Proposed Amendments to Canada’s National Security Review regulations would create certainty for voluntary filers, but materially extend regulatory risk for wallflowers
For years, stakeholders have been calling on the government to implement a voluntary filing regime in respect of certain classes of transaction that are not subject to a mandatory filing obligation, but nevertheless remain vulnerable to (post-closing) national security review and potential remedies under the Investment Canada Act (“ICA”). On February 12, 2022, the Department of Innovation, Science and Economic Development (“ISED”) answered these calls as it released proposed amendments to the National Security Review of Investments Regulations (the “Amendments”) to address this shortcoming. However, the Amendments also introduce a long tail of risk for investors that opt out of the voluntary regime.
Under the ICA, the acquisition of control of an existing Canadian business is subject to mandatory notification or application for review requirements (depending on whether applicable monetary thresholds are exceeded), while the establishment of a new Canadian business is subject to a mandatory notification requirement.
For investors subject to mandatory notification or review, the ICA stipulates that the government has 45 days from receipt of a complete filing to issue a notice of potential national security review. Once this period expires, the government can no longer challenge the investment on national security grounds. For investors wishing to discharge the risk of a post-closing national security intervention, it is common practice to file pre-closing and allow the 45-day period to expire.
However, the national security provisions of the ICA apply more broadly than the notification and review requirements. Transactions that do not constitute an acquisition of control (e.g., minority investments) or do not involve a “Canadian business” within the meaning of the ICA are not subject to notification or review, but remain subject to a potential national security review at the government’s discretion.
The government’s current position is that it cannot accept a notification or application for review where such a filing is not required by the statute, meaning that regardless of whether the investor brings the transaction to the government’s attention pre-closing, an investor undertaking a non-notifiable/non-reviewable transaction remains vulnerable to a post-closing intervention.
The Amendments would provide an option for foreign investors to obtain regulatory certainty pre-implementation with respect to an investment that is not otherwise subject to a filing obligation under the ICA, by allowing foreign investors to submit a voluntary filing pre-closing and thereby trigger the 45 day jurisdictional clock. In this way, parties to non-notifiable and non-reviewable investments may eliminate the risk of a post-closing divestiture or other remedial action to resolve national security concerns.
However, the benefit of certainty enabled by the Amendments comes with a trade-off for investors: where an investor to a non-notifiable investment does not exercise the option to submit a voluntary filing, the government proposes to extend the period within which it can initiate the national security review from 45 days to five years post-closing. This lengthy extension serves a dual purpose – it gives the government more time to detect, assess, and act on potentially injurious non-notifiable investments in Canada, but it also incentivizes investors to voluntarily notify to avoid five years of uncertainty. A five year window for potential review is consistent with equivalent timeframes in other jurisdictions, like Australia and the United Kingdom, where non-notified transactions are subject to national security review for ten years and five years post-closing, respectively.
- Foreign investors establishing a presence in Canada or making investments in Canadian entities of any scope should continue to consult counsel to determine whether a notification or review is required, as has always been the case normal course.
- Should the Amendments become law, foreign investors and their counsel will now also need to assess the advantages and disadvantages of voluntarily filing with ISED pre-closing in the context of transactions that do not trigger a mandatory filing obligation, taking into account the risk appetite of the investor, fact-specific substantive concerns, the geo-political climate, and the negotiating dynamic between the parties to the transaction.
- Relatedly, if the Amendments are implemented, foreign investors involved in non-notifiable and non-reviewable transactions involving Canadian assets or entities should consider early in the negotiation process whether covenants relating to voluntary filings may be warranted.
For more information, please consult our Competition/Antitrust & Foreign Investment Group.
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