Archive for the 'Investment Canada' Category
The past year has been a busy one for Canadian competition law.
Developments in 2011 include new cases, enforcement and legislation in most key areas including abuse of dominance (the Competition Bureau’s ongoing challenge of The Toronto Real Estate Board and CREA settlement in late 2010), criminal conspiracy (developments in price-fixing class action litigation and some Bureau enforcement), refusal to deal (several important private access section 75 cases, including a decision of the Federal Court of Appeal), contested mergers (in the waste and airline markets), price maintenance (the merchant fees case involving Visa and MasterCard) and misleading advertising (involving Bell Canada, Rogers and others).
The Competition Bureau is testing the new rules under Canada’s Competition Act, which came into force in 2009 and 2010, and private plaintiffs are creating new law in a number of ongoing competition/antitrust class actions in Canada (principally indirect purchaser price-fixing cases relating to the sale and supply of dynamic random access, or “DRAMs”, high fructose corn syrup and computer operating systems).
At the same time, several new pieces of legislation have been introduced including a federal omnibus crime bill, which will eliminate conditional sentences for some competition law offences, and sweeping new anti-spam legislation (Bill C-28 or “FISA“) that once in force will be among the strictest anti-spam regimes in the world.
The Commissioner of Competition, and other federal enforcement officials including the RCMP, have also expressed intentions to adopt tougher enforcement stances in relation to competition law and other white collar crime.
In general, these developments mean that it remains important for Canadian companies, organizations and their executives to maintain a practical awareness of Canadian competition law.
Some of the key competition law and related developments of 2011 include:
Bloomberg has reported that federal Industry Minister Christian Paradis has again raised the prospect of amending Canada’s Investment Canada Act (the “ICA”) in remarks he made in New York last week (see: Canada Open to Changing Foreign-Takeover Law, Paradis Says).
The Industry Minister’s comments closely follow a C.D. Howe Institute report also issued last week calling for fundamental changes to the ICA to stimulate foreign direct investment in Canada, including a change to the overarching test for foreign investment approval (replacing the current “net benefit to Canada” test with a national interest test) (see: New Publications – C.D. Howe Institute Report – Reforming the Investment Canada Act: Walk More Softly, Carry a Bigger Stick).
On December 1, 2011, the C.D. Howe Institute issued a report on the Investment Canada Act entitled Reforming the Investment Canada Act: Walk More Softly, Carry a Bigger Stick, authored by Philippe Bergevin and Daniel Schwanen.
On November 24, 2011, the Supreme Court of Canada denied leave in United States Steel Corporation et al. v. Attorney General of Canada (FC) (Civil) (By Leave) (34389). See: Supreme Court of Canada Judgements. See also: National Post – Supreme Court Won’t Hear U.S. Steel Appeal.
To appeal a decision of a court of appeal in a civil case to the Supreme Court, the party wishing to appeal must first obtain leave (i.e., permission) to do so. Under the Supreme Court Act, an application for leave to appeal may be granted if the Supreme Court finds that the case: (i) raises an issue of public importance and (ii) should be decided by the Supreme Court. Any case must raise an issue that goes beyond the immediate interests of the parties.
The Supreme Court does not issue reasons for its decisions to allow or dismiss applications for leave to appeal. Judgments on applications for leave to appeal are also generally final (under the Supreme Court of Canada Rules, an application for leave to appeal will not be reconsidered unless there are exceedingly rare circumstances in the case that warrant consideration).
This U.S. Steel case relates to the federal government’s lawsuit against U.S. Steel in relation to the performance of undertakings U.S. Steel provided in its 2007 acquisition of Hamilton-based Stelco Inc. The Federal Court had previously allowed the government’s lawsuit to proceed.
Where an investor fails to comply with the Investment Canada Act (e.g., 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 divestiture of assets, the revocation (or suspension) of voting rights and financial penalties of up to Cdn. $10,000 per day that an investor is in contravention of the Investment Canada Act (being sought by the government in this case).
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For the Supreme Court of Canada’s leave decision see:
Supreme Court of Canada Judgements
For more about the Investment Canada Act see:
On October 6, 2011 the Competition Bureau issued its updated Merger Enforcement Guidelines.
The Bureau’s new MEGs, which set out its approach to the substantive review of mergers in Canada, are the first update to the MEGs since 2004 and the result of publication consultations across Canada in 2010 and 2011.
The Bureau has also recently issued a number of new (or updated existing) merger related guidelines, policies and reports. These include: Merger Review Performance Report (2010), Competition Bureau Merger Remedies Study Summary, Competition Bureau Fees and Service Standards Handbook for Mergers and Merger-Related Matters, Procedures Guide for Notifiable Transactions and Advance Ruling Certificates Under the Competition Act, Hostile Transactions Interpretation Guidelines, Pre-Merger Notification Interpretation Guidelines and Merger Review Process Guidelines.
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For the Bureau’s news release issued with the new MEGs see:
Competition Bureau Issues Final Merger Enforcement Guidelines
For more information about Canadian merger control see:
On May 23, 2011, the U.S. Department of Justice announced that it had filed a lawsuit to block H&R Block Inc. from acquiring TaxAct based on concerns that the proposed transaction would further consolidate the “growing U.S. digital do-it-yourself tax preparation software market” from 3 to 2 and eliminate a maverick (TaxAct).
In making the announcement, the U.S. DoJ said:
“’The combination of H&R Block and TaxACT would likely lead to millions of American taxpayers paying higher prices for digital do-it-yourself tax preparation products,’ said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. ‘In addition, TaxACT has aggressively competed in the digital do-it-yourself tax preparation market with innovations such as free federal filing. If this merger is allowed to proceed, that type of innovation will be lost.’
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According to the department’s complaint, H&R Block’s acquisition of 2SS Holdings would eliminate a company that has aggressively competed with H&R Block and disrupted the U.S. digital do-it-yourself tax preparation market through low pricing and product innovation. By ending the head-to-head competition between TaxACT and H&R Block, American taxpayers would be left with only two major digital do-it-yourself tax preparation providers. This would lead to higher prices, lower quality, and reduced innovation. In addition, by taking control of the TaxACT business, which has been a maverick in the market, it would be easier for H&R Block to coordinate on prices, quality, and other business decisions with the other remaining industry leader – Mountain View, Calif.-based Intuit, which makes personal finance programs such as Quicken and TurboTax – the department said.”
This case is interesting in that in addition to considering market shares and existing remaining competition (according to the DoJ, the top three players including H&R Block and TaxAct account for about 90% of the relevant market), the DoJ is basing its challenge on the fact that in its view TaxAct is also a maverick. Like the U.S., in Canada whether a merging party is a maverick can also be a relevant factor for considering whether competition will be substantially lessened post-merger (though, not surprisingly, whether a party is a maverick can be the subject of considerable debate and maverick cases are relatively rare). In this regard, the Competition Bureau states in its Merger Enforcement Guidelines:
“Pre-merger, effective coordination may be constrained by the activities of a particularly vigorous and effective competitor (a ‘maverick’). An acquisition of a maverick may remove this constraint on coordination by reducing incentives to behave in an aggressive manner. Such an acquisition increases the likelihood that coordinated behaviour will be effective.”
This case is also interesting, if only for being a cautionary tale, in that the DoJ is basing its challenge of the proposed transaction in part on the merging parties’ own internal documents. According to the DoJ, these include statements from H&R Block’s internal emails and presentations that a primary benefit of acquiring TaxAct is “elimination of a competitor” and the “strategic opportunities” include to “eliminate the brand to regain control of industry pricing and further price erosion”.
Given that “4c documents” are a routine and required part of merger notification in the U.S., and that strategic planning documents are also now required for merger notification filings in Canada regardless of complexity (see Notifiable Transactions Regulations, 16(1)(d)),[1] merging parties are well advised to seek competition/antitrust counsel early in the planning stages of a proposed transaction to avoid similar potential issues from arising.
For the complete DoJ news release see: Justice Department Files Antitrust Lawsuit to Stop H&R Block Inc. From Buying TaxAct.
For Canada’s merger control rules see: Competition Act, Part IX – Notifiable Transactions and Notifiable Transactions Regulations.
For an overview of merger control in Canada see: Merger Control and Investment Canada.
[1] Subparagraph 16(1)(d) of the Notifiable Transactions Regulations requires that parties to a transaction, and their affiliates, file “all studies, surveys, analyses and reports that were prepared or received by an officer or director of the corporation … for the purpose of evaluating or analysing the proposed transaction with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into new products or geographic regions …” This requirement to file strategic planning documents as part of a pre-merger notification filing was recently added to the Canadian Notifiable Transactions Regulations as part of amendments to the Competition Act in 2009, and further aligns Canadian merger control rules with that in the U.S. under the HSR Act (the existing 4c documents requirement).
Industry Canada has announced that the monetary threshold for review for WTO investors or vendors, other than Canadians, is expected to be $312 million for 2011 and that the official threshold would be published in the Canada Gazette in early 2011. The monetary threshold for review under the Investment Canada Act (“ICA”) for WTO investors is both higher than the general thresholds under the ICA (which are $5 million and $50 million for direct and indirect transactions respectively) and increased annually based on growth in GDP, which declined in 2010 as a result of the global recession from $312 million to $299 million. For more information about the ICA and the regulation of foreign investment in Canada see: Investment Canada and Investment Canada FAQs.
The Competition Bureau has announced that it has approved remaining divestitures in relation to the July, 2010 Waste Services Inc. (WSI)/IESI-BFC Ltd. merger. Under a June, 2010 Consent Agreement, IESI-BFC and WSI were required to divest commercial waste collection assets in five Canadian cities (Edmonton, Calgary and Ottawa were divested earlier this year). The structural merger remedies in this case (divestitures) included the divestiture of: (i) about 428 waste customer contracts, 822 containers and two trucks in Simcoe County, Ontario (ii) about 460 customer contracts, 938 containers and two trucks in Hamilton, Ontario and (iii) all of WSI’s interest in its Hamilton transfer station.
For a copy of the Bureau’s News Release see: Competition Bureau Approves Remaining Divestitures in Waste Services Merger.
For a copy of the Consent Agreement see: Consent Agreement.
For more information about Canadian merger control and foreign investment law see: Canadian Merger Control, Merger Control FAQs, Investment Canada Act and Investment Canada FAQs.
Marius Kloppers
“My reputation is not important here … ego does not come into this, and all that matters is whether this is value-creating for our shareholders” See: The Australian.
Stephen Harper
“On the positive side, Prime Minister Stephen Harper referred to the deal as the takeover of a U.S.-controlled company by an Australian one.” See: The Australian.
Tony Clement
“I have not made a determination.” See: Winnipeg Free Press.
“I am neither a headwaiter to the premier of Saskatchewan, nor am I butler to the president of BHP.” See: Winnipeg Free Press.
“He’s ‘working hard’ to meet the Nov. 3 deadline for the Investment Canada Act review.” See: Bloomberg.
Brad Wall
“In the interests of jobs for Saskatchewan families, in the interest of quality of life that we prize that is funded by revenues to the government, we must say no to this hostile takeover … this is not a normal market transaction or a normal takeover. There hasn’t been a takeover in the history of takeovers, that we’re aware of, that involves almost a third of the world’s supply of something as strategic as potash.” See: BBC.
“In the past decade, promises about maintaining jobs, corporate headquarters and future investment have all been broken. … We simply cannot take that risk with this valuable resource.” See: Financial Times.
“BHP Billiton’s public statements about Canpotex and about operating at full production create serious concern about the future of Canpotex” … “This in turn puts $6 billion worth of capital expansion and thousands of jobs at risk.” See: DealBook / New York Times.
“In the interest of jobs for Saskatchewan families, in the interest of the quality of life that we prize that’s funded by revenue to government, in the interest of the place of our province and our country in the world, we must say no to this hostile takeover.” See: Winnipeg Free Press.
BHP executives
It’s a “special deal” for a special situation. See: Globe and Mail.
Media on the tax concessions
“BHP has proposed to essentially waive two of its biggest tax advantages stemming from the proposed acquisition. BHP has offered to give up the deduction it would get from development costs of a new potash mine, which could be used to reduce taxes on Potash Corp.’s future production. And, BHP has offered to only use about a third of the interest-cost deduction from acquisition debt that it could legitimately take under Canada’s thin-capitalization regime. In both cases, BHP is giving up something that it would be legitimately entitled to under existing (and longstanding) tax rules. The result is a package that BHP says will save Saskatchewan about $300-million a year in tax revenue that otherwise would be lost. Of course, BHP shareholders are the ones that would pay that price.” See: Globe and Mail.
BHP Chairman, Jac Nasser
“Any acquisition or investment must create value for our shareholders. … If shareholder value is not demonstrated, we will not proceed with the proposed acquisition.” See: The National Business Review.
Andrew Mackenzie, BHP’s chief of non-iron ore operations
“I’m engaging with the federal government to see how many of the commitments I’ve made thus far can be turned into binding undertakings, and I will take those undertakings and I will find ways of convincing the Saskatchewan government that those undertakings will be commitments written with real power and things that we will not disappoint on.” See: Winnipeg Free Press.
Ralph Goodale, Deputy Liberal Leader
“There are going to be consequences if the prime minister effectively gives the premier a slap in the face.” See: Winnipeg Free Press.
Jack Layton, NDP Leader
“Even he recognizes ideology takes a backseat to basic math. And the numbers here don’t add up for Canadians.” See: Winnipeg Free Press.
The Sidney Morning Herald, CBC News, Globe and Mail and others reported earlier today that Saskatchewan “government sources” had disclosed that the Saskatchewan Government intended to oppose BHP Billiton’s hostile bid for Potash Corp.
The principal obstacle in BHP’s ongoing discussions with the Saskatchewan Government has been a forecasted loss in tax revenues of approximately $2 billion (based on a Conference Board of Canada report commissioned by the Saskatchewan Government). On this basis, BHP now faces not only increased pressure to increase its bid, but also raises the question of what concessions it might seek with Saskatchewan in the next two weeks (e.g., commitments to remain in the Canpotex export cartel).
According to the Globe and Mail, the Saskatchewan Government’s decision, expected to be announced tomorrow, is the result of BHP refusing to a “one-time, special tax of more than $1 billion, as well as hundreds of millions of dollars worth of infrastructure funding”, which was sought to offset the Saskatchewan Government’s anticipated tax revenue losses. Saskatchewan’s current Premier, Brad Wall, a member of the Saskatchewan Party (that has been described as a “center” party), is scheduled to make an announcement to the media tomorrow morning and to the Regina Chamber of Commerce on Thursday.
While a number of Saskatchewan government officials have been indicating growing dissatisfaction with the proposed transaction over recent weeks, today’s media announcements indicate the toughest stance yet by Saskatchewan that could either be its final position, or merely a strategic move to seek further commitments from BHP. The Saskatchewan Government’s current position is not altogether surprising, however, given the renewed criticisms relating to the “hollowing out” of corporate Canada (and Canada’s resource sector in particular) and the unfortunate timing of BHP’s bid in relation to the Government’s litigation with U.S. Steel over U.S. Steel’s alleged breach of its undertakings following its acquisition of Stelco.
The timing of the Saskatchewan Government’s (expected) announcement is particularly interesting given that the 75 day review period under the Investment Canada Act for BHP’s proposed investment expires November 3rd which, again, may indicate that the timing of the Saskatchewan Government’s expected announcement this week are intended to press BHP into making more significant commitments.
