The threshold for certain pre-closing net benefit reviews under the Investment Canada Act (ICA) and the threshold for a pre-closing merger notification under the Competition Act have now both been released for 2020. The commissioner of competition announced on April 1 that the threshold would remain the same as in 2019.
Canada uses a two-part test for determining whether a pre-merger notification is necessary. The two-part test is based on the size of the parties and the size of the transaction. The transaction size component can be adjusted annually for inflation. Under the size of the parties test, the parties, together with their affiliates, must have aggregate assets in Canada or annual gross revenues from sales in, from or into Canada, in excess of C$400 million. Under the size of transaction test, the value of the assets in Canada or the annual gross revenue from sales (generated from those assets) in or from Canada of the target operating business and, if applicable, its subsidiaries, must be greater than C$96 million. This is unchanged from the 2019 transaction size threshold.
Investment Canada Act
In general, any acquisition by a “non-Canadian” of control of a “Canadian business” 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 an 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.
The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person or entity from a member of the World Trade Organization (WTO); (b) a state-owned enterprise (SOE); or (c) from a country considered a “Trade Agreement Investor” under the ICA1. A different threshold also applies if the Canadian business carries on a cultural business.
Generally speaking, for a non-SOE from a WTO country (other than a Trade Agreement Investor) directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1.075 billion (up from $1.045 billion in 2019).
For a non-SOE from a Trade Agreement Investor directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1.613 billion (up from $1.568 billion in 2019).
How enterprise value will be determined will depend on the nature of the transaction:
| Publicly traded entity: acquisition of shares
|| Market capitalization plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
| Not publicly traded entity: acquisition of shares
|| Total acquisition value, plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
| Acquisition of all or substantially all of the assets
|| Total acquisition value, plus assumed liabilities, minus cash and cash equivalents transferred to buyer
The net benefit review threshold for investments by SOEs from WTO member states is based on the book value of the assets of the Canadian business. It increases annually, and for 2020 the threshold is C$428 million, up from C$416 million in 2019.
The net benefit review threshold for investments by non-WTO investors, or for the direct acquisition of control of a cultural business (regardless of the nationality of the buyer) is C$5 million in book value. The threshold for an indirect acquisition of control is C$50 million in asset value.
It is important to remember that any acquisition, whether of control or even a minority interest, of a Canadian business by a non-Canadian can be reviewed to determine whether it could be harmful to Canada’s national security. Parties to transactions that could raise issues as identified in the Guidelines on the National Security Review of Investments, and that aren’t otherwise subject to a pre-closing net benefit review, should consider submitting their notice of acquisition in advance of closing.