As concerns about the re-emergence of economic nationalism and protectionist policies are voiced globally, the Canadian Government has signalled that Canada benefits from openness to the world and that attracting greater foreign investment is in our economic interest.
It has done so by introducing amendments to our foreign investment laws that will have the effect of substantially narrowing the scope of intervention by the government, encouraging new foreign investment in Canada. At the same time, a new review process has been created, which allows the government to block foreign investments that could be injurious to Canada's national security.
Expedited Time Frame for Implementation
Notably, these significant amendments to the Investment Canada Act (and additionally, far-reaching amendments to Canada's Competition Act) are contained in Bill C-10, the Budget Implementation Act, 2009 (the "Bill"), introduced on 6 February 2009. Given the importance of the economic stimulus measures contained in the Bill, it has progressed rapidly and received Second Reading on 12 February 2009. The Finance Committee will convene hearings on the Bill on 23 February 2009. Unless split off into a separate bill, these amendments could become law within weeks instead of months as would ordinarily be the case (For an overview of the proposed amendments to the Competition Act, please click here).
Key amendments to the Investment Canada Act are set out below.
Encouraging Foreign Investment in Canada
- The financial threshold for review of a direct acquisition of a Canadian business (except for cultural businesses) by or from a WTO investor would be increased substantially from the current $312 million to $600 million immediately after this amendment comes into force. This amount would be increased over a five-year period to $1 billion, adjusted according to inflation thereafter.
- The measurement standard would be changed from gross assets (book value) to the enterprise value of the assets of the acquired business. 'Enterprise value' is not defined in the Bill, but will be prescribed by regulation.
- According to the Competition Policy Review Panel Report (on which the Bill's amendments are based) "Enterprise Value is a measure used to evaluate the potential acquisition value of a business. It is equal to the sum of the price to be paid for the equity of an acquired business and the assumption of liabilities on its balance sheet minus its current cash assets" (June 2008).
- The lower review thresholds for Canadian businesses that engage in financial services, transportation services (including pipelines) or uranium production would be eliminated.
- Sector - specific investment requirements will continue to apply in the air transport and uranium mining fields.
- The special provisions for cultural businesses, including lower thresholds, are not amended by the Bill and would continue to apply.
- The test for approval of a proposed transaction continues to be where the Minister of Industry is satisfied that the investment is likely to be of "net benefit" to Canada, applying criteria set out in the Investment Canada Act.
- Amendments designed to increase transparency would require the Minister to provide reasons for any decision made that an investment is not likely to be of net benefit to Canada.
New National Security Test
- A new review process for transactions that raise national security concerns would be introduced.
- If the Minister of Industry believes that a foreign investment could be injurious to national security, the investment (whether implemented or proposed) could be reviewed.
- The Bill contains no definition of "national security", which may be understandable at the political level but injects significant Ministerial discretion and considerable uncertainty into the investment review process.
- The Governor in Council (the Federal Cabinet) would be empowered to take any measure in respect of the investment that it considers advisable to protect national security, including prohibiting the acquisition by a non-Canadian or if implemented, ordering a divestiture of the investment.
- The new national security screening mechanism would apply to (a) the establishment of a new Canadian business; (b) the direct acquisition of a Canadian business; or (c) the acquisition of an interest in or establishment of an entity carrying on all or any part of its operations in Canada.
- The new test would apply regardless of the size or the sector in which the foreign investment is made.
- Corporate reorganizations, following which ultimate control remains unchanged, are not exempt (except those involving financial institutions that are otherwise subject to governmental approval).
- The time frame for completion of the national security review process has not been articulated.
- Guidelines on investments by state-owned enterprises issued in December, 2007 continue in effect, subject to the new national security test.
Information contained herein provides a brief overview of Canadian foreign investment law developments and should not be regarded or relied upon as legal advice or opinions.
Catherine A. Pawluch is a partner in the Toronto office of Gowlings practising antitrust/competition, foreign investment and aviation law. She is the Toronto office leader for the Firm's China Group and leads the Transportation National Practice Group. She can be reached at 416.862.4371 or email@example.com
Jacques J.M. Shore is a a partner in Gowlings' Ottawa office practising administrative law, federal regulatory affairs and negotiations focusing on trade and procurement issues, nuclear energy and environmental issues, national security matters, aviation and aerospace, cultural policy, as well as government relations and government advisory work. He is the National Chair of the Firm's national Government Affairs Group and a member of the Advocacy Department. He can be reached at 613.786.0225 or firstname.lastname@example.orgRobert E. Milnes
is a partner in the Toronto office of Gowlings practising corporate law and foreign investment law. He can be reached at 416.369.7236 or email@example.com