Having said that, time is not up for BHP given that the 75 day review period can be further extended on consent of the investor (i.e., BHP), as well as the fact that even if the Minister was to conclude that the proposed investment was not of net benefit to Canada, BHP could request a further round of negotiations (i.e., investors have a right to make further representations and undertakings before a final decision is issued). Of course, further delay may have significant adverse market impacts.
The Saskatchewan Government also does not formally have any power to block or veto BHP’s proposed transaction, given that while the Minister is obligated under the Investment Canada Act to “take into consideration” the economic policy objectives of the provinces, the final decision rests with the Minister. This important distinction, i.e., the requirement for the Minister to consider provincial views with no formal obligation to consult with the provinces, was one of the Federal Government’s political wins during the drafting of Canada’s former foreign investment legislation (the Foreign Investment Review Act).
Legal niceties aside, however, while the ultimate decision rests with the Minister, it is difficult to see how the Saskatchewan Government’s position on a transaction that will have such significant impacts on the Saskatchewan economy will not be a key factor in the analysis. Having said that, the Investment Canada process is, by its nature, a largely political process and no single factor under section 20 of the Investment Canada Act is determinative, including the factor relating to regional economic policies, nor is there any meaningful authority as to which factors should be given particular weight. The process is intended to be, well, a flexible political process. This uncertainty and lack of transparency is amplified by the fact that the Federal Government has only refused one proposed investment since 1985 on non-cultural grounds (out of more than 1500 investments reviewed).
The reality at the end of the day, however, is that the key political players both in Saskatchewan and Ottawa (Brad Wall and Tony Clement) are center or right of center (Saskatchewan Party and Conservatives), time still remains for BHP in the process (with further review extensions possible) and of more than 1500 investments reviewed since 1985, only one proposed investment has been refused on non-cultural grounds.
Perhaps most importantly, both Canada’s competition laws and foreign investment laws were recently significantly amended to, among other things, liberalize foreign investment in Canada and align Canada’s merger and foreign investment regimes with that of its major trading partners, including the U.S. This is more than mere policy trivia, given that these very recent changes (in March 2009) were intentionally and consciously the result of Conservative policy to make Canada more investor-friendly, and resulted in sweeping changes to Canada’s competition and foreign investment law regimes. A refusal to approve BHP’s bid, assuming reasonable concessions are made by BHP, would be very difficult to reconcile with the Conservative Government’s recent policy initiatives to liberalize Canada’s foreign investment laws.
In sum, will the BHP transaction be approved? We think it is more likely than not, but will likely require more from BHP (including, in our view, more significant up-front commitments than may have been required in the past to reduce the perception of another U.S. Steel/Stelco transaction).
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Somewhat in contrast to recent developments in the BHP/Potash transaction, BHP received some good news today. Reuters and others are reporting that the BHP has received U.S. antitrust clearance (Hart-Scott clearance) for its bid for Potash Corp. At the same time, Bloomberg and others are reporting that Industry Minister Tony Clement said in Parliament today that BHP’s bid for Potash Corp. will be subject to “rigorous” review, reiterating the required test under the Investment Canada Act that BHP demonstrate that the transaction will be of “net benefit to Canada”. Also, in contrast to the clearance today by U.S. antitrust authorities, earlier this week the Canadian Competition Bureau issued a supplementary information request (“SIR”), moving the competition law review into a second stage review (triggering a second 30 day statutory waiting period, commencing on full compliance with the SIR).
For more information about Canada’s merger control and foreign investment regimes see: Canadian Merger Control, Canadian Merger Control FAQs, Investment Canada, Investment Canada FAQs.
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According to Reuters, Chinese state officials have ordered state companies to meet with investment bankers to explore options to potentially block BHP’s $39 billion hostile bid for Potash Corp. Late last week Reuters reported:
“In response to the directive, Sinochem is holding meetings with several banks, the source said on Friday, including Citigroup, HSBC and Morgan Stanley.
The order from Beijing underscores the seriousness with which China is taking the potential BHP-Potash tie up and its implications for the pricing and supply of the crop nutrient, despite obstacles to launching a successful counter-bid.
‘They are being instructed,’ the source said, adding the order was issued late last week. ‘The chairman of Sinochem has been asked to speak to other banks.’
A Wall Street Journal report on Thursday said Sinochem had hired HSBC to advise on options pertaining to Potash Corp.
One option being discussed is the possibility of Sinochem linking with China’s $300 billion sovereign wealth fund CIC, according to a second banking source familiar with the matter.
The most likely scenario is that China will consider buying a blocking stake, rather than attempt a complete takeover of Potash Corp, said both sources who were not authorized to speak publicly due to the sensitive nature of the discussions.
Assuming a consortium pays a 20 percent premium to Potash’s market price, a 15 percent stake would cost about $8.3 billion.”
Options for Chinese firms include launching a competing hostile bid for Potash Corp., acquiring a blocking stake in Potash Corp. or using Canada’s foreign investment rules to oppose the transaction. Such grounds may include arguments that the investment would not be of “net benefit” to Canada or, likely more remotely, that the investment threatens Canada’s national security (though it is difficult to see how potash could have any national security implications).
It seems rather doubtful, however, that strategies not involving competing acquisitions would be successful, particularly given BHP’s apparent willingness to provide satisfactory commitments (i.e., undertakings) in connection with the transaction and the difficulty of seeing how control of potash could be key to Canada’s national security. It seems even less likely, despite the recent Government proceedings against U.S. Steel (for allegedly failing to comply with its undertaking in connection with its acquisition of Stelco), that the current Conservative Government would oppose the transaction, particularly given that Canada’s foreign investment law regime was liberally amended last year as part of sweeping amendments to the Investment Canada Act to encourage more foreign investment and bring Canada in line with its other major trading partners.
As a practical matter as well, only one transaction has publicly been blocked out of more than 1500 applications for review since 1985.
Despite the widespread current debate, it remains to be seen whether any competing bidders will yet emerge in the play for Potash Corp., or whether the Chinese will indeed be successful in blocking or otherwise holding up the deal.
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RECENT AMENDMENTS
What Has Changed?
Significant changes were recent made to Canada’s foreign investment regime. The recent changes coincide with sweeping amendments to the federal Competition Act, including significant changes to Canada’s merger control regime. Some of the key changes to Canada’s foreign investment regime, not all of which are yet in force, include:
Calculation of Monetary Threshold for Review. Changing the method of calculating the general monetary threshold to determine whether a foreign investment is reviewable for publicly traded Canadian businesses from “gross assets” (based on book value) of the Canadian business to be acquired to one based on the “enterprise value” of the Canadian business. In the case of privately held Canadian businesses, the test is to remain based on the book value of the assets of the Canadian business.
Increased Review Threshold. Increasing the threshold for review for direct acquisitions by WTO members of publicly traded Canadian businesses from the current Cdn. $299 million threshold (for 2010) based on book value of assets to Cdn. $600 million based on enterprise value, which is to progressively rise to Cdn. $1 billion over a four-year period. It is anticipated that when the new monetary thresholds are in force, this will reduce the number of applications for review filed.
Sector Specific Review Thresholds. Eliminating certain lower review thresholds in specific industry sectors, namely financial services, uranium production and transportation services.
National Security Review Regime. The introduction of a new national security review regime, under which the Minister and federal Cabinet may review investments that may be “injurious to national security”. Unlike a general “net benefit” to Canada review under the Investment Canada Act, there is deliberately no definition of what constitutes “national security” and any investment may be subject to a national security review, regardless of whether the general monetary thresholds for review under the Investment Canada Act are met or whether control is acquired.
Why Was the Investment Canada Act Amended?
The recent amendments to the Investment Canada Act adopt a number of the recommendations of a Government appointed Competition Policy Review Panel in its report entitled Compete to Win: Final Report. The Competition Policy Review Panel was established in 2007 with a mandate to review Canada’s competition and foreign investment policies and make recommendations to the federal Government to make Canada more globally competitive. Overall, the Panel indicated that its recommendations were based on the view that Canada would benefit from increased global openness that that attracting greater foreign investment would be in Canada’s interest.
Where Can I Find More Information About the Recent Changes?
For more information about the recent amendments to the Investment Canada Act and regulations, see: Regulations Amending the Investment Canada Regulations – Regulatory Impact Analysis Statement, Compete to Win: Final Report, Investment Canada Act FAQs, Industry Canada and Investment Canada News.
OVERVIEW OF THE INVESTMENT CANADA ACT
What is the Investment Canada Act?
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 is responsible for investments relating to Canadian cultural businesses (discussed below).
What is the Purpose of the Investment Canada Act?
The purpose of the Investment Canada Act is to “provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security.”
What Other Laws Apply to Mergers in Canada?
Mergers in Canada are also subject to mandatory pre-merger notification under the federal Competition Act where a transaction exceeds certain prescribed monetary thresholds (see: Canadian Merger Control and Canadian Merger Control FAQs). Transactions may also be subject to sectoral regulation (e.g., transactions in the telecommunications, broadcasting, banking and transportation sectors).
When Does the Investment Canada Act Apply?
The Investment Canada Act applies where: (i) a “non-Canadian”, (ii) acquires “control” of (iii) 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 in particular what constitutes a “non-Canadian”, “control” and a “Canadian business” in specific circumstances, however, can be highly complex.
What Does an Application For Review Involve?
Where a foreign investment in a Canadian business is subject to review under the Investment Canada Act (i.e., where the criteria above apply for the Act to apply and the relevant thresholds discussed below are met) an investor must show that the investment is likely to be of “net benefit to Canada”. In many cases this involves the investor providing commitments (i.e., binding undertakings) in relation to the proposed investment (discussed below).
What Does a Notification Involve?
Where the applicable monetary thresholds under the Investment Canada Act are not met (discussed below), and an application for review is not required, investors are only required to file simple notifications with basic information within thirty days of the completion of a transaction. These filings are short and largely administrative (i.e., used for statistical purposes).
What is a “Non-Canadian”?
“Non-Canadians” under the Investment Canada Act are defined as individuals, entities or governments (or agencies of governments) that are not “Canadian”. A person will be considered to be a “Canadian” under the Investment Canada Act if they are a Canadian citizen or 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 Canadian citizenship.
When is a Corporation Considered to be a “Non-Canadian”?
In the case of corporations, a corporation will be “Canadian” if the ultimate controlling shareholders of the corporation are “Canadian”. In the case of widely held corporations, a corporation will be “Canadian” if at least 2/3 of its board of directors are Canadians and the corporation is not controlled in fact through its shares (i.e., no de facto control).
What Will Constitute “Control” under the Investment Canada Act?
The second general test to determine whether the Investment Canada Act applies is whether there will be an acquisition of “control”. Control for the purposes of the Investment Canada Act can be achieved as a result of: (i) the acquisition of voting interests (in the case of non-corporate entities), (ii) all (or substantially all) of the Canadian assets of a business or (iii) the acquisition of voting shares (for corporations). The provisions regarding acquisition of “control” under the Investment Canada Act are complex.
The Investment Canada Act, however, sets out a number of presumptions regarding the acquisition of control as follows: (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 have been acquired, control is presumed, unless it can be demonstrated that the shares that will 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. In sum, control may be acquired under the Investment Canada Act with the acquisition of as little as 1/3 of the voting shares.
Acquiring the shares of a non-Canadian corporation that has a Canadian division, but no Canadian subsidiaries, will not constitute control under the Investment Canada Act.
Does the Canadian Business Need to be Canadian-controlled?
No. A Canadian business proposed to be acquired does not need to be Canadian-controlled in order for the Investment Canada Act to apply to the acquisition of control.
Can “Control” be Acquired in Other Ways?
Yes. The Canadian Minister of Heritage may determine that there has been an acquisition of control of a Canadian business, in relation to Canadian cultural businesses, even in circumstances where the general tests under the Investment Canada Act for determining control are not met.
What is a “Canadian Business”?
Under the Investment Canada Act, a “Canadian business” is defined as a business carried on in Canada that has: (i) a place of business in Canada, (ii) an individual (or individuals) employed or self-employed in connection with the business and (iii) assets in Canada used for carrying on the business. In other words, to constitute a Canadian business, there must be at least one Canadian employee, a place of business in Canada and some Canadian assets.
A “business” under the Investment Canada Act is defined as an enterprise or undertaking that is capable of generating revenue and is carried on in anticipation of profit. As such, in considering whether there is an investment in a “Canadian business”, it is important to determine whether the target is operational (e.g., mining properties that are not yet producing, and only at the exploration stage, are not “Canadian businesses”).
REVIEW AND NOTIFICATION
When is a Notification Required?
A notification will be required when the general criteria for the application of the Investment Canada Act are met (i.e., acquisition of control of a Canadian business by a non-Canadian), but the prescribed financial thresholds for review under the Act are not met.
When is an Application for Review Required?
Investments are reviewable under the Investment Canada Act when they exceed the prescribed financial thresholds (discussed below). Where the prescribed thresholds are not met, foreign investors are only required to file a simple notification (discussed above) with basic information within thirty days of completion of the transaction.
Whether a particular investment will be subject to Investment Canada review depends on several factors. These include: (i) whether the investment is direct or indirect, (ii) whether the Canadian business in which the investment is being made is a Canadian cultural business and (iii) whether the investor is a WTO or non-WTO investor. As such, determining whether an investment is reviewable under the Investment Canada Act requires an analysis of the structure of a transaction, nature of the acquirer and nature of the target.
Are Canadian Cultural Businesses Treated Differently?
Yes. Investments involving Canadian cultural businesses are subject to lower review thresholds as follows: (i) direct investments – Cdn. $5 million; and (ii) indirect investments – Cdn. $50 million.
In addition, for indirect acquisitions, where the value of the worldwide assets of the Canadian business is more than 50% of the value of all of the assets being acquired, then the lower review threshold of Cdn. $5 million applies.
What is a “Cultural Business”?
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 film or video recordings, (iii) produces, distributes, sells or exhibits audio or video music recordings or (iv) publishes, distributes or sells music in print or machine readable form.
Is there a de minimis Threshold for a “Cultural Business”?
No. A Canadian business can still be a “cultural business” if the cultural activities engaged in comprise only a small portion of the total business (i.e., there is no specific financial threshold). Moreover, the Canadian Minister of Heritage has the power to review the acquisition of Canadian cultural businesses even where the general relevant monetary thresholds are not met.
What is an Indirect Acquisition and What is the Relevance?
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.
What is the Significance of WTO Investors?
With respect to WTO investors, generally speaking an individual will be a WTO investor where they are a national of a member of the WTO or have a right of permanent residence in a country that is a member of the WTO. In the case of corporations, a corporation will be a WTO investor where ultimate control rests with one or more WTO investors. In the case of widely held corporations, a corporation will be a WTO investor where the majority of the corporation’s voting shares are owned by WTO investors or, where no person or group of persons controls the corporation, where a minimum of 2/3 of the corporation’s board are comprised of Canadians and WTO members.
FINANCIAL THRESHOLDS FOR REVIEW
What are the Financial Thresholds for Review for WTO Investors?
