Essential Corporate News: Week ending December 3, 2021
On November 26, 2021 the Financial Conduct Authority (FCA) published Policy Statement PS21/16, summarising feedback to a Consultation Paper (CP21/25) it published in July 2021
On December 19, 2016, the Government of Canada issued long-sought guidelines to help foreign investors and their advisors understand the national security review process under the Investment Canada Act (ICA). Following amendments to the ICA in 2009 the government has had the explicit authority to review investments in Canadian businesses by non-Canadians to determine whether they “could be injurious to national security,” a term that was not defined in either the statute or the accompanying regulations.
Given the subject matter, both the previous and current governments have maintained that they are often constrained in what they can tell foreign investors about the nature of any possible concerns. This has resulted in criticisms that the review procedure lacks procedural safeguards and deprives investors of the ability to know the case against them.1 The new guidelines outline some of the factors that the government may consider as it assesses the impact of a transaction on national security, and indicate a willingness by review officials to consult with parties about these issues. Concurrent with the release of the guidelines, the government announced its intention to amend the ICA to require annual reporting on the national security provisions of the ICA and reiterated its plan to increase the net benefit review threshold earlier than planned.
In general, any acquisition of control of a ‟Canadian business” by a ‟non-Canadian” is either notifiable or reviewable under the ICA. Whether an acquisition is notifiable or reviewable depends on the structure of the transaction and the value and nature of the Canadian business being acquired, namely whether the transaction is a direct or indirect acquisition of control of a Canadian business.
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. The establishment of a new Canadian business by a non-Canadian is also notifiable and subject to national security review.
The threshold for the net benefit review is, with limited exceptions, based on the enterprise value of the Canadian business. At the time of its implementation (2015), the threshold was intended to be C$600 million for two years, followed by two years at C$800 million, and then C$1 billion for a year, after which it would be adjusted annually for inflation. However, in the 2016 Fall Economic Statement, the government announced that the threshold will be raised to C$1 billion in 2017, two years earlier than planned.
The Minister of Innovation, Science and Economic Development (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 that such an investment could be injurious to national security. Until now, there have been no guidelines for investors on the issue of what kinds of investments may be reviewed. At the time the National Security Review of Investments Regulations under the ICA were released, the government explicitly rejected calls for such guidance.
To date, there have been eight national security reviews ordered since the regime was adopted in 2009. Due to confidentiality restrictions, the government has not identified those matters. However, the government has revealed that of the eight, three transactions were blocked, divestitures were ordered in two, conditions were imposed in two to mitigate concerns, and one investor withdrew its application before a final order was made.
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. The initial review period is 45 days from the date that an application or notification is submitted. For a minority investment that is 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.
The new guidelines outline a number of factors that the government may consider when assessing the impact of a transaction on national security:
The guidelines encourage parties to transactions that include one or more of these factors to contact officials at the Investment Review Division early in their planning process to discuss the matter. Although review officials have always been willing to meet with potential investors, including these factors in the guidelines is a welcome commitment to increased transparency.
Non-Canadians considering investing in Canada must be mindful of their obligations under the ICA. If they plan a direct acquisition of control of a Canadian business, the transaction may require pre-closing approval under the net-benefit test as well as pass muster under a national security review. For indirect acquisitions of control, no pre-closing review will be necessary but where national security may be an issue, it is often advisable – though not legally required – to submit a notification at least 45 days prior to closing to allow for the initial national security review deadline to pass.
Similarly, although not legally required to submit a notification in respect of a minority investment, it is prudent to consider whether to proactively engage with investment review officials where national security concerns could be raised. Given the potential for cabinet to block a transaction or order that it be unwound if completed, national security considerations under the ICA should be top of mind for foreign investors. The new guidelines should provide additional insight into the types of transactions that may attract scrutiny under the ICA.
1 O-Net Communications Holdings Limited v. Canada (Attorney General), Docket: T-1319-15.
Recent decisions by the Court of Justice of the European Union (CJEU), the EU’s top court, have abolished the rights that EU investors previously had to bring claims against EU member states in international arbitration.
© Norton Rose Fulbright LLP 2021