CANADIAN COMPETITION LAW

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.

For more information about Canadian competition law visit: Merger Notification, Criminal Conspiracy, Abuse of Dominance, Misleading Advertising, Reviewable Matters, Competition Compliance Policies, Trade Associations and Competition Law, Promotional Contests, Competition Law Links, Competition Law Texts and Investment Canada Act.

For more information about Canadian intellectual property law visit: Canadian Intellectual Property Law, Canadian Trademark Law, Trademark Infringement, Trade-marks – FAQs, Canadian Copyright Law, Copyright Infringement, Canadian Internet Law, Internet Law Texts, Canadian Licensing Law, Canadian Domain Name Law, E-commerce, ISP Law, Intellectual Property Law Links and Intellectual Property Law Texts. 

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