Where the investor is a WTO investor or, alternatively, the Canadian business being acquired is controlled by a WTO investor, the following thresholds apply:
Direct Acquisitions. Direct acquisitions will be subject to review when the value of the assets of the Canadian business exceeds the review thresholds for WTO investors (which is currently Cdn. $299 million and based on the gross book value of the Canadian business being acquired). However, as a result of the recent amendments not yet in force, the financial threshold for review in the case of direct acquisitions of Canadian publicly traded businesses will be if the “enterprise value” of the assets of the Canadian business is equal to or exceeds Cdn. $600 million, which threshold will apply for the first two years after the new thresholds come into force and will increase annually.
Indirect Acquisitions. Indirect acquisitions by WTO members are generally not reviewable either pre- or post-closing (except where the Canadian business being acquired is a cultural business and the relevant threshold of Cdn. $50 million is exceeded), but only triggers a notification requirement.
What are the Financial Thresholds for Non-WTO Investors?
Where the investment is by a non-WTO member lower review thresholds apply as follows: (i) direct acquisitions – in the case of direct acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $5 million; and (ii) indirect acquisitions – in the case of indirect acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $50 million.
In addition, in an indirect acquisition, where the worldwide assets of the Canadian business being acquired is more than 50% of the value of all of the assets being acquired, then the lower Cdn. $5 million threshold applies.
TEST FOR REVIEW & REVIEW
What is the Test on Review?
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. While the term “net benefit” is not defined, the Minister is required to consider a number of relevant factors to determine whether a proposed investment is likely to be of “net benefit” to Canada.
What are the Relevant “Net Benefit” Factors?
In evaluating whether an investment is likely to be of “net benefit to Canada”, a number of factors are considered including: (i) the effect of the investment on the level and nature of economic activity in Canada, (ii) the degree and significance of participation by Canadians in the Canadian business, (iii) the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada and (iv) the compatibility of the investment with national industrial, economic and cultural policies.
In practice, undertakings typically focus on Canadian employment, Canadian management, the location of the head office and capital expenditures in Canada for a three to five year period following completion.
Is it Common for Investments to be Refused?
No. It is rare for an investment to be refused under the “net benefit to Canada” test under the Investment Canada Act. For example, the recent Competition Policy Review Panel’s 2008 Report Compete to Win stated that of the 1500 non-cultural sector reviews undertaken by the Minister of Industry under the Investment Canada Act between 1985 and 2008, only one investment proposal had been refused (MacDonald Dettwiler’s proposed sale of its space division to Alliant Techsystems Inc. In 2008). Similarly, between 1999 and 2008, the Minister of Canadian Heritage reviewed and approved 98 cultural investments, while only disallowing three investment proposals.
What is Required to be Filed?
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. For more information about the required filings see: Investment Canada Forms.
What is the Timing for Review?
Once an application for review has been filed, the Minister has an initial 45 days to determine whether a proposed investment should be approved. Where a review is not completed within the initial 45 day period, the Minister may extend the review period for an additional 30 days. The review period may be further extended with an investor’s consent.
How is Approval Issued?
A proposed investment is deemed to be approved if the investor does not receive a notice of approval (or a notice of extension) by the completion of the applicable review period.
What if the Minister Determines an Investment is not of “Net Benefit” to Canada?
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.
What May Undertakings Involve?
Where binding 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.
PENALTIES
What are the Potential Penalties under the Investment Canada Act?
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 divestiture of assets, the revocation (or suspension) of voting rights and financial penalties of up to Cdn. $10,000 per day that an investor is in contravention of the Investment Canada Act.
Are Penalties Ever Actually Sought?
In the recent U.S. Steel case, involving U.S. Steel’s undertakings in relation to its acquisition of Stelco, penalties were sought under the Investment Canada Act for the first time, and the constitutionality of the penalty provisions was upheld. See: Federal Court of Canada Dismisses U.S. Steel’s Motion Challenging the Constitutionality of Section 40 of the Investment Canada Act.
NATIONAL SECURITY REVIEW
When Was the National Security Review Regime Introduced and Why?
Amendments to the Investment Canada Act in March, 2009 introduced the new “national security” review mechanism, under which the Minister and federal Cabinet may review proposed or completed investments that may be considered to be “injurious to national security” (on March 12, 2009, the Canadian Government passed the Budget Implementation Act, 2009, intended to improve and modernize the Investment Canada Act and Competition Act, largely based on recommendations of the Government appointed Competition Policy Review Panel).
What are the Relevant New Rules?
A new part has been added to the Investment Canada Act (Part IV.1 – Investments Injurious to National Security) and new Investment Canada Act regulations have been adopted (see: National Security Review of Investments Regulations).
What Were the Rationales for the New National Security Mechanism?
The national security review regime, which is distinct and administered separately from the general “net benefit” to Canada review process under the Investment Canada Act, arose as a result of recommendations made by the Competition Policy Review Panel in its report entitled Compete to Win.
Among the Panel’s recommendations in its Report was a recommendation that Canada’s national security review regime be aligned with that of the investment review process used by the Committee on Foreign Investment in the United States:
“The Panel believes that it is in Canada’s interests in a post-9/11 world to have in place an explicit national security test to support its trade and investment policies. As such, we support the Minister of Industry’s statement that the government intends to carefully consider the creation of a new review requirement for transactions that raise ‘national security’ concerns. We respectfully suggest that the scope of this review requirement should be aligned with that of the investment review process used by the Committee on Foreign Investment in the United States. This would bring Canada into line with other countries that have introduced a national security screening procedure, including the United Kingdom, China, Japan and Germany.” See: Competition Policy Review Panel Final Report Compete to Win.
For a discussion of the Canadian Government’s rationales for the introduction of the new national security review mechanism, see the Government’s Regulatory Impact Analysis Statement accompanying the Regulations Amending the Investment Canada Regulations.
What is a National Security Review?
Under Canada’s new national security review regime, the Government may conduct a national security review of an investment by a non-Canadian that may be “injurious to national security” regardless of whether the investment triggers the general thresholds for a “net benefit” to Canada review under the Act or whether control of a Canadian business is acquired.
What is the Threshold for Review?
The relevant threshold for commencing a national security review is low and undefined. In this regard, the Minister may commence a national security review where the Minister “has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security.”
A national security review of a proposed investment may be commenced where there is a completed or proposed investment by a non-Canadian to: (i) establish a new Canadian business, (ii) acquire control of an existing Canadian business (“control” as defined in the Investment Canada Act) or (iii) acquire “in whole or in part” an entity carrying on all or any part of its operations in Canada, where the entity has a place of operations in Canada, employees in Canada or Canadian assets used for the Canadian entity’s operations.
Are there Monetary Thresholds? Does Control Need to be Acquired?
No. A national security review can be commenced regardless of the value of the particular investment (i.e., whether or not the general monetary thresholds for a “net benefit” review are triggered) and whether or not “control” as defined in the Investment Canada Act is acquired (section 28 of the Act contains certain deeming provisions regarding the acquisition of control required to trigger the general application of the Investment Canada Act – see Investment Canada Act, section 28 and Investment Canada Act FAQs).
What is the Definition of “National Security”?
“National security” has deliberately been left undefined to provide the Government with significant political discretion and there are no monetary thresholds.
What is the Timing and General Process for a National Security Review?
In September, 2009, regulations under the Investment Canada Act were issued that set out the time periods for a national security review (see: National Security Review of Investments Regulations).
Notice to Investors
Where the Minister has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security, the Minister may send the non-Canadian a notice that an order for a national security review may be made.
Where notice is provided, the Minister is required to notify the investor of a potential review within 45 days of the Minister becoming aware of the investment, triggered as follows: (i) when an application for review is filed (where an application for review is required), (ii) when a notification is filed (where a notification is required) and (iii) for all other investments when the investment is implemented.
If the Minister issues such a notice, the investor is prohibited from completing the transaction unless they receive: (i) a notice that no order for review of the investment will be made, (ii) a notice that no further action will be taken in relation to the investment or (iii) a copy of an order authorizing the investment.
Cabinet Orders – National Security Review
Where the Minister has issued a notice to the investor that a review may be required, the federal Cabinet has an additional 25 days to order a national security review of the transaction.
If a national security review is ordered, the Minister is required “without delay after the order has been made” to notify the investor that an order for a review of the investment has been made. Once notified, an investor may make representations in relation to the investment. The Minister also has broad powers to require an investor to provide any information the Minister “considers necessary” for the review.
Consultation with Government Departments
Where a national security review is ordered by Cabinet, other government departments and officials may be consulted, including the Department of Public Safety and Emergency Preparedness, Canadian Security Intelligence Service, Department of National Defence, Department of Natural Resources and Department of Foreign Affairs and International Trade.
Ministerial Reports to Cabinet
If after consulting with the Minister of Public Safety and Emergency Preparedness the Minister either determines that a proposed investment would be injurious to national security (or is unable to make this determination), the Minister is required to report to Cabinet with recommendations within 45 days after the review was ordered (or as agreed with the investor).
Alternatively, where the Minister is satisfied that a proposed investment would not be injurious to national security, the Minister is required to notify the investor that no further action will be taken in relation to the investment.
Cabinet Orders – Investment Injurious to National Security
Where an investment is found to be “injurious to national security”, the federal Cabinet has the power within 15 days of the Minister reporting to it to “take any measures in respect of the investment” considered advisable to protect national security, including: (i) blocking an investment in whole or in part, (ii) imposing conditions on the investment or (iii) in the case of a completed transaction, requiring divestitures.
Where the Cabinet makes an order, the Minister is required to send a copy of the order to the investor “without delay.”
What is the Maximum Time a National Security Review May Take?
A national security review can take up to 130 days.
Are Appeals Possible?
The national security review rules under the Investment Canada Act provide that the decisions of the federal Cabinet and Minister are final and only subject to judicial review.
Have any Investments Been Blocked or Challenged Based on National Security?
It is thought that there have been several transactions that have been blocked or challenged on national security grounds, including:
GFI/Forsys. George Forrest International Afrique’s proposed acquisition of Forsys Metals Corp., evidently on the basis of concerns related to a Forsys uranium project in Namibia and origin of GFI’s funding for the acquisition, which may have included Iranian funding. For example, in a news release issued by Forsys Metals Corp. in August, 2009 (see: GFI Investment Update), Forsys stated: “Forsys Metals Corp. … refers to its proposed plan of arrangement with George Forrest International Afrique … GFI has provided Forsys with a copy today of an unsolicited letter GFI received last night from Industry Canada … The Notification states that GFI is prohibited from implementing the investment pending further notice from industry Canada.”
Ericsson/Nortel. Ericsson’s proposed acquisition of the wireless unit of Nortel, based on national security challenges by several parties, including RIM. Despite opposition by opponents to the transaction, however, including RIM and some provincial and federal politicians, in September, 2009 the Government announced that it would not challenge the transaction.
MacDonald Dettwiler/Alliant. In 2008 the Minister blocked Alliant Techsystems Inc.’s acquisition of MacDonald Dettwiler and Associates Ltd. It is thought that this transaction was blocked on national security grounds (as the transaction involved the sale of MacDonald Dettwiler’s space division). The MacDonald Dettwiler/Alliant case, however, was reviewed under the general “net benefit” to Canada test, and not under the new specific national security regime.
Where Can I Find Additional Information About the New National Security Review Regime?
For more information about Canada’s national security review regime see: National Security Review of Investments Regulations and Investment Canada Act (Part IV.1 – Investments Injurious to National Security).
STATE-OWNED ENTERPRISES GUIDELINES
When Were Canada’s New SOE Guidelines Introduced?
In December, 2007, the Minister of Industry issued new guidelines under the Investment Canada Act (the “SOE Guidelines”) that apply to the acquisition of Canadian businesses by foreign state-owned enterprises (“SOEs”) (See: Guidelines – Investment by state-owned enterprises – Net benefit assessment).
What is the Purpose of the SOE Guidelines?
The SOE Guidelines provide guidance in relation to Investment Canada’s process for the review of investments where the investors are SOEs.
In particular, the SOE Guidelines provide that the federal Minister of Industry is to review, as part of the review process under the Investment Canada Act, the corporate governance and reporting mechanisms of SOEs.
What is a “State Owned Enterprise”?
Investment Canada defines an SOE as “an enterprise that is owned or controlled directly or indirectly by a foreign government” and states that it is the Government’s policy to consider the governance and commercial orientation of SOEs as part of its “net benefit to Canada” analysis. As such, the governance structure and commercial nature of an SOE investor are the principal criteria for assessing whether an investment by an SOE investor is likely to be of “net benefit” to Canada.
What are the Relevant Review Factors under the SOE Guidelines?
In addition to the ordinary net benefit factors set out in the Investment Canada Act, the SOE Guidelines provide that the Minister will also consider factors relating to the corporate governance and reporting structure of the SOE investor.
With respect to corporate governance, relevant factors include whether a SOE adheres to Canadian standards of corporate governance (e.g., commitments to transparency and disclosure, independent audit committees and independent board members) and to Canadian laws and practices.
With respect to the commercial orientation of a SOE, the Minister will assess whether a Canadian business to be acquired by an SOE will continue to operate on a commercial basis regarding, among other things, where to process, where to export, participation of Canadians in Canadian and non-Canadian operations and capital expenditures to maintain the global competitiveness of the Canadian business.
Are the SOE Guidelines Meant to Block Investments in Canada by SOEs?
No. In essence, the SOE Guidelines provide that an SOE investor may receive more intensive scrutiny in relation to its corporate governance structure and commercial orientation that non-SEO investors.
Are there Recent Examples Where Investments by SOEs Have Been Successful?
Yes. There have been some recent investments that might have been thought to have generated concerns, including PetroChina’s investment in Alberta oil sands projects in 2009, which proceeded based on undertakings that included commitments for Canadian participation in management, Canadian employment and capital expenditures in Canada (all of which being consistent with undertakings typically sought in relation to investments generally under the Act).
What Kinds of Undertakings May be Required?
Investment Canada provides examples in its SOE Guidelines of undertakings that could be provided to ensure that investments in Canada by SOEs are of net benefit to Canada. These include: (i) the appointment of Canadians as independent directors, (ii) appointing Canadians to senior management positions, (iii) incorporating the business in Canada and (iv) listing the SOE acquirer’s shares (or those of the Canadian business being acquired) on Canadian securities exchanges.
In addition, the Guidelines encourage SOE investors to file draft undertakings with Investment Canada together with their submissions for proposed acquisitions.
CANADIAN COMPETITION LAW LINKS
For more information about Canadian competition law or our competition law services visit our: Abuse of Dominance, Advertising and Marketing Law, Bid Rigging, Canadian Competition Law, Canadian Competition Law Compliance, Canadian Competition Law Home, Competition Act Amendments, Competition Bureau Investigations, Competition Law Courses and Conferences, Competition Law Litigation, Competition Law Publications, Competition Law Resources, Competition Law Services, Conferences, Conspiracy and Competitor Collaborations, Conspiracy – FAQs, Global Competition / Antitrust Law Resources, Global Competition Law Updates, Investment Canada Act, Merger Control, Merger Control FAQs, Private Actions, Promotional Contests, Publications, Refusal to Deal, Team, Trade Associations or Trade Association Cases pages or visit our website at www.NortonStewart.com.
