OVERVIEW
What is the Investment Canada Act?
The Investment Canada Act is federal legislation that governs foreign investment in Canada.
Who administers the Investment Canada Act?
The Investment Canada Act 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.
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 and may also be subject to sector-specific regulation (e.g., transactions in the broadcasting, telecommunications, 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 complex.
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.
A corporation is “Canadian” if the ultimate controlling shareholders of the corporation are “Canadian”. In the case of widely held corporations, a corporation is “Canadian” if at least 2/3 of its board of directors are Canadians and the corporation is not controlled in fact through its shares.
How is “control” defined?
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).
While the provisions regarding the acquisition of “control” under the Investment Canada Act are complex, the Act contains 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.
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. It is not necessary for a Canadian business to be Canadian-controlled 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 a Canadian cultural business, even in circumstances where the general tests under the Investment Canada Act for determining control are not met.
What is a “Canadian business”?
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.
A “business” under the Investment Canada Act is defined as an enterprise or undertaking capable of generating revenue and 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 – for example, non-producing mining properties that are 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 are not met. Notifications are simple filings with basic information filed within 30 days of the completion of a transaction.
When is an application for review required?
Investments are reviewable under the Investment Canada Act when they exceed the prescribed financial thresholds. Where an investment is reviewable, an investor must show that the investment is likely to be of “net benefit to Canada”, which typically involves the investor providing commitments (i.e., binding undertakings) relating to employment levels, head office, investment, among other things.
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 – C $5 million; and (ii) indirect investments – C $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 C $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.
Are there any de minimis thresholds for “cultural business”?
No. A Canadian business can still be a “cultural business” if the business’ cultural activities comprise only a small portion of the total business (i.e., there is no specific financial threshold). The Minister of Heritage also has the power to review acquisitions of Canadian cultural businesses even where the general relevant monetary thresholds are not met.
What is an “indirect acquisition”? How are indirect acquisitions treated?
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. A corporation is an WTO investor if 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, a minimum of 2/3 of the corporation’s board are comprised of Canadians and WTO members.
REVIEW THRESHOLDS
What are the financial thresholds for review for WTO investors?
Where the investor is a WTO investor or 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 (currently C $330 million based on the gross book value of the Canadian business being acquired).
As a result of amendments not yet in force, the financial threshold for review for 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 C $600 million (increased annually after the first two years).
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 C $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 – if the value of the assets of the Canadian business exceeds C $5 million; and (ii) indirect acquisitions – if the value of the assets of the Canadian business exceeds C $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 C $5 million threshold applies.
REVIEWS
What is the test on review?
Where an acquisition is subject to review, the foreign investor must show that the acquisition is likely to be of “net benefit to Canada” (the relevant test against which the Minister evaluates reviewable investments). 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, (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, management, 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 Competition Policy Review Panel’s 2008 Report Compete to Win states that of the 1500 non-cultural sector reviews between 1985 and 2008, only one investment proposal was refused (MacDonald Dettwiler’s proposed sale of its space division to Alliant Techsystems Inc. in 2008). Between 1999 and 2008, the Minister of Canadian Heritage reviewed and approved 98 cultural investments and disallowed three investment proposals.
What is required to be filed?
Where an investment is reviewable, an application must be filed setting out the information about the investor and the Canadian business, including the investor’s plans for the Canadian business and why the investment will be of net benefit to Canada.
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 30 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, commitments to invest in research and development and location of the head office.
PENALTIES
What are the potential penalties under the Investment Canada Act?
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 C $10,000 per day that an investor is in contravention 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 a 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”.
What are the relevant 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.
What were the rationales for the 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 final Report entitled Compete to Win.
Among the Panel’s recommendations was that Canada’s national security review regime be aligned with 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.”
What is a national security review?
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 Investment Canada 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. 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 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).
What is the definition of “national security”?
“National security” has deliberately been left undefined to provide the Government with significant political discretion. 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 (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 required), (ii) when a notification is filed (where 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, 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 on national security grounds?
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, 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 (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 not under the new specific national security regime.
STATE-OWNED ENTERPRISES GUIDELINES
When were Canada’s 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”).
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.
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 general 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. An SOE investor may receive more intensive scrutiny in relation to its corporate governance structure and commercial orientation that non-SEO investors.
Are there examples of successful investments by SOEs?
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 types 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 exchanges.
The SOE Guidelines also 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
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