On December 19, 2016, the Canadian government published Guidelines on the National Security Review of Investments under the Investment Canada Act (ICA). Included in the Guidelines are a non-exhaustive list of factors the government will consider in assessing national security risks, as well as guidance on filing notifications under the ICA.
In 2009, the (then Conservative) government introduced broad national security review powers under the ICA. These powers enable the government to review any investment in a Canadian business by a non-Canadian. The potential outcomes of such a review are:
- the investment is allowed to proceed, with or without conditions;
- closing of the investment is prohibited; or
- the non-Canadian is required to divest the Canadian business if closing has already occurred.
The government did not originally provide any guidance as to the factors that could trigger a national security review or influence its outcome. This degree of opaqueness resulted in significant criticism from stakeholders. Among other things, it made it difficult for potential investors to assess the risk of incurring significant pursuit costs in relation to acquisitions that could ultimately be rejected on national security grounds.
In the summer of 2016, the (current Liberal) government released, for the first time, some high level information on the use of the national security review powers, including the number of reviews that have been conducted, broken down by year, and their outcomes (see our August 2016 MarketCaps for more information). In its 2016 Fall Economic Statement, the government announced that it would publish the now released Guidelines by the end of the year (see our November 2016 MarketCaps for more information).
The most important aspect of the Guidelines is the following non-exhaustive list of factors the government will consider in assessing national security risks:
- The potential effects of the investment on Canada’s defence capabilities and interests;
- The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
- Involvement in the research, manufacture or sale of goods/technology identified in the Defence Production Act;
- 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, or the supply of goods and services to the Government of Canada;
- 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; and,
- The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.
The Guidelines encourage investors to file their notification form at least 45 days before the planned closing date for the investment, particularly where any of the factors listed above are present. The rationale behind this is that the government has 45 days from receiving a notification form to decide whether to do a national security review. While it is permissible to file a notification form up to 30 days after closing of the investment, the advantage of filing more than 45 days before closing is that doing so allows the investor to close the investment with certainty in relation to the national security review provisions – in effect, if the government has not initiated a national security review within 45 days then the investor can close the investment knowing that it will not subsequently face a potential divestiture order on national security grounds.
As a practical matter, in the context of transactions that could potentially give rise to national security concerns, based on a common sense and often cautious assessment of the nature of the buyer and the target, many investors have taken the “file early” approach since shortly after the national security review powers were originally enacted. The government now officially endorses this approach in the Guidelines.
It bears mentioning that this approach can be easier to conceptualize than to implement in practice. This is because sellers can be reluctant to agree to allow buyers to file their notification forms early, particularly in contexts where there are multiple potential bidders and one or more are either prepared to accept the risk of a potential post-closing national security review or are Canadian-controlled and therefore not at risk of a national security review. Despite the approach recommended in the Guidelines, there will likely continue to be some occasions where investors are, in effect, forced to choose between accepting the risk of a post-closing national security review and not making the investment at all.
In addition to recommending a “file early” approach, the Guidelines welcome investors to meet with Investment Review Division officials at the “earliest stages” of their investment planning, particularly where any of the factors outlined above are present. The degree of clarity that may result from such meetings, or the schedule on which it may be provided, is not yet known. However, the fact that the government is encouraging such meetings in the Guidelines should help to destigmatize engaging with government over potential national security concerns. Until now, some investors have been reluctant to seek any degree of guidance, or even to file their notification before closing, due to concerns that the act of doing so could be interpreted as the self identification of a problematic transaction.
Finally, it is significant that the government press release in which the Guidelines were released is entitled “Attracting global investments to develop world class companies” and that it contains multiple references to the government’s efforts to encourage foreign companies to invest in Canada. By so clearly linking this theme to the release of the Guidelines, the government seems to be acknowledging that the manner in which the national security review powers are administered may influence whether potential investors actually invest in Canada, and that a somewhat more transparent and less unpredictable process may be a positive influence, or at least less of a negative influence.