My Investment Canada Act services include advice regarding the application of the Investment Canada Act and Competition Act to mergers, the scope and application of Canada’s national security regime and state-owned-enterprise (SOE) investment guidelines and consulting services in relation to the likelihood for legal, political or other issues to arise during foreign investment reviews.
The Investment Canada Act is federal legislation that governs foreign investment in Canada and is primarily administered by the federal Minister of Industry and Investment Review Division (“IRD”) of Industry Canada. The federal Minister of Canadian Heritage and Heritage Canada are responsible for investments relating to Canadian cultural businesses.
Mergers in Canada are also subject to mandatory pre-merger notification under the federal Competition Act where a transaction exceeds prescribed monetary thresholds.
Generally speaking, the Investment Canada Act applies where a “non-Canadian” acquires “control” of a “Canadian business” (or establishes a new Canadian business), all as defined in the Investment Canada Act. The application of the Investment Canada Act, and what constitutes a “non-Canadian”, “control” and a “Canadian business”, can be complex.
Where a foreign investment in a Canadian business is subject to Investment Canada review, an investor must show that the investment is likely to be of “net benefit to Canada”.
Where the applicable thresholds are not met, investors are only required to file simple administrative notifications with basic information regarding the transaction.
“Non-Canadians” under the Investment Canada Act are defined as individuals, entities or governments (or agencies of governments) that are not “Canadian”.
An individual will be considered to be a “Canadian” under the Investment Canada Act if they are a Canadian citizen or a permanent resident of Canada who has been ordinarily resident in Canada for not more than one year after they first became eligible to apply for citizenship. A corporation will be “Canadian” if the controlling shareholders of the corporation are “Canadian”. For widely held corporations, a corporation will be “Canadian” if at least two thirds of its board of directors are Canadians and the corporation is not controlled in fact through its shares.
Acquisition of “Control”
The second general test to determine whether the Investment Canada Act applies is whether there will be an acquisition of “control”, which can be achieved through: (i) the acquisition of voting interests, (ii) all or substantially all of the assets of a Canadian business or (iii) voting shares.
The provisions regarding acquisition of “control” are complex. The Investment Canada Act contains a number of control presumptions: (i), where a majority of voting shares is acquired, control is deemed to have been acquired, (ii) where 1/3 or more (but less than a majority) of the voting shares of a Canadian business has been acquired, control is presumed, unless it is demonstrated that the shares to be acquired will not confer control in fact and (iii) where less than 1/3 of the voting shares of the Canadian business will be acquired, control is deemed not to have been acquired.
The Minister of Heritage may also determine that there has been an acquisition of control of a Canadian business, in relation to Canadian cultural businesses, even where the general tests for control are not met.
“Canadian business” is defined in the Investment Canada Act as a business carried on in Canada with: (i) a place of business in Canada, (ii) one or more individuals employed or self-employed in connection with the Canadian business and (iii) Canadian assets used to carry on the business.
A “business” for Investment Canada Act purposes is defined as an enterprise or undertaking capable of generating revenue and operated in anticipation of profit.
Where there is an acquisition of control of a Canadian business by a non-Canadian, but the relevant thresholds for review are not met, only a notification must be filed.
APPLICATIONS FOR REVIEW
Whether an investment will be subject to Investment Canada Act review depends on several factors that include: (i) whether the investment is made directly or indirectly, (ii) the nature of the business to be acquired (which has a bearing on the applicable thresholds) and (iii) whether the investor is a WTO investor.
In general, there must be an acquisition of control, of a Canadian business, by a non-Canadian with the relevant thresholds for the type of transaction and investor being exceeded (i.e., it is relevant whether transactions are direct or indirect and whether or not the investor is a WTO investor).
Applications for review must generally include the investor’s plans for the Canadian business and undertakings are typically required (i.e., that relate to the net benefit to Canada criteria of the Investment Canada Act and may include commitments relating to capital expenditures, head office location, listing on a Canadian exchange, Canadian employee and management levels, etc.).
CANADIAN CULTURAL BUSINESSES
Heritage Canada is responsible for reviewing and approving foreign investments that relate to Canadian cultural industries.
For investments in Canadian cultural businesses there are lower review thresholds. A “cultural business” under the Investment Canada Act includes a Canadian business that: (i) publishes, distributes or sells books, magazines, periodicals or newspapers in print or machine readable form, (ii) produces, distributes, sells or exhibits video or film products, (iii) produces, distributes, sells or exhibits audio or video music recordings or (iv) publishes, distributes or sells music in print or machine readable form.
There is no de minimis threshold for when a business will be a cultural business (i.e., a business can be a Canadian cultural business if its cultural activities comprise only a small portion of its total business activities).
An indirect acquisition under the Investment Canada Act is where a foreign investor acquires control of a corporation that is incorporated in a jurisdiction other than Canada, which in turn controls a Canadian entity carrying on a Canadian business. The significance of determining whether an investment is direct or indirect is that the thresholds for review are different depending on whether a transaction is direct or indirect. As well, indirect acquisitions by WTO investors are generally not reviewable.
FINANCIAL THRESHOLDS FOR REVIEW
Acquisitions of a Canadian business where the following financial thresholds are exceeded will be subject to review.
