Open Doors to Investment
New developments emphasize the Canadian government’s interest in easing the way for foreign investors
THE EVIDENCE COULDN'T be more overwhelming that Canada’s Liberal government has indeed prioritized “global investment and the jobs that come with it,” as declared in its Fall Economic Statement 2016.
Perhaps most importantly, the statement, released on November 1, proposed to raise the threshold for “net benefit” review under the Investment Canada Act to $1 billion in 2017, two years sooner than planned. “This move was an extremely strong signal of interest in investment, effectively removing a bunch of transactions from the requirement of review under the ICA and leaving only the largest for consideration,” says Neil Campbell of McMillan LLP in Toronto.
As well, on October 30, 2016, Canada signed the Comprehensive Economic and Trade Agreement (CETA) with the European Union. CETA will require Canada to increase the ICA net benefit review threshold to C$1.5 billion for investors from European Union member countries. Legislation is now before Parliament to implement the provisions of CETA into Canadian law.
Under the Investment Canada Act, a direct or indirect acquisition of a “Canadian business” by a “non-Canadian” is either notifiable or reviewable, depending on the transaction’s structure and the value and nature of the target business. Notifiable transactions require only the submission of a report following closing. Reviewable transactions, however, will not be approved unless the federal government (with limited exceptions) is satisfied that the transaction “is likely to be of net benefit to Canada.”
Quite apart from the net benefit review, however, any investment in a Canadian business by a non-Canadian is notifiable and subject to a national security review. “There is no definition of ‘national security’ in the ICA, and unlike the net-benefit review process, there is no financial threshold for investments under the national security review regime,” says Oliver Borgers of McCarthy Tétrault LLP. “Review can occur before or after closing and may apply to corporate reorganizations where there is no change in ultimate control.”
Equally significant to the future of foreign investment in Canada, then, was the Economic Statement’s promise “to publish guidelines under which investments are examined under national security provisions,” a promise fulfilled in December 2016 when the Liberals released guidelines that shed considerable light on the circumstances that may attract a national security review — a process previously widely criticized for its lack of transparency and procedural fairness. The stated aim of the guidelines was to “help investors better understand and navigate the review process” while ensuring the integrity of the national security process. “The guidelines are relatively short and don’t go into gory detail, but they are a significant positive step in messaging that we’re interested in dealing fairly with foreign investors,” Campbell says.
Even before that, on November 9, the feds sent a clear signal about where the government was headed by consenting to a landmark Federal Court order setting aside a Cabinet order requiring a Chinese investor to divest control of a Canadian business for national security reasons. What’s also of interest is that, thus far, the Liberals have not refused any applications for national security review: all have been approved or are pending. “It looks like this government is more committed to transparency than the previous government and also wants to reset the relationship with China,” says Omar Wakil of Torys LLP in Toronto.
The recent consent order stemmed from a Cabinet order directing O-Net Communications Holdings Ltd. to divest itself of the shares it had acquired in ITF Technologies, a Montréal-based technology company specializing in fiber components and modules. On consent, the court ordered the Minister of Innovation, Science and Economic Development to conduct a fresh review. While legalities may have dictated the government’s decision to consent to the order, it’s likely more than coincidental that the Fall Economic Statement, including its promise to amend the ICA, was issued just eight days previously.
As it turns out, it was Stephen Harper’s Conservatives who issued the divestiture order against O-Net 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 their reasons for the order.
O-Net applied for judicial review that August. The 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.”
On an operational level, the Minister of Innovation, Science and Economic Development has 45 days, which can be extended for a further 45 days, after an application has been made or notification given, to refer an investment to Cabinet for an order requiring a national security review. The Minister also has 45 days to do so after the implementation of a transaction that was not subject to notification or review. “Where a transaction gives rise to national security risks, investors are encouraged to contact the Investment Review Division at the earliest stage of the development of their investment projects to discuss their investment and, where applicable, to file a notification or an application for review at least 45 days prior to the planned closing date,” Borgers advises.
The new national security review guidelines advocate for an open door on pre-filing discussions with Investment Review Division personnel. “The general attitude of regulators under this government has been one of cooperation and engagement,” Borgers says. “A number of transactions I worked on last year, including some involving a number of Asia-based clients, all went very smoothly. My sense, then, is one of real acceptance of looking at foreign investment constructively. Efficiency is improving and timelines are being reduced, all of which is helpful to getting the deals done — so much so that we’re getting bullish in advising our clients on how long review and clearance under the ICA will take. It’s always nice to get a ‘yes,’ but it sure helps if that answer comes within three months.”
