms and conditions, or, in the case of a completed transaction, order a divestiture. The investor may be required to make legally binding undertakings to the Government of Canada to mitigate potential harm to national security. Undertakings may require the investor to (1) obtain government approval of proposed locations to avoid proximity to strategic assets; (2) service and support some or all business lines in Canada; (3) create approved corporate security protocols to protect information; (4) conduct third-party compliance audits; and (5) provide access to facilities for compliance inspection.
As noted above, unlike a net benefit review, which is limited to acquisitions of control over certain thresholds, a national security review may be invoked in any transaction involving a non-Canadian investor, irrespective of both the size of the transaction and the extent of the interest being acquired by the foreign investor. This can be particularly problematic from a timing perspective in situations where no application for review or notification is required under the net benefit provisions of the ICA, but a transaction may, nonetheless, raise national security concerns; for example, because of the nature of the target. Formal pre-acquisition clearance cannot be obtained under the national security provisions of the ICA.
Commentators have expressed concern that the ICA does not provide sufficient guidance on what may constitute a threat to national security. The ICA does not define 'national security', which commentators have said gives the Minister broad discretion to review investments and can lead to uncertainty for non-Canadian investors seeking to do business in Canada. In December 2016, the government issued guidelines detailing the factors that it will consider in either ordering or considering a national security review. While the guidelines do not provide a definition of national security, they list a number of factors the Minister or Governor in Council may take into account when assessing a proposed or implemented investment under the national security provisions of the ICA. The factors include:
- potential effects of the investment on Canada's defence capabilities and interests;
- potential effects of the investment on the transfer of sensitive technology or know-how outside Canada;
- potential effects of the investment on the security of Canada's critical infrastructure;
- potential effects of the investment on the supply of critical goods and services to Canadians or the Canadian government;
- potential for the investment to enable foreign surveillance or espionage, hinder current or future intelligence or law enforcement operations, or involve or facilitate the activities of terrorist organisations or organised crime; and
- potential effects of the investment on Canada's international interests, including foreign relationships.
The guidelines encourage early engagement with the IRD when any of these factors may be present.iii Enforcement
If the Minister believes that a non-Canadian has breached the ICA (for example, by implementing an investment that required prior approval without first obtaining the approval, or failing to comply with a written undertaking), the Minister may send a demand to the non-Canadian, requiring the person or entity to cease the contravention, to remedy the default, to show cause why there is no contravention or to justify non-compliance with any undertakings provided.
If a non-Canadian fails to comply with such a demand, the ICA provides for an application to be made to a superior court. The court may make any order that it determines is required in the circumstances, including an order imposing a penalty not exceeding C$10,000 for each day on which the person or entity is in contravention. The penalty is recoverable as a debt and any breach of a court order would constitute contempt of court. An appeal may be brought from any such order by the court.iv Exemptions from net benefit or national security reviews
Part II of the ICA provides a list of transactions that are exempt from the review and notification requirements contained in the ICA, and a list of transactions that are also exempt from the national security provisions of the ICA.
Transactions exempt from the review and notification requirements, but still subject to the national security review provisions, include:
- an acquisition in the ordinary course of business by a trader or dealer in securities;
- an acquisition in the ordinary course of business by a venture capitalist;
- an acquisition of control by a foreign lender in connection with the realisation of security granted for a loan or other financial assistance;
- an acquisition of control for the purpose of facilitating financing so long as the acquirer divests itself of control within two years;
- an acquisition of control through an amalgamation, merger, consolidation or reorganisation where the ultimate control through the ownership of voting interests remains unchanged;
- an acquisition of control of a Crown corporation;
- an acquisition of control of a non-profit corporation;
- a transaction to which Part XII.01 of the Bank Act applies;
- an involuntary acquisition of control resulting from the devolution of an estate or by operation of law;
- certain acquisitions of control by non-Canadian insurance businesses or affiliates thereof; and
- an acquisition of control of a farming business where real property is acquired.
Transactions exempt from the review and notification requirements contained in the ICA, and from the national security review provisions, include:
- an acquisition of control by a foreign lender in connection with the realisation of security granted for a loan or other financial assistance where the acquisition is subject to approval under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act;
- an acquisition of control through an amalgamation, merger, consolidation or reorganisation where the ultimate control through the ownership of voting interests remains unchanged and the acquisition is subject to approval under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act;
- an acquisition of control of a Crown corporation;
- a transaction to which Part XII.01 of the Bank Act applies; and
- certain acquisitions of control by non-Canadian insurance businesses, or affiliates thereof, where the acquisition is subject to approval under the Bank Act, the Cooperative the Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act.
