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More Amendments to the Investment Canada Act: the INDU Committee Reports on Bill C-34

On September 28, 2023, the House of Commons Standing Committee on Industry and Technology (the “INDU Committee”) presented its report on Bill C-34, An Act to amend the Investment Canada Act (the “Bill”). The Bill has been under review by the INDU Committee since April 2023, and the report is proposing further amendments to the Investment Canada Act (the “ICA”) and noteworthy changes to the Bill (the “INDUProposed Amendments”).

As we previously reported, the Bill was tabled by the Canadian government in December 2022, with a view of modernizing the Investment Canada Act (the “ICA”), and in particular equipping the government with more powers to intervene on national security grounds. Among other things, the Bill would introduce a new, mandatory, pre-closing filing regime for all investments, including acquisitions of minority interests, in targets that are active in sensitive industries and by which the investor can be expected to obtain access to material, non-public technical information. The Bill would also increase fines for non-compliance, in particular for failing to notify where mandatory notification is required, and grant the Minister of Innovation, Science and Industry (the “Minister”) both the authority to impose interim conditions while a national security review is ongoing and accept binding undertakings to settle a national security review in lieu of referring the matter to Cabinet for final determination.

The INDU Proposed Amendments not only strengthen these measures initially put forward in the Bill, but also introduce further uncertainty for foreign investors by widening the scope of both the “net benefit” and national security regimes. This is especially the case for investors that qualify as state-owned enterprises (“SOE”), who have attracted much scrutiny during the INDU Committee’s review of the Bill and feature significantly in the INDU Proposed Amendments.

In this Bulletin, we describe the key measures introduced by the INDU Committee’s report and assess their implications for foreign investors.

Proposed Amendments to Net Benefit Reviews

While the Bill was framed only to expand the reach of the ICA’s national security regime, the INDU Proposed Amendments also have consequences for the ICA’s net benefit framework, namely:

  • Increased oversight of investments by SOEs: The INDU Proposed Amendments would expand the circumstances under which the Governor in Council (the “GIC”) may initiate a net benefit review of a notifiable investment (i.e., any investment that falls below the ICA’s review thresholds but which constitutes an acquisition of control of a Canadian business or establishment of a new Canadian business), enabling the government to conduct an in-depth public interest review of a much broader category of foreign investments. If enacted, this amendment would enable the GIC to order a review of a notifiable investment, where the investor is: (i) a SOE or controlled by a SOE (which term is interpreted broadly to include privately-held entities that are subject to a foreign state’s influence); and (ii) from a country without a trade agreement with Canada.

Importantly, this power will apply to any notifiable investment by an SOE, whereas the existing power to order a net benefit review in respect of an investment otherwise subject to only a notification requirement is limited to investments in Canadian cultural businesses. Given the high applicable financial thresholds (for SOEs, currently an asset value of C$512 million), only a handful of transactions per year are subject to mandatory net benefit review. This proposed amendment would potentially pave the way for an increase in net benefit reviews, and a recognition that the government’s focus in respect of SOE investors extends to socio-economic, as well as national security, factors.

  • Greater emphasis on the protection of intellectual property and personal data: Consistent with the Bill’s desire to prevent sensitive Canadian intellectual property and know-how being accessed by undesirable foreign investors (and governments), the INDU Proposed Amendments incorporate the consideration of intellectual property and personal data into the list of factors to be taken into account during a net benefit review. In particular, the Minister would expressly be required to consider the effects of an investment on: (i) intellectual property developed or funded by the Canadian government; and (ii) the use of personal information about Canadians. While it has become more common in recent years for net benefit reviews (and the undertakings necessary to achieve approval) to focus on matters relating to intellectual property and personal data, their codification in the statute is recognition of their importance to Canada’s industrial strategy and socio-economic policy objectives.

Proposed Further Amendments to the National Security Regime

The INDU Proposed Amendments would also introduce a number of incremental changes to the national security regime, most importantly by expanding the ability of the government to take jurisdiction over transactions that are arguably not captured under the current legislation:

  • Redefining the jurisdictional boundaries of the national security regime: The INDU Committee has proposed to amend the ICA to codify that the national security regime applies to all asset acquisitions, even where the investor does not acquire all or substantially all of the assets of a Canadian business. Currently, the national security regime applies to the acquisition of part of an entity that is carrying on some of its operations in Canada (i.e. minority equity investments with sufficient nexus to Canada). Post-reform, the reach of the regime would formally extend to the acquisition of any assets, regardless of their significance to the target’s overall business. This could potentially bring IP transfers and offtake agreements into the scope of the regime, providing the government with statutory grounds to intervene in such cases.
  • Mitigating potential national security harm: The INDU Proposed Amendments would require the Minister to impose interim conditions during the national security review process where: (i) the Minister is satisfied that it is necessary to prevent injury to national security; and (ii) the imposition of interim conditions does not introduce significant new risks of injury to national security. The language previously introduced by the Bill allowed the Minister to impose such remedies, but did not require it. Should interim conditions become mandatory, the Minister could delay a transaction’s post-closing integration steps until a national security review has been completed, which can last upwards of 200 days. This subtle change signifies a likely hardening of stance on the usage of these powers, reflecting concerns articulated during the INDU committee’s review that the government may not use its interim measures powers in all cases that merit them.
  • Prior corruption convictions as a basis for review: The ICA allows the Minister to order a national security review where there are reasonable grounds to believe that an investment could be injurious to national security. Pursuant to the INDU Proposed Amendments, the fact that an investor has previously been convicted of an act of corruption would, in and of itself, constitute reasonable grounds to order a review. While the government has issued policy statements in the past which indicate that the existence of certain underlying facts makes national security intervention more likely, this amendment would represent the first time that such factors have been codified in the ICA itself. While national security reviews focused on corruption and related matters are relatively rare, this amendment reinforces the need for investors to consider their status in this respect as part of a Canadian national security risk assessment. This assessment will be made more difficult if the INDU Committee’s amendment is not time-limited; as drafted, any historical corruption conviction would require the government to consider whether an investment could be injurious to national security.

As the Bill moves steadily through the legislative process – including further readings in Parliament, foreign investors should anticipate its potential enactment later in 2023 or in early 2024. The Bill reflects the government’s broader objective to modernize the ICA, and better respond to evolving geopolitical risks. In strengthening the national security regime and granting the government greater authority to intervene, the Bill was already introducing a number of regulatory challenges for foreign investments in Canada, from mandatory pre-implementation filings for investments in prescribed sectors that remain to be delimited by regulations, to potential delays in post-closing integration due to interim conditions. The INDU Proposed Amendments add another layer of complexity, both widening the scope of national security jurisdiction and enabling closer scrutiny of investments by SOEs under the socio-economic “net benefit to Canada” regime.

For more information, please consult our Competition/Antitrust & Foreign Investment Group.