Campbell points out that the openness to foreign investment is a significant change from previous experience. “Historically, there wasn’t always a feeling that pre-filing dialogue and consultation was welcome or even possible,” he says.
But Campbell also cautions that the new guidelines don’t ensure investors access to all the information on which the government may be reviewing a case on national security grounds. Indeed, the guidelines specifically state that access to “sensitive information” that is protected under the Canada Evidence Act may be restricted. Section 38 of that statute defines “sensitive information” as information about “international relations or national defence or national security that is in the possession of the Government of Canada, whether originating from inside or outside Canada, and is of a type that the Government of Canada is taking measures to safeguard.”
The challenges around “sensitive information,” then, will in certain cases still have to be managed. “The truth remains that we’re not as fully evolved from a transparency viewpoint as we might like,” Campbell says. “But the process could evolve further and we might see something that turns out to be like the process they have in the immigration area where there are special security-cleared counsel who can have access to sensitive information.”
From a substantive perspective, the national security review guidelines reveal that the government will consider the nature of the assets or businesses as well as the nature of the foreign investors, including the potential for influence by third parties. More particularly, the factors considered may include: the potential effects of the investment on Canada’s defense capabilities and interests; the potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada; involvement in the research, manufacture or sale of goods and technology identified in the Defence Production Act; the potential impact of the investment on the security of Canada’s critical infrastructure, including processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government; the potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the government; the potential of the investment to enable foreign surveillance or espionage; the potential of the investment to hinder current or future intelligence or law enforcement operations; the potential impact of the investment on Canada’s international interests, including foreign relationships; and the potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.
Campbell says that “critical infrastructure,” which has attracted considerable attention in the US in the national security context, will likely be the most controversial of the factors listed. “What is critical infrastructure may be somewhat in the eyes of the beholder and therefore malleable case to case,” he says.
Also, the guidelines as a whole are non-binding and inclusive rather than exhaustive, leaving the government with some leeway in their interpretation and application. “We’re still cognizant that these guidelines could mean anything, and that things we never thought of could get caught under them,” Borgers says.
But that doesn’t mean the guidelines don’t have significant value — both for investors and the government. “From investors’ perspective, the guidelines reduce the risk that the government will use the national security view for political reasons,” Borgers says. “From the government’s point of view, the release of guidelines that are objectively clear with measurable criteria shield the decision from allegations of political motives.”
However that may be, it’s a far cry from the days when Canadian governments were secretive, even about the number of security reviews that had been conducted. “The Liberals have made it part of their policy to provide information about the number of reviews conducted and the results annually,” Borgers says. “It’s all very positive, because the new policies allow us to go to clients saying that we have objective criteria that give us a degree of confidence in predicting whether their deal will be cleared.”
As well, there are other developments emphasizing the federal government’s commitment to easing the pathways for foreign investors. The Fall Economic Statement indicated that the government would allocate C$218 million over five years to create a new federal body, the Invest in Canada Hub, which would employ a sales force to promote Canada and work with global companies to increase investment that will benefit Canada, and increase the number of trade commissioners focused on investment attraction in strategic markets.
The Liberals have also introduced new legislation that eases foreign ownership restrictions on Canadian airlines from 25 per cent to 49 per cent. As a sign of its commitment, the government — even though the legislation had not yet been passed — immediately exempted two existing airlines from the 25-per-cent restriction so that they could pursue foreign injections of capital.
It’s not, however, as if Canada is shying completely away from protectionism. For example, neither the $1-billion threshold for direct WTO investments nor the CETA $1.5-billion threshold will apply to investments by non-WTO investors; to investments by any foreign SOE investors; or to acquisitions of Canadian cultural businesses, to which lower thresholds will apply. Nor, some will observe, has the government allowed non-Canadians to actually control Canadian airlines.
Still, Brian Facey at Blake, Cassels & Graydon LLP in Toronto is optimistic that the trend to liberalization will continue. “We expect the current government to remain steadfast in its support for foreign investment,” he says. “With the increasing thresholds, less transactions will be subject to a net benefit review. For those that remain above the thresholds, we expect that the Minister will take a careful and reasoned approach, and ultimately will be prepared to agree to reasonable undertakings.”