CONTACT US
We provide Canadian competition law and consulting services to Canadian and international clients. For more information about our services contact us at steve@nortonstewart.com, info@competitionlawcanada.com or call us on +1 604 687 0555 or +1 778 867 5558. Visit us on the web in Toronto at www.torontocompetitionlawyer.com or www.torontocompetitionlaw.com.
The Globe and Mail has reported that there is speculation that Chinese bidders may emerge in the play for Potash Corp., to rival BHP Billiton Ltd.’s USD $38.6 billion hostile bid. According to the Globe, potential Chinese bidders include Sinochem Group (chemical conglomerate and China’s largest fertilizer trader, with its fertilizer unit Sinofert), China National Offshore Oil Corp. (energy firm – CNOOC Ltd.) or China Investment Corp. (CIC, China’s sovereign wealth fund). Yesterday, Sinofert’s CEO Feng Zhibin told reporters in Hong Kong that the companies “continue to closely watch the deal” but did not comment on whether they were considering a rival bid.
According to Reuters Sinofert (Sinochem Group’s fertilizer unit) has said that it is worried about the impact of the BHP/Potash transaction, but would not say whether its parent Sinochem was planning to launch a rival offer. Potash is a shareholder and significant supplier to Sinofert.
Forbes.com has also speculated that another rival Chinese bidder could include Chinese private-equity fund Hopu Investment Management.
The Wall Street Journal’s China Real Time Report reports that Chinese government officials have fanned out across the country urging greater use of fertilizers to enhance this year’s output of rice. See: As Potash Drama Unfolds, China Flogs Fertilizers. According to the Wall Street Journal, the Chinese government’s efforts are not related to the BHP bid for Potash, but rather worry over the coming fall grain harvest. According to the Wall Street Journal, Chinese companies have five potash projects in Laos (one of which is in production), are pursuing two Canadian potash exploration projects and have two projects in the Congo. China is in fact the world’s largest consumer of potash.
Commentators are also saying that a Chinese bid could face increased scrutiny from Investment Canada, and in particular under Investment Canada’s Regulations for investments by foreign state-owned enterprises. For more on Canadian foreign investment regulations see: Canadian Investment Canada Act, Investment Canada Act FAQs, National Security Review and State-owned Enterprise Review under the Canadian Investment Canada Act.
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For more information about Canadian competition law or our competition law services visit our: Abuse of Dominance, Advertising and Marketing Law, Bid Rigging, Canadian Competition Law, Canadian Competition Law Compliance, Canadian Competition Law Home, Competition Act Amendments, Competition Bureau Investigations, Competition Law Courses and Conferences, Competition Law Litigation, Competition Law Publications, Competition Law Resources, Competition Law Services, Conferences, Conspiracy and Competitor Collaborations, Conspiracy – FAQs, Global Competition / Antitrust Law Resources, Global Competition Law Updates, Investment Canada Act, Merger Control, Merger Control FAQs, Private Actions, Promotional Contests, Publications, Refusal to Deal, Team, Trade Associations or Trade Association Cases pages.
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RECENT AMENDMENTS
What Has Changed?
Significant changes were recent made to Canada’s foreign investment regime. The recent changes coincide with sweeping amendments to the federal Competition Act, including significant changes to Canada’s merger control regime. Some of the key changes to Canada’s foreign investment regime, not all of which are yet in force, include:
Calculation of Monetary Threshold for Review. Changing the method of calculating the general monetary threshold to determine whether a foreign investment is reviewable for publicly traded Canadian businesses from “gross assets” (based on book value) of the Canadian business to be acquired to one based on the “enterprise value” of the Canadian business. In the case of privately held Canadian businesses, the test is to remain based on the book value of the assets of the Canadian business.
Increased Review Threshold. Increasing the threshold for review for direct acquisitions by WTO members of publicly traded Canadian businesses from the current Cdn. $299 million threshold (for 2010) based on book value of assets to Cdn. $600 million based on enterprise value, which is to progressively rise to Cdn. $1 billion over a four-year period. It is anticipated that when the new monetary thresholds are in force, this will reduce the number of applications for review filed.
Sector Specific Review Thresholds. Eliminating certain lower review thresholds in specific industry sectors, namely financial services, uranium production and transportation services.
National Security Review Regime. The introduction of a new national security review regime, under which the Minister and federal Cabinet may review investments that may be “injurious to national security”. Unlike a general “net benefit” to Canada review under the Investment Canada Act, there is deliberately no definition of what constitutes “national security” and any investment may be subject to a national security review, regardless of whether the general monetary thresholds for review under the Investment Canada Act are met or whether control is acquired.
Why Was the Investment Canada Act Amended?
The recent amendments to the Investment Canada Act adopt a number of the recommendations of a Government appointed Competition Policy Review Panel in its report entitled Compete to Win: Final Report. The Competition Policy Review Panel was established in 2007 with a mandate to review Canada’s competition and foreign investment policies and make recommendations to the federal Government to make Canada more globally competitive. Overall, the Panel indicated that its recommendations were based on the view that Canada would benefit from increased global openness that that attracting greater foreign investment would be in Canada’s interest.
Where Can I Find More Information About the Recent Changes?
For more information about the recent amendments to the Investment Canada Act and regulations, see: Regulations Amending the Investment Canada Regulations – Regulatory Impact Analysis Statement, Compete to Win: Final Report, Investment Canada Act FAQs, Industry Canada and Investment Canada News.
OVERVIEW OF THE INVESTMENT CANADA ACT
What is the Investment Canada Act?
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 is responsible for investments relating to Canadian cultural businesses (discussed below).
What is the Purpose of the Investment Canada Act?
The purpose of the Investment Canada Act is to “provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security.”
What Other Laws Apply to Mergers in Canada?
Mergers in Canada are also subject to mandatory pre-merger notification under the federal Competition Act where a transaction exceeds certain prescribed monetary thresholds (see: Canadian Merger Control and Canadian Merger Control FAQs). Transactions may also be subject to sectoral regulation (e.g., transactions in the telecommunications, broadcasting, banking and transportation sectors).
When Does the Investment Canada Act Apply?
The Investment Canada Act applies where: (i) a “non-Canadian”, (ii) acquires “control” of (iii) 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 in particular what constitutes a “non-Canadian”, “control” and a “Canadian business” in specific circumstances, however, can be highly complex.
What Does an Application For Review Involve?
Where a foreign investment in a Canadian business is subject to review under the Investment Canada Act (i.e., where the criteria above apply for the Act to apply and the relevant thresholds discussed below are met) an investor must show that the investment is likely to be of “net benefit to Canada”. In many cases this involves the investor providing commitments (i.e., binding undertakings) in relation to the proposed investment (discussed below).
What Does a Notification Involve?
Where the applicable monetary thresholds under the Investment Canada Act are not met (discussed below), and an application for review is not required, investors are only required to file simple notifications with basic information within thirty days of the completion of a transaction. These filings are short and largely administrative (i.e., used for statistical purposes).
What is a “Non-Canadian”?
“Non-Canadians” under the Investment Canada Act are defined as individuals, entities or governments (or agencies of governments) that are not “Canadian”. A person will be considered to be a “Canadian” under the Investment Canada Act if they are a Canadian citizen or 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 Canadian citizenship.
When is a Corporation Considered to be a “Non-Canadian”?
In the case of corporations, a corporation will be “Canadian” if the ultimate controlling shareholders of the corporation are “Canadian”. In the case of widely held corporations, a corporation will be “Canadian” if at least 2/3 of its board of directors are Canadians and the corporation is not controlled in fact through its shares (i.e., no de facto control).
What Will Constitute “Control” under the Investment Canada Act?
The second general test to determine whether the Investment Canada Act applies is whether there will be an acquisition of “control”. Control for the purposes of the Investment Canada Act can be achieved as a result of: (i) the acquisition of voting interests (in the case of non-corporate entities), (ii) all (or substantially all) of the Canadian assets of a business or (iii) the acquisition of voting shares (for corporations). The provisions regarding acquisition of “control” under the Investment Canada Act are complex.
The Investment Canada Act, however, sets out a number of presumptions regarding the acquisition of control as follows: (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 have been acquired, control is presumed, unless it can be demonstrated that the shares that will 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. In sum, control may be acquired under the Investment Canada Act with the acquisition of as little as 1/3 of the voting shares.
Acquiring the shares of a non-Canadian corporation that has a Canadian division, but no Canadian subsidiaries, will not constitute control under the Investment Canada Act.
Does the Canadian Business Need to be Canadian-controlled?
No. A Canadian business proposed to be acquired does not need to be Canadian-controlled in order for the Investment Canada Act to apply to the acquisition of control.
Can “Control” be Acquired in Other Ways?
Yes. The Canadian Minister of Heritage may determine that there has been an acquisition of control of a Canadian business, in relation to Canadian cultural businesses, even in circumstances where the general tests under the Investment Canada Act for determining control are not met.
What is a “Canadian Business”?
Under the Investment Canada Act, a “Canadian business” is defined as a business carried on in Canada that has: (i) a place of business in Canada, (ii) an individual (or individuals) employed or self-employed in connection with the business and (iii) assets in Canada used for carrying on the business. In other words, to constitute a Canadian business, there must be at least one Canadian employee, a place of business in Canada and some Canadian assets.
A “business” under the Investment Canada Act is defined as an enterprise or undertaking that is capable of generating revenue and is carried on in anticipation of profit. As such, in considering whether there is an investment in a “Canadian business”, it is important to determine whether the target is operational (e.g., mining properties that are not yet producing, and only at the exploration stage, are not “Canadian businesses”).
REVIEW AND NOTIFICATION
When is a Notification Required?
A notification will be required when the general criteria for the application of the Investment Canada Act are met (i.e., acquisition of control of a Canadian business by a non-Canadian), but the prescribed financial thresholds for review under the Act are not met.
When is an Application for Review Required?
Investments are reviewable under the Investment Canada Act when they exceed the prescribed financial thresholds (discussed below). Where the prescribed thresholds are not met, foreign investors are only required to file a simple notification (discussed above) with basic information within thirty days of completion of the transaction.
Whether a particular investment will be subject to Investment Canada review depends on several factors. These include: (i) whether the investment is direct or indirect, (ii) whether the Canadian business in which the investment is being made is a Canadian cultural business and (iii) whether the investor is a WTO or non-WTO investor. As such, determining whether an investment is reviewable under the Investment Canada Act requires an analysis of the structure of a transaction, nature of the acquirer and nature of the target.
Are Canadian Cultural Businesses Treated Differently?
Yes. Investments involving Canadian cultural businesses are subject to lower review thresholds as follows: (i) direct investments – Cdn. $5 million; and (ii) indirect investments – Cdn. $50 million.
In addition, for indirect acquisitions, where the value of the worldwide assets of the Canadian business is more than 50% of the value of all of the assets being acquired, then the lower review threshold of Cdn. $5 million applies.
What is a “Cultural Business”?
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 film or video recordings, (iii) produces, distributes, sells or exhibits audio or video music recordings or (iv) publishes, distributes or sells music in print or machine readable form.
Is there a de minimis Threshold for a “Cultural Business”?
No. A Canadian business can still be a “cultural business” if the cultural activities engaged in comprise only a small portion of the total business (i.e., there is no specific financial threshold). Moreover, the Canadian Minister of Heritage has the power to review the acquisition of Canadian cultural businesses even where the general relevant monetary thresholds are not met.
What is an Indirect Acquisition and What is the Relevance?
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.
What is the Significance of WTO Investors?
With respect to WTO investors, generally speaking an individual will be a WTO investor where they are a national of a member of the WTO or have a right of permanent residence in a country that is a member of the WTO. In the case of corporations, a corporation will be a WTO investor where ultimate control rests with one or more WTO investors. In the case of widely held corporations, a corporation will be a WTO investor where the majority of the corporation’s voting shares are owned by WTO investors or, where no person or group of persons controls the corporation, where a minimum of 2/3 of the corporation’s board are comprised of Canadians and WTO members.
FINANCIAL THRESHOLDS FOR REVIEW
What are the Financial Thresholds for Review for WTO Investors?
Where the investor is a WTO investor or, alternatively, the Canadian business being acquired is controlled by a WTO investor, the following thresholds apply:
Direct Acquisitions. Direct acquisitions will be subject to review when the value of the assets of the Canadian business exceeds the review thresholds for WTO investors (which is currently Cdn. $299 million and based on the gross book value of the Canadian business being acquired). However, as a result of the recent amendments not yet in force, the financial threshold for review in the case of direct acquisitions of Canadian publicly traded businesses will be if the “enterprise value” of the assets of the Canadian business is equal to or exceeds Cdn. $600 million, which threshold will apply for the first two years after the new thresholds come into force and will increase annually.
Indirect Acquisitions. Indirect acquisitions by WTO members are generally not reviewable either pre- or post-closing (except where the Canadian business being acquired is a cultural business and the relevant threshold of Cdn. $50 million is exceeded), but only triggers a notification requirement.
What are the Financial Thresholds for Non-WTO Investors?
Where the investment is by a non-WTO member lower review thresholds apply as follows: (i) direct acquisitions – in the case of direct acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $5 million; and (ii) indirect acquisitions – in the case of indirect acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $50 million.
In addition, in an indirect acquisition, where the worldwide assets of the Canadian business being acquired is more than 50% of the value of all of the assets being acquired, then the lower Cdn. $5 million threshold applies.
TEST FOR REVIEW & REVIEW
What is the Test on Review?
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. While the term “net benefit” is not defined, the Minister is required to consider a number of relevant factors to determine whether a proposed investment is likely to be of “net benefit” to Canada.
What are the Relevant “Net Benefit” Factors?
In evaluating whether an investment is likely to be of “net benefit to Canada”, a number of factors are considered including: (i) the effect of the investment on the level and nature of economic activity in Canada, (ii) the degree and significance of participation by Canadians in the Canadian business, (iii) the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada and (iv) the compatibility of the investment with national industrial, economic and cultural policies.
In practice, undertakings typically focus on Canadian employment, Canadian management, the location of the head office and capital expenditures in Canada for a three to five year period following completion.
Is it Common for Investments to be Refused?
No. It is rare for an investment to be refused under the “net benefit to Canada” test under the Investment Canada Act. For example, the recent Competition Policy Review Panel’s 2008 Report Compete to Win stated that of the 1500 non-cultural sector reviews undertaken by the Minister of Industry under the Investment Canada Act between 1985 and 2008, only one investment proposal had been refused (MacDonald Dettwiler’s proposed sale of its space division to Alliant Techsystems Inc. In 2008). Similarly, between 1999 and 2008, the Minister of Canadian Heritage reviewed and approved 98 cultural investments, while only disallowing three investment proposals.
What is Required to be Filed?
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. For more information about the required filings see: Investment Canada Forms.
What is the Timing for Review?
Once an application for review has been filed, the Minister has an initial 45 days to determine whether a proposed investment should be approved. Where a review is not completed within the initial 45 day period, the Minister may extend the review period for an additional 30 days. The review period may be further extended with an investor’s consent.
How is Approval Issued?
A proposed investment is deemed to be approved if the investor does not receive a notice of approval (or a notice of extension) by the completion of the applicable review period.
What if the Minister Determines an Investment is not of “Net Benefit” to Canada?
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.
What May Undertakings Involve?
Where binding 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.
PENALTIES
What are the Potential Penalties under the Investment Canada Act?
