Feds agree to new national security review for foreign businessman

Federal court sets aside Cabinet order requiring Chinese investor to divest control of Canadian business
The Federal Court ordered the Minister of Innovation, Science and Economic Development, Navdeep Bains, to conduct a fresh review. REUTERS/Chris Wattie
The Federal Court ordered the Minister of Innovation, Science and Economic Development, Navdeep Bains, to conduct a fresh review. REUTERS/Chris Wattie

IN A LANDMARK DECISION with significant consequences for the future of foreign investment review in Canada, the federal government has consented to the Federal Court setting aside a Cabinet order requiring a Chinese investor to divest control of a Canadian business for national security reasons.

Since the national security process was introduced in 2009, there have been no successful judicial reviews of the eight national security reviews that have occurred. Seven of the reviews resulted in Cabinet orders, and one investment application was withdrawn.

The current case involved a Cabinet order directing O-Net Communications Holdings Limited to divest itself of the shares it had acquired in a Montreal-based technology company, ITF Technologies, which specializes in fiber components and modules. On consent, the Federal Court ordered the Minister of Innovation, Science and Economic Development to conduct a fresh review of the order.

“I don’t know if it means the government will be more careful in conducting its foreign investment reviews in the future, but it’s definitely a ‘wow’ development,” says Sandy Walker of Dentons Canada LLP in Toronto. “It’s fascinating, because the government actually agreed to redo a national security review despite the fact that it has extremely broad discretion in these matters.”

But Walker is careful to say that it’s not clear whether the government will be more cautious in conducting such reviews in the future.

“The difficulty is that we don’t know really why they agreed to a fresh review,” she says. “We don’t know whether there were substantive or procedural legal concerns about information being mischaracterized or missed or whether there were other reasons for doing what they did.”

While legalities may have dictated the government’s decision to consent to a new review in the case, it’s likely more than coincidental that the Liberal’s fall economic statement on November 1st promised that the government intended to amend the Investment Canada Act (ICA) before the end of the year.

The economic statement proposed not only to raise the threshold at which foreign investors are required to notify the government of transactions for national security reviews to $1 billion in 2017, two years sooner than planned, but also “to publish guidelines under which investments are examined under national security provisions.” The government’s aim was to “help investors better understand and navigate the review process” while ensuring the integrity of the national security process.

“I think we’re going to see a bit of a reset in the ICA process, which until now has been extremely opaque,” says Omar Wakil of Torys LLP in Toronto. “If you look at the combination of the promise of new guidelines and the agreement to revisit the O-Net situation, it looks like this government is more committed to transparency than the previous government and also wants to reset the relationship with China.”

As it turns out, it was Stephen Harper’s Conservatives who issued the divestiture order in July 2015. Cabinet resorted to a rarely used provision to keep the order-in-council secret and unpublished. The Conservatives also refused to provide any details about its reasons for the order.

O-Net applied for judicial review that August. Its application was based on a failure of procedural fairness and natural justice, a common criticism of the review process.

“The challenge for both foreign investors and the government has been to balance a need to understand the government’s concerns in order to address them in a meaningful way, while at the same time preserving the integrity of the national security review process,” Wakil says. “This can be a challenge where the information that the government possesses is highly secret and where its ability to disclose that information may be limited. However, even in complex cases there can be some level of disclosure.”

The Liberals were elected in October, about two months after the O-Net judicial review filing. Almost immediately, it appears, the new government was looking for a way to revisit the matter.

In an affidavit filed with the court, Roger Flaim, counsel for Justice Canada, advised that since the commencement of the application “the parties have consented on three occasions to orders from the Court placing the proceeding in abeyance to allow the parties to negotiate the potential resolution of this application.”