Canadian COMPETITION LAW

August 25, 2010

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.

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