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 divestiture of assets, the revocation (or suspension) of voting rights and financial penalties of up to Cdn. $10,000 per day that an investor is in contravention of the Investment Canada Act.
Are Penalties Ever Actually Sought?
In the recent U.S. Steel case, involving U.S. Steel’s undertakings in relation to its acquisition of Stelco, penalties were sought under the Investment Canada Act for the first time, and the constitutionality of the penalty provisions was upheld. See: Federal Court of Canada Dismisses U.S. Steel’s Motion Challenging the Constitutionality of Section 40 of the Investment Canada Act.
NATIONAL SECURITY REVIEW
When Was the National Security Review Regime Introduced and Why?
Amendments to the Investment Canada Act in March, 2009 introduced the new “national security” review mechanism, under which the Minister and federal Cabinet may review proposed or completed investments that may be considered to be “injurious to national security” (on March 12, 2009, the Canadian Government passed the Budget Implementation Act, 2009, intended to improve and modernize the Investment Canada Act and Competition Act, largely based on recommendations of the Government appointed Competition Policy Review Panel).
What are the Relevant New Rules?
A new part has been added to the Investment Canada Act (Part IV.1 – Investments Injurious to National Security) and new Investment Canada Act regulations have been adopted (see: National Security Review of Investments Regulations).
What Were the Rationales for the New National Security Mechanism?
The national security review regime, which is distinct and administered separately from the general “net benefit” to Canada review process under the Investment Canada Act, arose as a result of recommendations made by the Competition Policy Review Panel in its report entitled Compete to Win.
Among the Panel’s recommendations in its Report was a recommendation that Canada’s national security review regime be aligned with that of the investment review process used by the Committee on Foreign Investment in the United States:
“The Panel believes that it is in Canada’s interests in a post-9/11 world to have in place an explicit national security test to support its trade and investment policies. As such, we support the Minister of Industry’s statement that the government intends to carefully consider the creation of a new review requirement for transactions that raise ‘national security’ concerns. We respectfully suggest that the scope of this review requirement should be aligned with that of the investment review process used by the Committee on Foreign Investment in the United States. This would bring Canada into line with other countries that have introduced a national security screening procedure, including the United Kingdom, China, Japan and Germany.” See: Competition Policy Review Panel Final Report Compete to Win.
For a discussion of the Canadian Government’s rationales for the introduction of the new national security review mechanism, see the Government’s Regulatory Impact Analysis Statement accompanying the Regulations Amending the Investment Canada Regulations.
What is a National Security Review?
Under Canada’s new national security review regime, the Government may conduct a national security review of an investment by a non-Canadian that may be “injurious to national security” regardless of whether the investment triggers the general thresholds for a “net benefit” to Canada review under the Act or whether control of a Canadian business is acquired.
What is the Threshold for Review?
The relevant threshold for commencing a national security review is low and undefined. In this regard, the Minister may commence a national security review where the Minister “has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security.”
A national security review of a proposed investment may be commenced where there is a completed or proposed investment by a non-Canadian to: (i) establish a new Canadian business, (ii) acquire control of an existing Canadian business (“control” as defined in the Investment Canada Act) or (iii) acquire “in whole or in part” an entity carrying on all or any part of its operations in Canada, where the entity has a place of operations in Canada, employees in Canada or Canadian assets used for the Canadian entity’s operations.
Are there Monetary Thresholds? Does Control Need to be Acquired?
No. A national security review can be commenced regardless of the value of the particular investment (i.e., whether or not the general monetary thresholds for a “net benefit” review are triggered) and whether or not “control” as defined in the Investment Canada Act is acquired (section 28 of the Act contains certain deeming provisions regarding the acquisition of control required to trigger the general application of the Investment Canada Act – see Investment Canada Act, section 28 and Investment Canada Act FAQs).
What is the Definition of “National Security”?
“National security” has deliberately been left undefined to provide the Government with significant political discretion and there are no monetary thresholds.
What is the Timing and General Process for a National Security Review?
In September, 2009, regulations under the Investment Canada Act were issued that set out the time periods for a national security review (see: National Security Review of Investments Regulations).
Notice to Investors
Where the Minister has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security, the Minister may send the non-Canadian a notice that an order for a national security review may be made.
Where notice is provided, the Minister is required to notify the investor of a potential review within 45 days of the Minister becoming aware of the investment, triggered as follows: (i) when an application for review is filed (where an application for review is required), (ii) when a notification is filed (where a notification is required) and (iii) for all other investments when the investment is implemented.
If the Minister issues such a notice, the investor is prohibited from completing the transaction unless they receive: (i) a notice that no order for review of the investment will be made, (ii) a notice that no further action will be taken in relation to the investment or (iii) a copy of an order authorizing the investment.
Cabinet Orders – National Security Review
Where the Minister has issued a notice to the investor that a review may be required, the federal Cabinet has an additional 25 days to order a national security review of the transaction.
If a national security review is ordered, the Minister is required “without delay after the order has been made” to notify the investor that an order for a review of the investment has been made. Once notified, an investor may make representations in relation to the investment. The Minister also has broad powers to require an investor to provide any information the Minister “considers necessary” for the review.
Consultation with Government Departments
Where a national security review is ordered by Cabinet, other government departments and officials may be consulted, including the Department of Public Safety and Emergency Preparedness, Canadian Security Intelligence Service, Department of National Defence, Department of Natural Resources and Department of Foreign Affairs and International Trade.
Ministerial Reports to Cabinet
If after consulting with the Minister of Public Safety and Emergency Preparedness the Minister either determines that a proposed investment would be injurious to national security (or is unable to make this determination), the Minister is required to report to Cabinet with recommendations within 45 days after the review was ordered (or as agreed with the investor).
Alternatively, where the Minister is satisfied that a proposed investment would not be injurious to national security, the Minister is required to notify the investor that no further action will be taken in relation to the investment.
Cabinet Orders – Investment Injurious to National Security
Where an investment is found to be “injurious to national security”, the federal Cabinet has the power within 15 days of the Minister reporting to it to “take any measures in respect of the investment” considered advisable to protect national security, including: (i) blocking an investment in whole or in part, (ii) imposing conditions on the investment or (iii) in the case of a completed transaction, requiring divestitures.
Where the Cabinet makes an order, the Minister is required to send a copy of the order to the investor “without delay.”
What is the Maximum Time a National Security Review May Take?
A national security review can take up to 130 days.
Are Appeals Possible?
The national security review rules under the Investment Canada Act provide that the decisions of the federal Cabinet and Minister are final and only subject to judicial review.
Have any Investments Been Blocked or Challenged Based on National Security?
It is thought that there have been several transactions that have been blocked or challenged on national security grounds, including:
GFI/Forsys. George Forrest International Afrique’s proposed acquisition of Forsys Metals Corp., evidently on the basis of concerns related to a Forsys uranium project in Namibia and origin of GFI’s funding for the acquisition, which may have included Iranian funding. For example, in a news release issued by Forsys Metals Corp. in August, 2009 (see: GFI Investment Update), Forsys stated: “Forsys Metals Corp. … refers to its proposed plan of arrangement with George Forrest International Afrique … GFI has provided Forsys with a copy today of an unsolicited letter GFI received last night from Industry Canada … The Notification states that GFI is prohibited from implementing the investment pending further notice from industry Canada.”
Ericsson/Nortel. Ericsson’s proposed acquisition of the wireless unit of Nortel, based on national security challenges by several parties, including RIM. Despite opposition by opponents to the transaction, however, including RIM and some provincial and federal politicians, in September, 2009 the Government announced that it would not challenge the transaction.
MacDonald Dettwiler/Alliant. In 2008 the Minister blocked Alliant Techsystems Inc.’s acquisition of MacDonald Dettwiler and Associates Ltd. It is thought that this transaction was blocked on national security grounds (as the transaction involved the sale of MacDonald Dettwiler’s space division). The MacDonald Dettwiler/Alliant case, however, was reviewed under the general “net benefit” to Canada test, and not under the new specific national security regime.
Where Can I Find Additional Information About the New National Security Review Regime?
For more information about Canada’s national security review regime see: National Security Review of Investments Regulations and Investment Canada Act (Part IV.1 – Investments Injurious to National Security).
STATE-OWNED ENTERPRISES GUIDELINES
When Were Canada’s New SOE Guidelines Introduced?
In December, 2007, the Minister of Industry issued new guidelines under the Investment Canada Act (the “SOE Guidelines”) that apply to the acquisition of Canadian businesses by foreign state-owned enterprises (“SOEs”) (See: Guidelines – Investment by state-owned enterprises – Net benefit assessment).
What is the Purpose of the SOE Guidelines?
The SOE Guidelines provide guidance in relation to Investment Canada’s process for the review of investments where the investors are SOEs.
In particular, the SOE Guidelines provide that the federal Minister of Industry is to review, as part of the review process under the Investment Canada Act, the corporate governance and reporting mechanisms of SOEs.
What is a “State Owned Enterprise”?
Investment Canada defines an SOE as “an enterprise that is owned or controlled directly or indirectly by a foreign government” and states that it is the Government’s policy to consider the governance and commercial orientation of SOEs as part of its “net benefit to Canada” analysis. As such, the governance structure and commercial nature of an SOE investor are the principal criteria for assessing whether an investment by an SOE investor is likely to be of “net benefit” to Canada.
What are the Relevant Review Factors under the SOE Guidelines?
In addition to the ordinary net benefit factors set out in the Investment Canada Act, the SOE Guidelines provide that the Minister will also consider factors relating to the corporate governance and reporting structure of the SOE investor.
With respect to corporate governance, relevant factors include whether a SOE adheres to Canadian standards of corporate governance (e.g., commitments to transparency and disclosure, independent audit committees and independent board members) and to Canadian laws and practices.
With respect to the commercial orientation of a SOE, the Minister will assess whether a Canadian business to be acquired by an SOE will continue to operate on a commercial basis regarding, among other things, where to process, where to export, participation of Canadians in Canadian and non-Canadian operations and capital expenditures to maintain the global competitiveness of the Canadian business.
Are the SOE Guidelines Meant to Block Investments in Canada by SOEs?
No. In essence, the SOE Guidelines provide that an SOE investor may receive more intensive scrutiny in relation to its corporate governance structure and commercial orientation that non-SEO investors.
Are there Recent Examples Where Investments by SOEs Have Been Successful?
Yes. There have been some recent investments that might have been thought to have generated concerns, including PetroChina’s investment in Alberta oil sands projects in 2009, which proceeded based on undertakings that included commitments for Canadian participation in management, Canadian employment and capital expenditures in Canada (all of which being consistent with undertakings typically sought in relation to investments generally under the Act).
What Kinds of Undertakings May be Required?
Investment Canada provides examples in its SOE Guidelines of undertakings that could be provided to ensure that investments in Canada by SOEs are of net benefit to Canada. These include: (i) the appointment of Canadians as independent directors, (ii) appointing Canadians to senior management positions, (iii) incorporating the business in Canada and (iv) listing the SOE acquirer’s shares (or those of the Canadian business being acquired) on Canadian securities exchanges.
In addition, the Guidelines encourage SOE investors to file draft undertakings with Investment Canada together with their submissions for proposed acquisitions.
INVESTMENT CANADA ACT LINKS & RESOURCES
Industry Canada
Legislation
Regulations Respecting Investment in Canada
National Security Review of Investments Regulations
Reports
Competition Policy Review Panel – Final Report: Compete to Win
Regulations Not in Force
Regulations Amending the Investment Canada Regulations
Investment Canada Guidelines
Guidelines – Investment by state-owned enterprises – Net benefit assessment
Investment Canada Interpretation Notes
Review Thresholds
Investment Canada Forms
Investment Canada Administrative Documents
Decisions
CANADIAN COMPETITION LAW LINKS
For more information about Canadian competition law or our competition law services visit our: Abuse of Dominance, Advertising and Marketing Law, Bid Rigging, Canadian Competition Law, Canadian Competition Law Compliance, Canadian Competition Law Home, Competition Act Amendments, Competition Bureau Investigations, Competition Law Courses and Conferences, Competition Law Litigation, Competition Law Publications, Competition Law Resources, Competition Law Services, Conferences, Conspiracy and Competitor Collaborations, Conspiracy – FAQs, Global Competition / Antitrust Law Resources, Global Competition Law Updates, Investment Canada Act, Merger Control, Merger Control FAQs, Private Actions, Promotional Contests, Publications, Refusal to Deal, Team, Trade Associations or Trade Association Cases pages or visit our website at www.NortonStewart.com.
CONTACT US
We provide Canadian competition law and consulting services to Canadian and international clients. For more information about our services contact us at steve@nortonstewart.com, info@competitionlawcanada.com or call us on +1 604 687 0555 or +1 778 867 5558. Visit us on the web in Toronto at www.torontocompetitionlawyer.com or www.torontocompetitionlaw.com.
NATIONAL SECURITY REVIEW
Overview
Amendments to the 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” (on March 12, 2009, the Canadian Government passed the Budget Implementation Act, 2009, intended to improve and modernize the Investment Canada Act and Competition Act).
In this regard, a new part has been added to the Investment Canada Act (Part IV.1 – Investments Injurious to National Security) and new Investment Canada Act regulations have been adopted (see: National Security Review of Investments Regulations).
Rationales for National Security Mechanism
The national security review regime, which is distinct and administered separately from the general “net benefit” to Canada review process under the Investment Canada Act, arose as a result of recommendations made by the Competition Policy Review Panel in its report entitled Compete to Win.
Among the Panel’s recommendations in its Report was a recommendation that Canada’s national security review regime to be “aligned with that of the investment review process used by the Committee on Foreign Investment in the United States”, which would “bring Canada into line with other countries that have introduced a national security screening procedure, including the United Kingdom, China, Japan and Germany.”
Core recommendations of the Panel focused on Canada becoming more open to investment, increasing transparency, streamlining Canadian foreign investment processes and protecting Canadian interests.
For a discussion of the Canadian Government’s rationales for the introduction of the new national security review mechanism, see the Government’s Regulatory Impact Analysis Statement accompanying the Regulations Amending the Investment Canada Regulations.
National Security Reviews
Under Canada’s new national security review regime, the Government may conduct a national security review of an investment regardless of whether it triggers the general thresholds for a review under the Act and regardless of whether control of a Canadian business is acquired.
Moreover, the term “national security” has intentionally been left undefined, which gives the Minister and federal Cabinet wide scope to determine which investments to review from a national security perspective (and the grounds on which to approve, block or impose conditions on investments).
“National Security” and Threshold for Review
The relevant threshold for commencing a national security review is low and undefined. In this regard, the Minister may commence a national security review where the Minister “has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security.”
“National security” has deliberately been left undefined to provide the Government with significant political discretion and there are no monetary thresholds.
A national security review of a proposed investment may be commenced where there is a completed or proposed investment by a non-Canadian to: (i) establish a new Canadian business, (ii) acquire control of an existing Canadian business (“control” as defined in the Investment Canada Act) or (iii) acquire “in whole or in part” an entity carrying on all or any part of its operations in Canada, where the entity has a place of operations in Canada, employees in Canada or Canadian assets used for the Canadian entity’s operations.