Where the investor is a WTO investor, the following thresholds apply:
Direct Acquisitions. Direct acquisitions are subject to review when the value of the assets of the Canadian business is equal to or exceeds the review thresholds for WTO investors, which is currently C $344 million and based on the gross book value of the assets of the Canadian business being acquired. These thresholds are currently proposed to increase gradually to $1 billion based on “enterprise value”.
Indirect Acquisitions. Indirect acquisitions by WTO members are generally not reviewable (except where the Canadian business being acquired is a cultural business and the relevant threshold of C $50 million is exceeded), but only trigger a notification requirement.
Lower thresholds apply for acquisition of cultural businesses (i.e., those relating to books, newspapers, audio/video recordings or magazines – see above). The thresholds for the acquisition of cultural businesses are C $5 million and $50 million (direct / indirect acquisitions). There is no de minimis threshold in terms of the portion of a business that is devoted to cultural activities.
Where the investment is by a non-WTO member lower review thresholds apply as follows: (i) direct acquisitions – the value of the assets of the Canadian business exceeds C $5 million; (ii) indirect acquisitions – the value of the assets of the Canadian business exceeds C $50 million.
TEST FOR REVIEW
“Net Benefit to Canada” Test
Under the Investment Canada Act, where an acquisition is subject to review, the foreign investor must show that the acquisition is likely to be of “net benefit to Canada”. This is the relevant test against which the Minister will evaluate a reviewable investment. In evaluating whether an investment is likely to be of “net benefit to Canada” a number of factors are considered that relate to employment, exports, productivity, technology development, competition and compatibility with Canada’s economic and cultural policies.
The specific net benefit to Canada criteria under section 20 of the Investment Canada Act are as follows:
1. The effect of an investment on the level and nature of economic activity in Canada, including, without limiting the generality of the foregoing, the effect on employment, on resource processing, on the utilization of parts, components and services produced in Canada and on exports from Canada.
2. The degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada of which the Canadian business or new Canadian business forms or would form a part.
3. The effect of an investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada.
4. The effect of an investment on competition within any industry or industries in Canada.
5. The compatibility of an 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.
6. The contribution of an investment to Canada’s ability to compete in world markets.
The net benefit to Canada review process is, however, political and some factors may be assigned more importance during a review than others depending on the nature of the proposed transaction.
Applications for Review and Timing
Where an investment is reviewable, an application must be filed setting out the information about both the investor and the Canadian business (and in particular, the investor’s plans for the Canadian business and why the investment will be of net benefit to Canada).
Once an application has been filed, the Minister has an initial 45 days to approve or reject the investment. Where a review is not completed within the first 45 days, the Minister may extend the review for another 30 days. The initial maximum 75 day review period can be extended further (with no set timetable) with an investor’s consent.
Reviews typically include consultation with other federal Government departments, as well as provincial governments affected by a transaction. Investment Canada Act reviews are also inherently political based on the current review mechanism. This means that targets that are perceived as key strategic Canadian assets or national champions will commonly receive more public or political scrutiny (which increases the risk that a transaction will not be approved). It can also be difficult to predict where public or political opposition will originate until a review is well underway.
If the Minister concludes that an investment would not be of “net benefit to Canada”, an investor may make representations and file undertakings within thirty days of the Minister’s notice.
Where undertakings are required for approval of an investment, they may involve terms in relation to maintaining certain employment levels in Canada, Canadian participation in the management of the business, undertaking capital expenditures, and commitments to invest in research and development and the location of the head office of the Canadian business. In essence, undertakings provided by investors track the various net benefit to Canada criteria under the ICA.
Where an investor fails to comply with the Investment Canada Act, for example fails to file an application for review or notification, fails to comply with undertakings or completes a reviewable investment without the requisite approval, a number of penalties may be imposed. These include revocation (or suspension) of voting rights, the divestiture of assets and penalties of up to C $10,000 per day that an investor is in violation of the Investment Canada Act.
In 2007, guidelines (the “SOE Guidelines”) were issued under the Investment Canada Act that provide guidance for the review and monitoring of acquisitions of Canadian businesses by state-owned enterprises (“SOEs”). The SOE Guidelines were updated on December 7, 2012.
Further new Investment Canada Act rules relating to SOEs have also been proposed.
NATIONAL SECURITY REVIEWS
Amendments to Investment Canada Act in March, 2009 introduced a new “national security” review mechanism, under which the Minister and federal Cabinet have the power to review proposed or completed investments that may be considered to be “injurious to national security”. Following these changes, a new part was added to the Investment Canada Act (Part IV.1 – Investments Injurious to National Security) and new Investment Canada Act regulations were adopted (National Security Review of Investments Regulations).
Where an investment is found to be “injurious to national security”, the federal Cabinet has the power to block an investment in whole or in part, impose conditions on the investment or, in the case of a completed transaction, require divestitures.
Further new Investment Canada Act rules relating to national security reviews have also been proposed.
LINKS AND RESOURCES
Government of Canada, Invest in Canada
Industry Canada, Investment Canada Act
Investment Canada – Guidelines
Investment Canada Forms
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