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National security considerations when investing in Canada

July 2021  |  SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2021 Issue

Foreign investment in Canada is regulated under the Investment Canada Act (ICA). Originally, Canada’s foreign investment review regime was created to empower the government to review significant foreign investments to determine their net economic benefit to Canada. The review and approval of certain acquisitions of control under the ‘net benefit’ criteria continues to be a feature of the ICA. However, following geopolitical changes in the wake of the 11 September attacks, the ICA was amended in 2009 to introduce a second basis for review – national security. This article provides an overview of the ICA’s national security regime, from its creation through to the recent updates this year.

Under the ICA’s national security review provisions, the government has the power to review foreign investment in Canada if the investment could be “injurious to national security”. If, after its review, the government concludes that an investment would be injurious to Canada’s national security, the government can block or, if already implemented, order the divestiture of an investment. The government can also impose mitigation measures as a condition of allowing an investment to proceed or, if already implemented, continue to be held. Virtually any equity investment by a non-Canadian in Canada is subject to the ICA’s national security regime; there is no minimum investment threshold and minority investments are also caught.

The government is usually made aware of foreign investments through ICA filings that are mandatory where an acquisition of control has occurred. As mentioned, certain acquisitions of control that meet a specified monetary threshold are subject to a ‘net benefit’ review, in which case the investor typically must provide binding undertakings, such as, in respect of Canadian employment and capital expenditures, to secure approval. Where national security is also a concern, the ‘net benefit review’ is paused, pending the national security review. Acquisitions of control that are not subject to a ‘net benefit’ review require only the filing of a notification that can be filed pre- or post-closing. These ICA filings require, among others, information about the investor, its directors and highest-paid officers, the investor’s ultimate controller and the nature of the Canadian business. Although the government can engage its national security powers with respect to non-control investments as well, they are not subject to any ICA notification or approval requirements.

In the initial years following its introduction, the national security review process was shrouded in mystery. This was because the government almost never disclosed or made any public statements about national security reviews, even where remedial action was taken, let alone give any reasons for decisions or release any statistics. In addition, undefined terms in the ICA (for example, “injurious to national security” is not defined) coupled with a lack of policy guidance created uncertainty as to how the government assessed national security interests. Nonetheless, national security played much less of a role in foreign investment during those years than it does today.

The government started releasing data on national security reviews in its ICA annual reports for the 2015/16 fiscal year. However, the data provided is quite high-level, such as the number of reviews, withdrawals and blocks or divestitures, the countries of origin of investors that have faced reviews, and the corresponding industry sectors. There continues to be a dearth of public information about which transactions have faced scrutiny and the government still rarely releases information about specific national security reviews. Indeed, even the investors are not always provided with much information about the national security concerns applicable to their transactions.

In 2017, the government released national security guidelines, which provided helpful clarity on the process, explaining that a national security review will focus on the nature of the target assets or business activities, as well as the parties involved in or influencing the transaction. Additionally, the guidelines include a non-exclusive list of factors the government considers when assessing whether an investment poses a national security risk. These national security factors include investments relating to defence, intelligence, law enforcement, sensitive technology, critical infrastructure and the supply of critical goods and services.

The COVID-19 pandemic triggered the next significant development in foreign investment review in Canada. When the pandemic began, many Canadian businesses saw their valuations decline precipitously. The government, concerned about opportunistic investment behaviour by foreign buyers, swiftly implemented a new policy in April 2020. Under this policy, the government subjects investments in Canadian businesses related to public health or the supply of critical goods and services, and investments by state-owned enterprises (SOEs) or investors working under the influence or direction of a foreign government to “enhanced scrutiny”. The ICA was also amended to temporarily extend the timeline during which the government could exercise its national security powers. While the extended timeline expired at the end of 2020, the COVID-19 policy continues to be in effect.

In March of this year, the government revised its national security guidelines, indicating a sustained focus on national security. In the revised guidelines, the government restated its intention to subject investments by SOEs to enhanced scrutiny, thereby making permanent that facet of the COVID-19 policy. This was not surprising as SOEs have long been a focus in the ICA investment review process. Even prior to the introduction of the national security review regime in 2009, the government considered the governance and commercial orientation of SOE investors as part of its ‘net benefit’ analysis in granting ICA approvals. However, SOE involvement is clearly no longer just one consideration among many; it has become a central consideration for national security. The government is concerned that SOEs or private investors assessed as being closely tied to or subject to direction from foreign governments may be motivated by “non-commercial imperatives” that may harm Canada’s economic or national security interests. Therefore, regardless of size, an investment by an SOE will receive more attention from the government.

It is also instructive to note that SOEs from certain countries have attracted more scrutiny than others. For example, of the 22 national security reviews reported between 2012 and 2019, 14 have involved Chinese investors. This has occurred against the backdrop of an increasing number of national security reviews more generally over the years. It is expected that both trends will continue, so they should be considered when gauging the risk of a national security review.

In addition, the revised national security guidelines expanded the non-exhaustive list of national security factors that the government considers by adding investments relating to Canada’s critical minerals and Canadians’ sensitive personal data. These changes bring Canada more in line with the approach being taken in the US. Canada’s recently released list of critical minerals followed the implementation of a bilateral initiative with the US, which aims to develop reliable and integrated supply chains in North America for critical minerals. Similarly, the inclusion and definition of “sensitive personal data” echoes the rules that govern national security reviews in the US, and lines up with broader developments relating to privacy rights.

Finally, in its revisions, the government also expanded the descriptions of several of the national security factors that were already in the guidelines. For example, the revised guidelines explicitly include the non-governmental defence industry within the ambit of “defence”. The definition of “illicit actors” now looks beyond organised crime and terrorist organisations to include corrupt foreign officials. Moreover, a non-comprehensive list of examples has been provided to explain what constitutes “sensitive technology”. The list includes, for example, advanced surveillance, aerospace, biotechnology, artificial intelligence, energy, robotics and space.

In short, national security considerations have never been more prominent in foreign investment review in Canada. This trend is consistent with what is happening in the rest of the world, where many jurisdictions are only now creating foreign investment review regimes to better protect national security. As such, when investing in Canada from abroad, it is crucial to consider the ICA and assess whether any national security considerations may be at play.

 

Jonathan Bitran is a partner and Erin Keogh is an associate at McCarthy Tétrault LLP. Mr Bitran can be contacted on +1 (416) 601 7693 or by email: jbitran@mccarthy.ca. Ms Keogh can be contacted on +1 (416) 601 4320 or by email: ekeogh@mccarthy.ca.

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BY

Jonathan Bitran and Erin Keogh

McCarthy Tétrault LLP

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