A national security review can be commenced regardless of the value of the particular investment (i.e., whether or not the general monetary thresholds for a “net benefit” review are triggered) and whether or not “control” as defined in the Investment Canada Act is acquired (section 28 of the Act contains certain deeming provisions regarding the acquisition of control required to trigger the general application of the Investment Canada Act – see Investment Canada Act, section 28 and Investment Canada Act FAQs).
Timing of Review and Cabinet Orders
In September, 2009, regulations under the Investment Canada Act were issued that set out the time periods for a national security review (see: National Security Review of Investments Regulations).
Notice to Investors
Where the Minister has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security, the Minister may send the non-Canadian a notice that an order for a national security review may be made.
Where notice is provided, the Minister is required to notify the investor of a potential review within 45 days of the Minister becoming aware of the investment, triggered as follows: (i) when an application for review is filed (where an application for review is required), (ii) when a notification is filed (where a notification is required) and (iii) for all other investments when the investment is implemented.
If the Minister issues such a notice, the investor is prohibited from completing the transaction unless they receive: (i) a notice that no order for review of the investment will be made, (ii) a notice that no further action will be taken in relation to the investment or (iii) a copy of an order authorizing the investment.
Cabinet Orders – National Security Review
Where the Minister has issued a notice to the investor that a review may be required, the federal Cabinet has an additional 25 days to order a national security review of the transaction.
If a national security review is ordered, the Minister is required “without delay after the order has been made” to notify the investor that an order for a review of the investment has been made. Once notified, an investor may make representations in relation to the investment. The Minister also has broad powers to require an investor to provide any information the Minister “considers necessary” for the review.
Consultation with Government Departments
Where a national security review is ordered by Cabinet, other government departments and officials may be consulted, including the Department of Public Safety and Emergency Preparedness, Canadian Security Intelligence Service, Department of National Defence, Department of Natural Resources and Department of Foreign Affairs and International Trade.
Ministerial Reports to Cabinet
If after consulting with the Minister of Public Safety and Emergency Preparedness the Minister either determines that a proposed investment would be injurious to national security (or is unable to make this determination), the Minister is required to report to Cabinet with recommendations within 45 days after the review was ordered (or as agreed with the investor).
Alternatively, where the Minister is satisfied that a proposed investment would not be injurious to national security, the Minister is required to notify the investor that no further action will be taken in relation to the investment.
Cabinet Orders – Investment Injurious to National Security
Where an investment is found to be “injurious to national security”, the federal Cabinet has the power within 15 days of the Minister reporting to it to “take any measures in respect of the investment” considered advisable to protect national security, including: (i) blocking an investment in whole or in part, (ii) imposing conditions on the investment or (iii) in the case of a completed transaction, requiring divestitures.
Where the Cabinet makes an order, the Minister is required to send a copy of the order to the investor “without delay.”
Total Timing for Review
A national security review can take up to 130 days.
Appeal
The national security review rules under the Investment Canada Act also provide that the decisions of the federal Cabinet and Minister are final and only subject to judicial review.
Cases
It is thought that there have been several transactions that have been challenged on national security grounds. These appear to include George Forrest International Afrique’s proposed acquisition of Forsys Metals Corp. (evidently on the basis of concerns related to a Forsys uranium project in Namibia and origin of GFI’s funding for the acquisition, which may have included Iranian funding) and Ericsson’s proposed acquisition of the wireless unit of Nortel (based on national security challenges by several parties, including RIM).
For example, in a news release issued by Forsys Metals Corp. in August, 2009 (see: GFI Investment Update), Forsys stated: “Forsys Metals Corp. … refers to its proposed plan of arrangement with George Forrest International Afrique … GFI has provided Forsys with a copy today of an unsolicited letter GFI received last night from Industry Canada … The Notification states that GFI is prohibited from implementing the investment pending further notice from industry Canada.”
With respect to the Ericsson/Nortel transaction, despite opposition by opponents to the transaction (including RIM and some provincial and federal politicians), in September, 2009 the Government announced that it would not challenge the transaction.
Additional Information
For more information about Canada’s national security review regime see: National Security Review of Investments Regulations and Investment Canada Act (Part IV.1 – Investments Injurious to National Security).
STATE-OWNED ENTERPRISES GUIDELINES
Overview
In December, 2007, the Minister of Industry issued new guidelines under the Investment Canada Act (the “SOE Guidelines”) that apply to the acquisition of Canadian businesses by foreign state-owned enterprises (“SOEs”) (See: Guidelines – Investment by state-owned enterprises – Net benefit assessment). The SOE Guidelines provide guidance in relation to Investment Canada’s process for the review of investments where the investors are SOEs.
In particular, the SOE Guidelines provide that the federal Minister of Industry is to review, as part of the review process under the Investment Canada Act, the corporate governance and reporting mechanisms of SOEs.
“State Owned Enterprise”
Investment Canada defines an SOE as “an enterprise that is owned or controlled directly or indirectly by a foreign government” and states that it is the Government’s policy to consider the governance and commercial orientation of SOEs as part of its “net benefit to Canada” analysis. As such, the governance structure and commercial nature of an SOE investor are the principal criteria for assessing whether an investment by an SOE investor is likely to be of “net benefit” to Canada.
Relevant Factors
In addition to the ordinary net benefit factors set out in the Investment Canada Act, the SOE Guidelines provide that the Minister will also consider factors relating to the corporate governance and reporting structure of the SOE investor.
With respect to corporate governance, relevant factors include whether a SOE adheres to Canadian standards of corporate governance (e.g., commitments to transparency and disclosure, independent audit committees and independent board members) and to Canadian laws and practices.
With respect to the commercial orientation of a SOE, the Minister will assess whether a Canadian business to be acquired by an SOE will continue to operate on a commercial basis regarding, among other things, where to process, where to export, participation of Canadians in Canadian and non-Canadian operations and capital expenditures to maintain the global competitiveness of the Canadian business.
In essence, the SOE Guidelines provide that an SOE investor may receive more intensive scrutiny in relation to its corporate governance structure and commercial orientation that non-SEO investors.
Having said that, there have been some recent investments that might have been thought to have generated concerns, including PetroChina’s investment in Alberta oil sands projects in 2009, which proceeded based on undertakings that included commitments for Canadian participation in management, Canadian employment and capital expenditures in Canada (all of which being consistent with undertakings typically sought in relation to investments generally under the Act).
Illustrative Undertakings
Investment Canada also provides examples in its SOE Guidelines of undertakings that could be provided to ensure that investments in Canada by SOEs are of net benefit to Canada. These include: (i) the appointment of Canadians as independent directors, (ii) appointing Canadians to senior management positions, (iii) incorporating the business in Canada and (iv) listing the SOE acquirer’s shares (or those of the Canadian business being acquired) on Canadian securities exchanges.
In addition, the Guidelines encourage SOE investors to file draft undertakings with Investment Canada together with their submissions for proposed acquisitions.
OUR INVESTMENT CANADA ACT SERVICES
We offer a full range of Investment Canada Act advice and services, including in relation to Investment Canada Act applications and notifications, advice regarding foreign investment regulations in Canada, application of the new national security review regime and restrictions on investments by state-owned enterprises. Our services include:
- Advice on the application of the Investment Canada Act.
- Investment Canada Act applications and notifications.
- Canada’s new national security review regime.
- Restrictions on investments by SOEs.
- Advice on Canada’s merger control regime.
- Merger control notifications and filings.
INVESTMENT CANADA ACT LINKS & RESOURCES
Industry Canada and Investment Canada
Legislation
Regulations Respecting Investment in Canada
National Security Review of Investments Regulations
Reports
Competition Policy Review Panel – Final Report: Compete to Win
Regulations Not in Force
Regulations Amending the Investment Canada Regulations
Investment Canada Guidelines
Guidelines – Investment by state-owned enterprises – Net benefit assessment
Investment Canada Interpretation Notes
Review Thresholds
Investment Canada Forms
Investment Canada Administrative Documents
Decisions
CANADIAN COMPETITION LAW LINKS
For more information about Canadian competition law or our competition law services visit our: Abuse of Dominance, Advertising and Marketing Law, Bid Rigging, Canadian Competition Law, Canadian Competition Law Compliance, Canadian Competition Law Home, Competition Act Amendments, Competition Bureau Investigations, Competition Law Courses and Conferences, Competition Law Litigation, Competition Law Publications, Competition Law Resources, Competition Law Services, Conferences, Conspiracy and Competitor Collaborations, Conspiracy – FAQs, Global Competition / Antitrust Law Resources, Global Competition Law Updates, Investment Canada Act, Merger Control, Merger Control FAQs, Private Actions, Promotional Contests, Publications, Refusal to Deal, Team, Trade Associations or Trade Association Cases pages or visit our website at www.NortonStewart.com.
CONTACT US
We provide Canadian competition law and consulting services to Canadian and international clients. For more information about our services contact us at steve@nortonstewart.com, info@competitionlawcanada.com or call us on +1 604 687 0555 or +1 778 867 5558. Visit us on the web in Toronto at www.torontocompetitionlawyer.com or www.torontocompetitionlaw.com.
Recent Investment Canada Act Amendments
Significant changes were recent made to Canada’s foreign investment regime. The recent changes coincide with sweeping amendments to the federal Competition Act, including significant changes to Canada’s merger control regime.
The recent amendments to the Investment Canada Act adopt a number of the recommendations of a Government appointed Competition Policy Review Panel in its report entitled Compete to Win: Final Report. The Competition Policy Review Panel was established in 2007 with a mandate to review Canada’s competition and foreign investment policies and to make recommendations to the federal government to make Canada more globally competitive. Overall, the Panel indicated that its recommendations were based on the view that Canada would benefit from increased global openness that that attracting greater foreign investment would be in Canada’s interest.
Some of the key changes to Canada’s foreign investment regime as a result of the Panel’s report, though not all of which are yet in force, include:
Calculation of Monetary Threshold. Changing the method of calculating the general monetary threshold to determine whether a foreign investment is reviewable from “gross assets” (based on book value) of the Canadian business to be acquired to one based on the “enterprise value” of the Canadian business (not yet in force).
Increased Review Threshold. Increasing the threshold for review for WTO members from the current Cdn. $299 million threshold (for 2010) to Cdn. $600 million based on enterprise value, which will progressively rise to Cdn. $1 billion over a four-year period (not yet in force).
Sector Specific Review Thresholds. Eliminating certain lower review thresholds in specific industry sectors, namely financial services, uranium production and transportation services (not yet in force).
National Security Review Regime. The introduction of a new national security review regime, under which the Minister and the federal Cabinet now have the power to review investments that may be “injurious to national security”. Unlike a general review under the Investment Canada Act, there is deliberately no definition of what constitutes “national security” and any investment may be subject to a national security review, regardless of whether the general thresholds for review under the Investment Canada Act are met or whether control of a Canadian business is acquired.
For more information about the recent amendments to the Investment Canada Act and regulations, see: Regulations Amending the Investment Canada Regulations – Regulatory Impact Analysis Statement.
OVERVIEW OF THE INVESTMENT CANADA ACT
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 is 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 certain prescribed monetary thresholds (see: Canadian Merger Control and Canadian Merger Control FAQs).
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 in particular what constitutes a “non-Canadian”, “control” and a “Canadian business” in specific circumstances, however, can be complex.
Where a foreign investment in a Canadian business is subject to review under the Investment Canada Act, an investor must show that the investment is likely to be of “net benefit to Canada” (discussed in more detail below). Alternatively, where the applicable monetary thresholds under the Investment Canada Act are not met, investors are only required to file simple notifications with basic information within thirty days of the completion of a transaction.
“Non-Canadian”
“Non-Canadians” under the Investment Canada Act are defined as individuals, entities or governments (or agencies of governments) that are not “Canadian”. A person will be considered to be a “Canadian” under the Investment Canada Act if they are a Canadian citizen or are 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 Canadian citizenship.
In the case of corporations, a corporation will be “Canadian” if the ultimate controlling shareholders of the corporation are “Canadian”. In the case of 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 (i.e., there is no de facto control).
Acquisition of “Control”
The second general test to determine whether the Investment Canada Act applies is whether there will be an acquisition of “control”. Control for the purposes of the Investment Canada Act can be achieved as a result of: (i) the acquisition of voting interests (in the case of non-corporate entities), (ii) all (or substantially all) of the Canadian assets of a business or (iii) the acquisition of voting shares (for corporations).
The provisions regarding acquisition of “control” under the Investment Canada Act are complex. The Investment Canada Act, however, sets out a number of presumptions regarding the acquisition of control as follows: (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 can be demonstrated that the shares that will be acquired will not confer control in fact (de facto control) 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. In sum, control may be acquired under the Investment Canada Act with the acquisition of as little as 1/3 of the voting shares of a Canadian business.
Acquiring the shares of a non-Canadian corporation that has a Canadian division, but no Canadian subsidiaries, will not constitute control under the Investment Canada Act.
The Canadian 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 in circumstances where the general tests under the Investment Canada Act for determining control are not met.
“Canadian Business”
Under the Investment Canada Act, a “Canadian business” is defined as a business carried on in Canada that has: (i) a place of business in Canada, (ii) an individual (or individuals) employed or self-employed in connection with the business and (iii) assets in Canada used for carrying on the business. In other words, to constitute a Canadian business, there must be at least one Canadian employee, a place of business in Canada and some Canadian assets.
A “business” under the Investment Canada Act is defined as an enterprise or undertaking that is capable of generating revenue and is carried on in anticipation of profit. As such, in considering whether there is an investment in a “Canadian business”, it is important to determine whether the target is operational (e.g., mining properties that are not yet producing, and only at the exploration stage, are not “Canadian businesses”).
REVIEW UNDER THE INVESTMENT CANADA ACT
Investments are reviewable under the Investment Canada Act when they exceed the prescribed financial thresholds (discussed below). Where the prescribed financial thresholds are not met, foreign investors are only required to file a simple notification with basic information within thirty days of the completion of the transaction.
Whether a particular investment will be subject to Investment Canada review depends on several factors. These include: (i) whether the investment is direct or indirect, (ii) whether the Canadian business in which the investment is being made is a Canadian cultural business and (iii) whether the investor is a WTO or non-WTO investor. As such, determining whether an investment is reviewable under the Investment Canada Act requires an analysis of the structure of a transaction and the nature of the acquirer and target.
Canadian Cultural Businesses
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 film or video recordings, (iii) produces, distributes, sells or exhibits audio or video music recordings or (iv) publishes, distributes or sells music in print or machine readable form.
It is worth noting also that a Canadian business can still be a “cultural business” if the cultural activities engaged in comprise only a small portion of the total business (i.e., there is no specific financial threshold). Moreover, the Canadian Minister of Heritage has the power to review the acquisition of Canadian cultural businesses even where the general relevant monetary thresholds are not met.
Indirect Investments
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.
Investments by WTO Investors
Finally, with respect to WTO investors, generally speaking an individual will be a WTO investor where they are a national of a member of the WTO or have a right of permanent residence in a country that is a member of the WTO. In the case of corporations, a corporation will be a WTO investor where ultimate control rests with one or more WTO investors. In the case of widely held corporations, a corporation will be a WTO investor where the majority of the corporation’s voting shares are owned by WTO investors or, where no person or group of persons controls the corporation, where a minimum of 2/3 of the corporation’s board are comprised of Canadians and WTO members.
FINANCIAL THRESHOLDS FOR REVIEW
Acquisitions of a Canadian business where the following financial thresholds are exceeded will be subject to review.
