OVERVIEW
Amendments to the Investment Canada Act (“ICA”) 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 “injurious to national security”. If national security threats related to new investments in Canada are identified – for example, by Canada’s security and intelligence agencies – they may be reported to the Industry Minister who may refer the investment to Cabinet for review.
These changes to ICA are the result of the passing of the Federal Budget Implementation Act, 2009 (Bill C-10) on March 12, 2009, which introduced sweeping amendments to the ICA and the Competition Act.
As a result of these amendments, a new part was added to ICA (Part IV.1 – Investments Injurious to National Security). New ICA Regulations were also registered on September 17, 2009 (National Security Review of Investments Regulations), which prescribe the time periods within which the Minister of Industry or Cabinet must take actions to trigger a national security review, conduct a review and order measures to protect national security. The Regulations also list investigative bodies with which confidential information may be shared and that may use the information for investigations.
Canada’s national security review regime, which is distinct and administered separately from the general “net benefit” to Canada review process under ICA arose as a result of recommendations made by the Competition Policy Review Panel in its 2008 final Report Compete to Win. The Panel was established in 2007 to review Canada’s competition and foreign investment laws and to make proposals to increase Canada’s competitiveness.
The Panel’s core recommendations focused on Canada becoming more open to investment, increasing transparency, streamlining processes and protecting Canadian interests. The Panel specifically recommended that Canada adopt an explicit national security test to “support its trade and investment policies” and that the test be aligned with the United Stated (with the Foreign Investment and National Security Act of 2007), the U.K., China, Japan and Germany (other jurisdictions with national security screening procedures).
The Sponsor of Bill C-10 (Conservative Gordon O’Connor) said that the new regime would “make sure that new investments do not jeopardize Canada’s national security” and Canada’s Industry Minister at the time (Tony Clement) said that the changes would “ensure that [new investments] would not pose a threat to national security”. The Chair of the Policy Committee of the Canadian Chamber commented on the political nature of Canada’s new national security regime and lack of certainty:
“[Bill C-10] … had good news and bad news. The good news is they have increased the threshold, which now is the scope so you only focus on big deals. The bad news, in our view, is the national security amendments. You may ask why; national security is a good thing. It is not defined, there is no limitation period and there is no financial threshold to be passed before it applies. If you are foreign and you buy 5 per cent of a company, you could be at risk in that. I can tell you from my practice that that is creating concern in the investment community. In my mind, that is not encouraging investment in Canada.”
For general discussions of Canada’s new national security review regime see: Federal Government Regulatory Impact Analysis Statement accompanying the National Security Regulations (Regulatory Impact Analysis Statement), Senate Report on Bill C-10 (Report on the Budget Implementation Act, 2009), Competition Policy Review Panel’s final Report (Compete to Win) and Legislative Summary accompanying Bill C-10 (Legislative Summary).
NATIONAL SECURITY REVIEWS
“National Security” and Threshold for Review
The relevant threshold for commencing a national security review is low and undefined. A national security review may be conducted where the Minister “has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security.”
“National security” is undefined giving the Government political discretion to review investments. In this regard, the Regulatory Impact Analysis Statement accompanying the National Security Review Regulations state that proposals to define “national security” were rejected “since national security threats are dynamic in nature and, therefore, constantly evolve” and because “future threats to national security cannot be predetermined [a definition could] limit the government’s flexibility to respond to future threats.”
In addition, a national security review can be commenced regardless of the value of a particular investment (i.e., whether or not the general monetary thresholds for a “net benefit” review under the ICA are triggered) and whether or not control of a Canadian business is acquired (section 28 of the ICA contains certain deeming provisions regarding the acquisition of control required to trigger the general application of the ICA).
This is because a national security review may be conducted where there is an acquisition of control of a Canadian business or acquisition “in whole or in part” of 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.
Timing of Review and Cabinet Orders
In September, 2009, regulations under the ICA 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 ICA also provide that the decisions of the federal Cabinet and Minister are final and only subject to judicial review.
CASES
There have been several transactions that have been challenged or abandoned based on national security grounds, including:
Alliant/MacDonald Dettwiler. The proposed 2008 acquisition by Alliant Techsystems (a U.S. American defence contractor) of MacDonald Dettwiler (a Canadian company with satellite operations providing information to the Canadian government) was not approved by the Minister of Industry and appears to have been blocked on national security grounds (although under the ICA’s general net benefit to Canada test prior to Canada’s national security review regime coming into force in 2009). Industry Canada’s news release issued in relation to the transaction stated only that the Minister of Industry was “not satisfied that [Alliant’s] application to acquire control of the Information Systems Business of MacDonald, Dettwiler and Associates Ltd. is likely to be of net benefit to Canada.”
George Forrest International’s (GFI) proposed acquisition of Forsys Metals Corp. This 2009 transaction appears to have been abandoned based on national security concerns relating to a Forsys uranium project in Namibia and origin of GFI’s funding for the acquisition, which may have included Iranian financing. In a news release issued by Forsys on August 19, 2009, the company stated: “Forsys Metals Corp … refers to its proposed plan of arrangement with George Forrest International Afrique S.P.R.L. … 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’s proposed acquisition of the wireless unit of Nortel. This 2009 transaction appears to have been challenged on national security grounds by RIM and some provincial and federal politicians. In September, 2009, however, the Government announced that it would not block the transaction.
National Security Review Links and Resources
Government Agencies
Canadian Security Intelligence Service (CSIS)
Legislation and Regulations
National Security Review of Investments Regulations
Regulatory Impact Analysis Statement
Amending Legislation
Legislative Summary (Bill C-10)
Parliamentary and Senate speeches on Bill C-10
Reports
CCCE Report – Chinese Foreign Direct Investment in Canada: Threat or Opportunity?
CCIL – Canada’s New National Security Review of Foreign Investments under the Investment Canada Act
C.D. Howe Institute – Reforming the Investment Canada Act
Competition Policy Review Panel – Final Report – Compete to Win
Library of Parliament – The Foreign Investment Review Process in Canada
Library of Parliament – Foreign Investment in Canada
Senate Report – Report on the Budget Implementation Act, 2009
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