Investments that are subject to foreign investment review may also be subject to review under the Competition Act (CA), whereby certain proposed acquisitions and business combinations trigger advance notification requirements. Specifically, Part IX of the CA establishes a review process whereby parties to a transaction must provide the Commissioner of Competition with pre-transaction notification filings if the proposed transaction exceeds specified monetary and shareholding thresholds. These thresholds are different from those contained in the ICA. When a transaction is subject to review under Part IX of the CA, it cannot be closed until expiry of a 30-day statutory waiting period, which may be extended if the Commissioner requires more information about the proposed transaction. Many reviews under the CA take approximately four to five months to complete; some cases certainly take longer.
Competition and foreign investment reviews in Canada cannot be 'siloed', as they require careful coordination, in terms of both timing and message. For example, it is of fundamental importance to ensure that information provided to each authority by the transacting parties is consistent. One of the factors considered in the net benefit test during a foreign investment review is the effect of the investment on competition within any industry or between industries in Canada. Given the Competition Bureau's expertise in this area, the Minister, through the Director of Investments, will consult the Bureau in respect of this criterion.
Parallel reviews under the CA and the ICA can also have real-world timing implications for a proposed transaction. For example, the Minister might not issue a clearance under the ICA until the Bureau has completed its review, especially where there are significant competition issues. While not usual practice, there is also a possibility that the Competition Bureau may not complete its assessment until the ICA review process is concluded, especially if there are significant foreign investment issues and sufficient competition issues to give rise to a supplementary information request.vi Special rules for SOEs and cultural businesses
Special considerations apply to investments by foreign SOEs and acquisitions of Canadian cultural businesses.SOEs
As part of the Minister's net benefit assessment, investments by foreign SOEs must meet specific guidelines. These guidelines were significantly revised in 2012, following high-profile acquisitions of Canadian oil and gas producers by Asian SOEs.
Reflecting Canada's heightened sensitivity to SOE transactions, the ICA definition of an SOE was broadened significantly in the 2012 amendments. Now, in addition to organisations that are directly owned by foreign governments, SOEs include entities 'controlled or influenced directly or indirectly' by a foreign government. The ICA also allows the Minister to make 'control in fact' determinations about SOEs; in practice, this means the Minister can declare that a Canada-controlled investor is controlled in fact by an SOE, possibly subjecting the investment to review under the ICA. The Minister can also determine that an SOE has acquired control of a Canada-controlled entity, subjecting even minority investments by SOEs to ICA review.
As detailed above, the financial thresholds for review are lower for SOEs, increasing the likelihood of review of SOE transactions. The 2019 financial threshold applicable to a WTO SOE is C$416 million.
Pursuant to the SOE guidelines, the Minister may consider the governance and commercial orientation of SOEs to determine whether an acquisition by an SOE is of net benefit to Canada. The Minister's aim is to ensure that foreign SOEs acquiring Canadian businesses will operate in a transparent and commercially oriented manner that mirrors private sector enterprises, and to prevent state owners from using Canadian acquisitions to effect their own undesirable objectives. In practice, this means that SOEs seeking to complete investments subject to the ICA must satisfy the Minister that they are free from political influence and will adhere to Canadian laws, implement standards and practices that promote sound corporate governance and transparency, adopt free market principles and make positive contributions to the productivity and industrial efficiency of the Canadian business.
To ensure these principles are upheld, the Minister may require that an SOE investor provide additional undertakings, such as the appointment of Canadians as independent directors on the board of directors. Unlike undertakings required by non-SOE investors, which typically have a three-year term, undertakings required of SOEs might continue indefinitely or for as long as the investor is an SOE.Cultural businesses
The Minister of Canadian Heritage is responsible for reviewing acquisitions of, or investments in, cultural businesses. A 'cultural business' is defined in the ICA and can include, for example, businesses involved in the publication or distribution of books, film, music and radio communications. Even if only a small portion of a business's operations are cultural, it will still be considered a cultural business for the purposes of foreign investment review.
As set out in Section IV.i, the monetary thresholds for review of cultural businesses are much lower than those for non-cultural businesses, ranging from C$5 million to C$50 million. Even when an investment would be otherwise notifiable, the Minister of Canadian Heritage has considerable discretion to review a transaction involving a cultural business when certain notification requirements are met.
Transactions involving cultural businesses must also align with Canada's cultural policy objectives, where relevant, in addition to meeting the standard 'net benefit to Canada' test.
Specifically, the Minister of Canadian Heritage will consider the consistency of the investment with Canada's cultural policies in such industries as periodical and book publishing, and film production and distribution.