WTO Investors
Where the investor is a WTO investor (discussed above) or, alternatively, the Canadian business being acquired is controlled by a WTO investor, the following thresholds apply:
Direct Acquisitions. Direct acquisitions will be 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 Cdn. $299 million and based on the gross book value of the Canadian business being acquired and ●). However, as a result of the recent amendments that are not yet in force, the financial threshold for review in the case of direct acquisitions of Canadian businesses will be if the “enterprise value” of the assets of the Canadian business is equal to or exceeds Cdn. $600 million, which threshold will apply for the first two years after the new thresholds come into force. This threshold will increase annually.
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 Cdn. $50 million is exceeded), but only trigger a notification requirement.
Non-WTO Investors
Where the investment is by a non-WTO member lower review thresholds apply as follows:
Direct Acquisitions. In the case of direct acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $5 million.
Indirect Acquisitions. In the case of indirect acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $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 including employment, exports, productivity, technology development and compatibility with Canada’s national industrial, economic and cultural policies.
It is rare for an investment to be refused under the “net benefit to Canada” test under the Investment Canada Act. For example, the recent Competition Policy Review Panel stated in its 2008 Report Compete to Win that of the 1500 non-cultural sector reviews undertaken by the Minister of Industry under the Act since 1985, only one investment proposal had been refused. Similarly, between 1999 and 2008, the Minister of Canadian Heritage has reviewed and approved 98 cultural investments, while only disallowing three investment proposals.
Having said that, in one relatively recent case, involving MacDonald Dettwiler’s proposed sale of its space division in 2008, the transaction was blocked on national security grounds.
Review Application, Review Periods and Undertakings
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 refuse the investment. Where a review is not completed within the initial 45 days, the Minister may extend the review period for another 30 days (and the review period may be further extended with an investor’s consent).
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 binding 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, commitments to invest in research and development and the location of the head office of the Canadian business.
PENALTIES
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 divestiture of assets, the revocation (or suspension) of voting rights and financial penalties of up to Cdn. $10,000 per day that an investor is in contravention of the Investment Canada Act.
While the imposition of penalties under the Investment Canada Act is rare, the recent U.S. Steel case, involving U.S. Steel’s undertakings in relation to its acquisition of Stelco, illustrates that the Government is increasingly intent on ensuring that foreign investors comply with their commitments. See: Federal Court of Canada Dismisses U.S. Steel’s Motion Challenging the Constitutionality of Section 40 of the Investment Canada Act.
NATIONAL SECURITY REVIEW
Recent Investment Canada Act amendments have now also introduced a new national security test, under which the Minister and the federal Cabinet have the power to review investments that could be “injurious to national security.” The national security review regime, which is administered separately from the net benefit review process under the Act generally, also arose as a result of recommendations made by the Competition Policy Review Panel in its report entitled Compete to Win.
In particular, the Panel recommended in its report that Canada’s national security review regime should be “aligned with that of the investment review process used by the Committee on Foreign Investment in the United States”, which would “bring Canada into line with other countries that have introduced a national security screening procedure, including the United Kingdom, China, Japan and Germany.”
Under Canada’s new national security review regime, the Government may conduct a review regardless of whether an investment meets the general thresholds for a review under the Act and regardless of whether control of a Canadian business is acquired. Moreover, the term “national security” has intentionally been left undefined, which gives the Minister and federal Cabinet wide scope to determine which investments to review from a national security perspective (and the grounds on which to approve or block investments).
A national security review of a proposed investment could take place where there is an investment (or proposed investment) by a non-Canadian to: (i) establish a new Canadian business, (ii) acquire control of an existing Canadian business or (iii) to acquire (in whole or in part) an entity carrying on all or part of its operations in Canada (where the entity has a place of Canadian operations, employees in Canada and Canadian assets).
The relevant threshold for commencing a national security review is low and undefined. In this regard, the Minister may commence a national security review where there are reasonable grounds to believe that an investment by a non-Canadian “could be injurious to national security”.
When a notice is issued by the Minister that an investment may be reviewed on national security grounds, the investment cannot be completed unless prescribed conditions are met as follows: (i) receipt of a notice that no further action will be taken in relation to the investment or (ii) a copy of an order authorizing the investment.
Where a proposed or completed investment is found to be “injurious to national security”, the federal Cabinet has the power to: (i) block an investment (in whole or in part), (ii) impose conditions on an investment or (iii) in the case of a completed investment, order divestitures.
For more information about Canada’s new national security review regime see: National Security Review of Investments Regulations and Investment Canada Act (Part IV.1 – Investments Injurious to National Security).
GUIDELINES – INVESTMENT BY STATE-OWNED ENTERPRISES
Industry Canada has also recently issued guidelines for its “net benefit to Canada” assessment where an investor is a state-owned enterprise (“SOE”) (See: Guidelines – Investment by state-owned enterprises – Net benefit assessment).
Investment Canada defines an SOE as an enterprise that is owned or controlled directly or indirectly by a foreign government, and states that it is the Government’s policy to consider the governance and commercial orientation of SOEs as part of the “net benefit to Canada” analysis.
Relevant factors include whether the SOE investor adheres to Canadian standards of corporate governance (e.g., commitments to transparency and disclosure, independent audit committees and independent board members) and to Canadian laws and practices. Investment Canada also considers the extent to which a SOE investor is owned or controlled by a state and whether it will continue to have the ability to operate on a commercial basis.
Investment Canada also provides examples in its SOE Guidelines of undertakings that could be provided to ensure that Canadian investments by SOEs are of net benefit to Canada, including the appointment of Canadians as independent directors, appointing Canadians to senior management positions, incorporating the business in Canada and listing the acquirer’s shares on Canadian exchanges.
INVESTMENT CANADA ACT LINKS & RESOURCES
Industry Canada and Investment Canada
Legislation
Regulations Respecting Investment in Canada
National Security Review of Investments Regulations
Reports
Competition Policy Review Panel – Final Report: Compete to Win
Regulations Not in Force
Regulations Amending the Investment Canada Regulations
Investment Canada Guidelines
Guidelines – Investment by state-owned enterprises – Net benefit assessment
Investment Canada Interpretation Notes
Review Thresholds
Investment Canada Forms
Investment Canada Administrative Documents
Decisions
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We practice federal competition law, have provided competition law and compliance advice to clients across Canada and internationally and provide a full range of competition law and consulting services in relation to the criminal conspiracy, merger, abuse of dominance, misleading advertising and deceptive marketing provisions of the federal Competition Act, as well as the Investment Canada Act.
Our Canadian merger control and Investment Canada Act services includes advice on the application of the Competition Act to mergers, application of the Investment Canada Act to foreign investment in Canada, preparing merger notification and Investment Canada Act filings and submissions, drafting transaction documents, merger-related compliance advice and guidelines (pre-merger conduct memoranda and guidelines), negotiating merger remedies and assistance coordinating multi-jurisdictional transactions.
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Like most other major jurisdictions, under Canadian competition law merger control is one of the three main pillars of Canadian competition law (together with conspiracy/cartel and abuse of dominance/monopoly rules). As a result of amendments made to the Competition Act (the “Act”) in 2009, Canada now has a U.S.-style two-stage merger control regime. Together with a number of other recent amendments to the Act, the adoption of a new two-stage merger control system in Canada is one of the most significant changes to Canadian competition law in twenty-five years.
The pre-merger notification provisions of the Act require both parties to specified types of transactions that exceed the statutory monetary thresholds under the Act to file pre-merger notification filings with the Bureau. In addition, regardless of size, any transaction that falls within the statutory definition of “merger” under the Act, which is broad, is also potentially subject to substantive review by the Bureau to determine whether it is likely to result in a substantial prevention or lessening of competition in a relevant market (or markets). For mergers that exceed the statutory monetary thresholds, notification is mandatory and failure to pre-notify is a criminal offence.
Pre-merger Notification
For a transaction to be notifiable in Canada it must: (i) involve the acquisition of an “operating business” in Canada, (ii) be one of five specified types of transactions, (iii) exceed the statutory monetary thresholds and (iv) not fall within one of the statutory exceptions in the Act.
Canadian Operating Business
In order for a transaction to be notifiable in Canada, it must involve the acquisition of an “operating business” in Canada, which is defined under the Act as a business undertaking in Canada to which employees employed in connection with the undertaking ordinarily report for work. In this regard, the Bureau has taken the position that employees may include both independent contractors and part-time employees.
Types of Transactions
The five types of transactions that require pre-merger notification filing, assuming all of the other requirements for notification are met, are: (i) asset acquisitions, (ii) share acquisitions, (iii) amalgamations, (iv) non-corporate combinations and (v) acquisitions of interests in non-corporate combinations.
Thresholds
In order to be notifiable a transaction must also exceed the “size of parties” and “size of transaction” thresholds under the Act.
With respect to the size of parties threshold, the parties to a transaction and their affiliates’ Canadian assets (or gross revenues from sales in, from or into Canada) must exceed $400 million. With respect to the size of transaction threshold, the book value of the target’s assets in Canada, or annual gross revenues from sales in or from Canada generated by those assets, must exceed $70 million.
For share acquisitions, there is an additional threshold that must be met. For the acquisition of public companies, the acquisition must result in the acquirer holding more than 20% of the voting shares (more than 50% if more than 20% is already held). For the acquisition of private companies, the acquisition must result in the acquirer holding more than 35% of the voting shares (more than 50% if more than 35% is already held).
Exceptions
The Act also contains a number of exceptions from the pre-merger notification requirements. These include certain ordinary course acquisitions of real property and goods, an underwriting exception, transactions between affiliates and where an Advance Ruling Certificate (”ARC”), which is one form of pre-merger clearance available under the Act, is obtained.
Who Must Notify
Both parties to a transaction (i.e., both the acquirer and the target) are required to file a pre-merger notification filing. Parties may request that an ARC or alternatively a “no action” letter be issued. Parties will also often file a separate competitive effects brief together with the filing setting out the reasons why the proposed transaction is unlikely to prevent or lessen competition substantially in the relevant market(s).
Waiting Periods
Canada is a suspensory jurisdiction, in that parties to a notifiable transaction are prohibited from completing the transaction after filing unless the applicable waiting period has expired (or affirmative clearance has been received). As a result of the recent amendments, Canada now has a U.S. style two-stage merger review process.
Under the new regime, filing triggers an initial 30 calendar day waiting period during which the parties to a transaction are not permitted to complete unless clearance has been received (either by receipt of a no action letter or ARC). During this initial 30 day waiting period the Bureau may advise the parties to the transaction that it does not intend to challenge the transaction. Alternatively, where the Bureau takes the position that there are potential issues, it now has the power to issue supplementary information requests (a “SIR”) (the Canadian equivalent to U.S. second requests). If the Bureau issues a SIR, the waiting period stops until a complete response to the SIR has been filed upon which a second 30 day waiting period begins during which the parties are not permitted to close (again, unless affirmative clearance is received).
Under the new regime, there is no limit as to how long the second request process can take. This is because the burden is on the merging parties to complete the request and, where a second request is made, the “clock” will not start again until the order has been fully complied with (compared to the lesser standard of substantial completion in the U.S).
In addition, while merging parties are free to complete a transaction after 30 days of complying with a second request, the Bureau is not required to have completed its review by that time. As such, parties may either opt to wait for the Bureau to complete its review or close and assume the risk that the Bureau may challenge the transaction post-completion.
The recently amended Act also now gives a court or the Tribunal new powers relating to non-compliance with the statutory waiting periods. These include, in the case of proposed transactions, the power to issue an interim injunction or compel the filing of information and, in the case of completed transactions, the power to order that the merger be dissolved, an order for the divestiture of shares or assets or “administrative monetary penalties” (essentially civil fines) of up to $10,000 for each day of non-compliance.
Clearance
Parties may complete a notifiable transaction when: (i) an ARC is received (the strongest form of clearance under the Act and typically issued in non-complex transactions where there are few or no issues and no overlap), (ii) a “no action letter” is received stating that the Commissioner does not at that time intend to seek a remedial order or (iii) the applicable statutory waiting period has expired. It is worth noting, however, that the Bureau has the power to continue to review a transaction after the applicable waiting periods have expired if clearance has not been received.
Hostile Transactions
There are special rules under the Act for hostile transactions. Under these rules, the initial 30 day review period begins on receipt of a complete filing from the bidder and the Bureau will notify the target that a filing has been received from the bidder and give the target 10 days to file from the date the target is notified. In addition, the second 30 day waiting period, where a SIR has been issued, begins when the Bureau receives the requested information from the bidder (i.e., regardless of when the target complies), a process that is intended to prevent targets from stalling a transaction by delaying filing.
Filing
The Bureau’s Merger Notification Unit (“MNU”) is responsible for all pre-merger notifications in Canada. The MNU also gives guidance to parties regarding timing and information requirements for merger notification filings and enforces compliance with the pre-merger notification provisions of the Act. In February, 2010 the new Notifiable Transactions Regulations came into force and the Bureau issued its new single notification form.
Substantive Review of Mergers
Broadly speaking, substantive review of mergers in Canada involves an analysis as to whether a proposed transaction is likely to prevent or lessen competition substantially in one or more relevant markets post-merger (i.e., the primary competition law issue is to assess whether and to what extent a merged firm may be able to exercise market power post-merger). Whether a merger is likely to prevent or lessen competition substantially in a relevant market turns largely on whether the merged firm will be likely to exercise a materially greater degree of market power in a relevant market (or markets) post-merger.
The framework to analyze the potential anti-competitive effects of a transaction includes evaluative criteria set out in the Act, past Tribunal merger decisions and the Bureau’s Merger Enforcement Guidelines (“MEGs”) (though the latter are not law). In assessing potential competition issues associated with a merger, the Bureau considers both unilateral effects (i.e., whether the merged firm alone is likely to be able to exercise market power post-merger) as well as coordinated effects (i.e., whether a group of firms together are likely to be able to exercise market power post-merger).
This analysis of market power involves, among other things, the review of a number of factors including the estimated market shares of the parties, concentration in the relevant market (or markets), barriers to entry and other so-called “evaluative criteria” that include effective remaining competition, foreign competition and the countervailing power of customers, among other criteria.
With respect to market shares, the Bureau takes the position in its MEGs that it will generally not challenge a merger on the basis of a concern of a unilateral exercise of market power where the post-merger share is less than 35% and will not generally challenge a merger on the basis of a concern of coordinated effects if: (i) the combined post-merger share of the four largest firms in the relevant market (CR4) is less than 65% or (ii) the post-merger share of the merged entity is less than 10%.
Challenging Mergers
The Bureau has exclusive jurisdiction to challenge mergers in Canada and may challenge a merger either pre- or post-completion. Where the Bureau takes the position that a proposed merger is likely to prevent or lessen competition substantially, the Commissioner may seek remedial orders from the Tribunal including an order to block the merger (in the case of a proposed transaction) or an order for the dissolution of assets of shares (in the case of a completed merger). The Bureau has also sought injunctions in the past to allow more time for substantive review and may challenge a transaction for up to one year after closing, which time period has recently been shortened from the previous three years. However, while the Commissioner has the power to make applications to the Tribunal for remedial orders, contested merger proceedings are relatively uncommon in Canada and the majority of issues are typically resolved by way of negotiated settlement (i.e., consent agreements for the divestiture of assets or in some cases “behavioral remedies”).
