On March 24, the Canadian government issued updated guidance on the types of foreign investments that may raise national security concerns under the Investment Canada Act. The new Guidelines on the National Security Review of Investments provide additional illustrative examples of the sectors in which foreign investments may draw scrutiny, and in a significant development, provide that Canada will subject any investment by a state-owned investor or a private investor deemed “closely tied or subject to direction from foreign governments,” to enhanced scrutiny under the Act, regardless of the value of the investment.
Background: overview of the Investment Canada Act
In general, any acquisition of control of a ‟Canadian business” by a ‟non-Canadian” is either notifiable or reviewable under the ICA, depending on the structure of the transaction and the value and nature of the Canadian business being acquired. The direct acquisition of control of a Canadian business will be subject to review where applicable thresholds are exceeded, which vary based on the country from which the investor is ultimately controlled. Information on the 2021 Investment Canada Act thresholds and how they are calculated can be found here.
With limited exceptions, the federal government must be satisfied that a reviewable transaction ‟is likely to be of net benefit to Canada” before closing can proceed; notifiable transactions only require that the investor submit a report after closing.
Separate and apart from the net benefit review, the ICA also provides that any investment in a Canadian business by a non-Canadian can be subject to a national security review, regardless of its structure or value. A non-Canadian establishing a new Canadian business is also notifiable and subject to national security review regardless of the value of the investment.
National security reviews
The Minister of Innovation, Science and Industry (Minister) has the authority to review almost any investment by a non-Canadian, regardless of the size of the interest acquired or the value of the assets, where the Minister has reasonable grounds to believe such an investment could be injurious to national security. Since the national security review powers were added to the Act in 2009 to March 31, 2019, 22 transactions were ordered to undergo an in-depth national security review. Of those, three ended with no further action being taken, the investor withdrew its application in four transactions, four deals were blocked, four were cleared with conditions, and seven were approved subject to some divestiture requirements.
National security reviews can, if all stages of the review take their maximum allotted time, take 200 days from the date of filing an application or notification. This can be extended unilaterally at various stages by the Minister, or with the investor’s consent. The initial review period is 45 days from the date that an application or notification is submitted. For a minority investment not subject to review or notification, the Minister has 45 days after closing to raise any initial concerns. Where the Minister gives notice that a transaction may be injurious to national security, cabinet, on the Minister’s recommendation, has a further 45 days to determine whether to order a review of the transaction.
Further information regarding the review process and the types of transactions where orders were made can be found in our Doing Business in Canada guide or in Innovation, Science and Economic Development Canada’s Annual Report on the Investment Canada Act.
New updated national security guidelines
Guidelines were first issued in December 2016, and outlined a number factors that the government may consider when assessing a transaction’s impact on national security:
- The investment’s potential effects on Canada's defence capabilities and interests;
- The investment’s potential effects on the transfer of sensitive technology or know-how outside of Canada;
- Involvement in the research, manufacture or sale of goods/technology identified in Section 35 of the Defence Production Act;
- The investment’s potential impact on the security of Canada's critical infrastructure. Critical infrastructure refers to 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 investment’s potential impact on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
- The investment’s potential to enable foreign surveillance or espionage;
- The investment’s potential to hinder current or future intelligence or law enforcement operations;
- The investment’s potential impact on Canada's international interests, including foreign relationships; and,
- The investment’s potential to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.
The new 2021 updated guidelines add several new factors:
- The investment’s potential impact on critical minerals and critical mineral supply chains. These are generally materials used to produce batteries, semiconductors, and other important technologies. Reference is made to the Government of Canada’s Critical Minerals List.
- The investment’s potential to enable access to sensitive personal data that could be leveraged to harm Canadian national security through its exploitation, including data related to a person’s health or genetic information, biometrics, finances, geolocation, or private communications.
- Additional examples of sensitive technologies are also provided, and include technology that has military, intelligence or dual military/civilian applications.
These new sectors bring Canada more closely in line with the recent changes to the US foreign investment process known as CFIUS, the Committee on Foreign Investment in the United States. Through the Foreign Investment Risk Review Modernization Act of 2018, CFIUS’ jurisdiction was expanded to include certain non-controlling investments in US businesses related to critical technologies, critical infrastructure, or sensitive personal data of US persons, as well as certain real estate transactions.
The examples set out above for each factor in Canada’s new guidelines are non-exhaustive. The guidelines note that they may be updated from time to time, and also state that even if a transaction falls outside these areas, it may be reviewed. As such, falling outside of these fields and examples should not be considered a “safe harbour,” conferring immunity from review.
Finally, the updated guidelines make clear that any investment by a state-owned investor, or by a private investor that the government considers “closely tied to or subject to direction from foreign governments” will be subject to enhanced scrutiny under the Act. Like all national security reviews, this will apply regardless of the transaction’s value. This addition to the guidelines of the investor’s identity reflects recent practice by the Investment Review Division, which has been subject to criticism for lacking transparency when allegations are made against private investors, which the division was typically unwilling to share as the basis for its concerns.
Impact of COVID-19
In April 2020, the Canadian government issued a policy statement related to the application of the Investment Canada Act during the COVID-19 pandemic. It noted that investments in certain sectors would be subject to enhanced scrutiny, using the national security powers, until the economy recovers from the impact of the pandemic. These sectors included those related to public health or involved in supplying critical goods and services to Canadians or to the government. Additional details of this policy are available in our May 2020 briefing note. In announcing the updated national security guidelines, the Minister made clear that the April 2020 policy statement remains in effect.
Parties should ensure they consider the impact of the revised and enhanced national security guidelines and the Investment Canada Act on any proposed transaction. In drafting transaction agreements, parties should consider how to allocate the risk of a prolonged national security review and the potential that the transaction could be blocked or permitted with conditions. Reviews can take a considerable time, and it is best to develop a strategy early and begin the process with the Investment Review Division in a timely way.