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Our Canadian merger control and foreign investment services include:
- Advice on the application of the Competition Act to mergers.
- Application of the Investment Canada Act to foreign investment in Canada.
- Preparing pre-merger notification filings and submissions.
- Drafting transaction documents.
- Merger-related compliance guidelines (pre-merger conduct memoranda).
- Coordinating and advice in relation to multi-jurisdictional merger review.
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On June 14, 2010, the Honourable Madam Justice Hansen of the Federal Court of Canada (“FCA”) dismissed U.S. Steel Corporation’s and U.S. Steel Canada Inc.’s (“U.S. Steel”) motion challenging the constitutional validity of section 40 of the Investment Canada Act (“ICA”).
This case relates to recent proceedings commenced by the Canadian government against U.S. steel for allegedly failing to comply with undertakings given in connection with U.S. Steel’s acquisition of Stelco Inc’s Hamilton-based Canadian business in 2007. In connection with its investment, U.S. Steel provided 31 undertakings, including two undertakings in relation to employment and production levels. On October 29, 2007, the Minister approved the acquisition.
In May, 2009, following approval, the Minister sent a demand to U.S. Steel under section 39 of the ICA taking the position that U.S. Steel had contravened its employment and production undertakings and requested that U.S. Steel cease the contraventions, remedy the default and show cause why there were no contraventions (or, alternatively, to justify the failure to comply).
Unsatisfied with U.S. Steel’s response, in July, 2009, the Attorney General of Canada filed an application under section 40 of the ICA seeking an order directing U.S. Steel to comply with the two undertakings and a penalty of Cdn. $10,000 per day, per breach of the undertakings from November, 2008 until compliance with the undertakings.
A section 40 proceeding under the ICA arises after a ministerial demand made pursuant to section 39 of the ICA, and is commenced by a superior court application. If the court is satisfied at the conclusion of a hearing that the Minister was justified in sending the demand (and the non-Canadian investor has failed to comply with the demand), the court may make any order (or orders) that it considers are required by the circumstances including orders provided for under section 40(2). In relation to the U.S. Steel motion, the court may order that a monetary penalty of up to Cdn. $10,000 per day for each day U.S. Steel is in contravention. The court may also direct the disposition by U.S. Steel of any voting interests or assets acquired that are or were used in carrying on the Canadian business.
Following the Attorney General’s application, U.S. Steel filed a motion challenging section 40 on two grounds: (i) that section 40 contravened section 11(d) of the Canadian Charter of Rights and Freedoms (the right to be presumed innocent until proven guilty according to law in a fair and public hearing) and (ii) that section 40 contravened section 2(e) of the Canadian Bill of Rights (the right to a fair hearing in accordance with the principles of fundamental justice).
To succeed under section 11(d) of the Charter, U.S. Steel needed to establish that it was “a person charged with an offence” and, to do so, that it met either of the two branches of the test set out in R. v. Wigglesworth (a matter by its very nature is a criminal proceeding or it involves the imposition of true penal consequences). The Federal Court found that U.S. Steel failed to meet either branch of the test – i.e., a section 40 proceeding under the ICA is not “by nature” a penal proceeding and the monetary penalty was not a true penal consequence. U.S. Steel similarly failed to satisfy the court that it would be deprived of its right to a fair hearing under section 2(e) of the Bill of Rights and, in particular, its right to know the case to meet.
On this basis, the court concluded that section 40 of the ICA did not violate section 11(d) of the Charter or section 2(e) of the Bill of Rights and dismissed U.S. Steel’s motion.
This recent Federal Court decision potentially clears the way for a consideration of the Canadian government’s allegations against U.S. Steel that it failed to comply with its undertakings in connection of its acquisition of Stelco’s Hamilton-based business.
For the complete decision see: The Attorney General of Canada v. United States Steel Corporation and U.S. Steel Canada Inc. For more information about the Investment Canada Act see: Investment Canada.
OUR CANADIAN MERGER CONTROL & INVESTMENT CANADA ACT SERVICES
We practice federal competition law, have provided competition law and compliance advice to clients across Canada and internationally and provide a full range of competition law services in relation to the criminal conspiracy, merger, abuse of dominance, misleading advertising and deceptive marketing provisions of the federal Competition Act, as well as Investment Canada Act advice. Our Canadian merger control and Investment Canada Act services include:
- Advice on the application of the Competition Act to mergers.
- Application of the Investment Canada Act to foreign investment in Canada.
- Preparing pre-merger notification filings and submissions.
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- Merger-related compliance guidelines (pre-merger conduct memoranda).
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I. Overview
Earlier this year, significant amendments were made to the federal Investment Canada Act (the “ICA”). These significant amendments coincide with sweeping amendments to the federal Competition Act. As a result, Canada’s foreign investment and competition law regimes are now both significantly different.
The recent amendments to the ICA adopt a number of the recommendations of the Competition Policy Review Panel that was established in 2007 to review and make recommendations in relation to Canada’s foreign investment regime.
Some of the key changes to the ICA (discussed in more detail below) include:
1. Changing the general threshold to determine whether a foreign investment is reviewable from the book value of the gross assets of the Canadian business to be acquired to one based on the “enterprise value” of the Canadian business;
2. Raising the threshold to review an investment in a Canadian business from the previous CDN $312 million (that was based on the gross assets of the Canadian business to be acquired) to CDN $600 million which will now be based on the “enterprise value” of the assets of the Canadian business being acquired (to be raised to CDN $1 billion over a four year period);
3. Eliminating certain lower review thresholds in specific sectors (i.e., financial services, uranium production and transportation services); and
4. Introducing a requirement for the Minister to disclose administrative information on the investment review process.
The recent amendments also introduce a new national security test, under which the Minister and the federal Cabinet will have the power to review investments that are “injurious to national security” (which came into force on February 6, 2009).
II. The Investment Canada Act
The ICA is federal legislation that governs foreign investments in Canada. The ICA is primarily administered by the federal Minister of Industry and the Investment Review Branch of Industry Canada.
Where a foreign investment in a Canadian business is subject to review, a foreign investor must show that the investment is likely to be of “net benefit to Canada” (discussed in more detail below).
In general, the ICA applies in cases where a “non-Canadian” acquires “control” of a “Canadian business” (or alternatively establishes a new Canadian business) (all as defined in the ICA).
The application of the ICA, and in particular what constitutes a “non-Canadian”, the acquisition of “control” and a “Canadian business” in specific circumstances can be complex.
(a) “Non-Canadian”
“Non-Canadians” under the ICA are defined as individuals, entities or governments (or agencies of governments) that are not “Canadian”. A person will be considered to be a “Canadian” under the ICA if they are a Canadian citizen (or are a permanent resident of Canada that has ordinarily been resident in Canada for up to one year after they are eligible to apply for citizenship).
For corporations, a corporation will be “Canadian” if the ultimate 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 – i.e., no de facto ownership).
(b) Acquisition of “Control”
The second general test to determine whether the ICA applies is whether there will be an acquisition of “control”. Control for the purposes of the ICA can be achieved as a result of (a) the acquisition of voting interests in a non-corporate entity, (b) all (or substantially all) of the Canadian assets of a business or (c) the acquisition of voting shares in the case of corporations.
The provisions regarding the acquisition of “control” under the ICA are complex. The ICA, however, sets out a number of presumptions regarding control as follows: (a), where a majority of voting shares is acquired, control is deemed to have been acquired, (b) 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 can be demonstrated that the shares that will be acquired will not confer control in fact to the investor) and (c) where less than 1/3 of the voting shares of the Canadian business will be acquired, control is deemed not to have been acquired.
It is also worth noting that acquiring the shares of a non-Canadian corporation that has a Canadian division (but which does not have any Canadian subsidiaries) will not be an acquisition of control for the purposes of the ICA. Moreover, the Canadian 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 determining control under the ICA are not met.
(c) “Canadian Business”
Under the ICA, a “Canadian business” is defined to mean (a) a business that is carried out in Canada with an individual (or individuals) that are employed in the business, (b) with a Canadian place of business and (c) with assets in Canada that used for the operation of the business. In other words, in order to constitute a Canadian business, there must be Canadian employees, a place of business and Canadian assets.
A “business” under the ICA is defined as enterprises or undertakings that are capable of generating revenue and are operated in anticipation of profit. As such, in considering whether there is an investment in a “Canadian business”, it is important to determine whether the target is operational (e.g., mining properties that are not yet producing, and which are only at the exploration stage, are not “Canadian businesses” for the purposes of the ICA).
III. ICA Review Thresholds
Under the ICA, investments are reviewable when they exceed the prescribed financial thresholds. Where the ICA thresholds are not met, foreign investors are only required to file simple notifications with basic information within thirty days of the completion of the transaction.
In addition, whether a particular investment is reviewable turns of a number of factors. These include (a) whether the investment is direct or indirect, (b) whether the Canadian business in which the investment is being made is a Canadian cultural business and (c) whether the investor is a WTO investor. As such, whether a particular investment is reviewable under the ICA will involve an analysis of the structure of the transaction and as well as the nature of the target and the acquirer.
In order to obtain approval, foreign investors may be required to give undertakings to the Minister (discussed in more detail below).
(a) Indirect Investments
An indirect acquisition under the ICA is where an 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 and indirect and, as well, indirect acquisitions by WTO investors are generally not reviewable.
(b) Canadian Cultural Businesses
For investments in Canadian cultural businesses there are lower review thresholds. A “cultural business” under the ICA includes a business that (a) publishes, distributes or sells music in print or machine readable form, (b) publishes, distributes or sells books, magazines, periodicals or newspapers (in print or machine readable form), (c) produces, distributes, sells or exhibits film or video products, (d) produces, distributes, sells or exhibits audio or video music recordings or (e) is engaged in radio communication where the transmissions are intended for direct reception by the public, radio, television and cable broadcasting, and satellite programming and broadcast network services.
It is worth noting as well that a Canadian business can still be a “cultural business” if the cultural activities in which it is engaged comprise only a small portion of its total business (i.e., there is no particular threshold). Moreover, the Canadian Minister of Heritage has the power to review the acquisition of Canadian cultural businesses even where the relevant financial thresholds (discussed below) are not met.
(c) Investments by WTO Investors
Finally, with respect to WTO investors, generally speaking an individual will be a WTO investor where they are a national of a member of the WTO (for a list of WTO members see WTO Members) or have a right of permanent residence in a country that is a member of the WTO.
For corporations, a corporation will be a WTO investor if it is ultimately controlled by one or more WTO investors. For widely held corporations, a corporation will be a WTO investor where (a) a majority of the voting shares are held by WTO members or (b) if no person (or voting group) controls the corporation, a minimum of 2/3 of the corporation’s board of directors are comprised of Canadians and WTO members.
(d) Financial Thresholds
Acquisitions of a Canadian business where the following financial thresholds are exceeded will be subject to review.
(i) WTO Investors
Where the investor is a WTO investor (discussed above) or, alternatively, the Canadian business being acquired is controlled by a WTO investor, then the following thresholds apply.
Direct acquisitions. Direct acquisitions will be subject to review when the value of the assets of the Canadian business is equal to or exceeds the review thresholds for WTO investors. As a result of recent amendments, the financial threshold for review in the case of direct acquisitions of Canadian businesses will be if the “enterprise value” of the assets of the Canadian business is equal to or exceeds CDN $600 million (which is the threshold that will apply or the first two years after the new thresholds come into force).
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 CDN $50 million is exceeded), but only triggers a notification requirement.
(ii) Non-WTO Investors
Where the investment is by a non-WTO member, then lower review thresholds apply as follows.
Direct acquisitions. In the case of direct acquisitions by non-WTO investors, an investment will be subject to review under the ICA if the value of the assets of the Canadian business is over CDN $5 million.
Indirect acquisitions. In the case of indirect acquisitions by non-WTO investors, an investment will be subject to review under the ICA if the value of the assets of the Canadian business is over CDN $50 million.
IV. Review
(a) “Net Benefit” Test
Under the ICA, where an acquisition is subject to review, the foreign investor must show that the acquisition is likely to be of “net benefit” to Canada (i.e., 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 criteria are considered which may include: (a) Canadian participation in the Canadian business being acquired, (b) the effect of an investment on economic activity in Canada, (c) the effect on competition in Canada and (d) whether the investment is likely to be compatible with Canada’s national industrial, economic and cultural policies.
(b) Review Application
Where an investment is reviewable, an application form must be filed setting out the information about both the investor and the Canadian business.
(c) Review Periods
Once an application is received, the Minister has an initial forty-five days to approve or refuse the investment. Where a review is not completed within the initial forty-five days, the Minister has the power to extend the review period for another thirty days. As such, where the review period is extended, the total review period will be seventy-five days (further extensions are possible, but require an investor’s consent).
If the Minister determines that an investment would not be of “net benefit” to Canada, an investor may make representations and may also file undertakings (within thirty days of the Minister’s notice). Where undertakings are required in order to obtain approval for an investment, they may involve terms in relation to matters that include, among other things: (a) maintaining certain Canadian employment levels, (b) ensuring the participation of Canadians in the management of the business, (c) investing in research and development and (d) the location of the head office of the Canadian business.
V. Penalties
Where an investor fails to comply with the ICA (e.g., failure to file an application for review or notification, failure to comply with undertakings or completes an investment without the requisite approval), the potential penalties include (a) the revocation (or suspension) of voting rights, (b) divestiture and (c) financial penalties of up to CDN $10,000 per day that an investor is in contravention of the ICA.
VI. National Security Review (New)
The recent ICA amendments also introduce a new national security test, under which the Minister and the federal Cabinet will have the power to review investments that “could be injurious to national security”. The new national security review regime came into force on February 6, 2009.
The new national security review regime will be administered separately from the net benefit review process and, according to the government, is meant to “ensure the focus is on national security … consistent with [Canada’s] international trade obligations.”
The federal Cabinet now has the power, where a proposed or completed investment is found to be injurious to national security, to block an investment, impose conditions on an investment or, in the case of a completed investment, to order divestiture. There are, however, no monetary thresholds that must be met in order to trigger a national security review and the term “national security” is not defined. This will potentially give the government very wide latitude to determine which investments to review from a national security perspective.
A national security review of a proposed investment could take place where an entity carrying on all (or a portion) of its operations in Canada is being acquired in “whole or part” and (a) the Canadian entity has a place of operations in Canada, (b) Canadian assets used to carry out its operations and (c) an individual (or individuals) located in Canada that are employed or are self-employed in relation to the entity’s operations.
The process to order a national security review would involve a consultation process between the Minister and the Minister of Public Safety and Emergency Preparedness, that can result in an order made by the federal Cabinet. In addition, investments under the ICA can be reviewed on national security grounds regardless of whether control of a Canadian business has been acquired.
When a notice is issued by the Minister that an investment may be reviewed on national security grounds, the investment cannot be completed unless (a) notice is received that a national security review will not be conducted or (b) after a national security review is conducted, the government concludes that the proposed investment will not be “injurious to national security”.
Where the Minister determines that an investment would be “injurious to national security”, the federal Cabinet has the power to take a number of steps to protect national security. These include (a) prohibiting the investment, (b) ordering a divestiture (where an investment has already been completed) or (c) imposing conditions on the proposed investment.
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