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Tighten Up: Proposed Amendments to the Investment Canada Act’s National Security Provisions

On December 7, 2022, the Canadian government tabled Bill C-34: An Act to amend the Investment Canada Act (the “Proposed Amendments”), which would mark the first significant legislative changes to the Investment Canada Act (the “ICA”) since 2009.

The Proposed Amendments are brought forward pursuant to the Prime Minister’s 2021 mandate letter for the Minister of Innovation, Science and Industry (the “Minister”), which tasked the Minister with “reviewing and modernizing the ICA to strengthen the national security review process and better identify and mitigate economic security threats from foreign investment.” These amendments are, therefore, not wholly unexpected. Indeed, they come on the heels of a flurry of changes to the national security framework, with several introduced in 2022 alone. For example, in February 2022, the government proposed national security regulatory amendments to extend the limitations period for reviewing investments not subject to mandatory notification, and to introduce a voluntary filing mechanism for such investments (those amendments were put into effect in August). Then, in late October 2022, the government introduced national security guidance for investments by state-owned enterprises in critical minerals, announcing enhanced national security scrutiny for this category of investments.

As a result, it is no surprise that the common thread throughout the Proposed Amendments is the further sharpening of the Minister’s national security toolkit. The proposed changes fall into three broad categories, addressed in turn below, which all seek to strengthen the government’s jurisdiction to detect, review and restrict foreign investments deemed likely to be injurious to Canadian national security and to block access to and otherwise prevent the transfer of sensitive technology, IP and other such assets or information during the pendency of a national security review.

1. Amendments to Better Detect National Security Risks

The Proposed Amendments make clear that the government intends to receive notice of any potentially harmful acquisitions prior to their implementation. As currently drafted, the only foreign investments subject to mandatory pre-implementation notice and review under the ICA are acquisitions of control of an existing Canadian business where applicable monetary review thresholds are exceeded, which are reviewed to determine if they represent a “net benefit to Canada”. Where an acquisition of control of an existing Canadian business falls below the applicable threshold, or where the investor is establishing a new Canadian business, the foreign investor can file an administrative notice any time before or up to 30 days post-closing. Moreover, non-controlling investments and investments that do not involve a Canadian “business” (i.e., a business with assets, employees and a place of business in Canada), but rather involve a Canadian “entity” (i.e., a corporation, partnership, trust or joint venture whether or not it is capable of generating revenue) that has at least one of assets, employees, or a place of business in Canada, may, as of August 2022, be notified at the investors’ discretion.

a. Pre-Implementation Notification for Prescribed Businesses

The Proposed Amendments expand the categories of investments subject to pre-implementation notification. The new regime would require pre-implementation notification, within a to-be prescribed period, of any investment:

  • in an entity (i.e., would exclude the establishment of a greenfield entity) carrying on all or any of its operations in Canada, and that has at least one of: a place of operations in Canada; an individual or individuals in Canada who are employed or self-employed in connection with the entity’s operations; or assets in Canada used in carrying on the entity’s operations, provided;
  • the entity carries on a “prescribed business activity”; and
  • the investment could result in the investor obtaining access to, or direct the use of, “material, non-public technical information or material assets”; and
  • the investor would, as a result of the investment, have the power to appoint at least one board member, senior management, trustee or a general partner, or prescribed special rights with respect to the entity.

If each of these conditions is met, the investor would be barred from closing for at least 45 days after filing, thereby aligning the period for potential national security intervention with the current mandatory notification system. The stated rationale for this change is to increase government visibility over transactions where there is a risk of the investor acquiring – immediately on closing - access to sensitive assets, information, intellectual property or trade secrets, making post-closing national security enforcement ineffective in the eyes of the government.

While the terms “prescribed business activity” and “material, non-public technical information or material assets” remain to be defined in the regulations, one can make an educated guess as to what will be covered based on the government’s various policy positions in recent years and from hypotheticals released by the government in its December 7th technical briefing. For instance, Innovation, Science, and Economic Development Canada (“ISED”) cited quantum computing, a form of “sensitive technology”, as a possible example of a “prescribed business activity”. ISED also confirmed that critical minerals would “likely” be captured. Neither of these activities is a surprising inclusion, given they appear in the current Guidelines on the National Security Review of Investments. We therefore anticipate that the “prescribed business activities” will likely reflect sectors already included in these guidelines, though these important questions will remain unanswered for now.

The government has indicated that the new pre-implementation notification regime will not become active – even once enacted - until the accompanying regulations defining key substantive terms are released. The timing for these regulations is uncertain, but they appear unlikely to be finalized before spring 2023. 

b. Increased Fines for Non-Compliance

The second mechanism included in the Proposed Amendments to purportedly improve detection of harmful investments are the increased penalties available for non-compliance. The Proposed Amendments would levy a hefty fine for failure to notify pre-implementation when required. In the event mandatory pre-implementation notification is not given prior to closing, the government could seek a court order for a fine of at least $500,000 (or a greater amount prescribed by regulations), in addition to injunctive relief. For all other contraventions of the ICA and its regulations, including late filings of a traditional notification, the government has increased the penalty to $25,000 per day (up from $10,000), per contravention.

2. Amendments to the Review Process Itself

The Proposed Amendments have not only sought to bolster the government’s detection toolkit, but the stated aim is to increase the efficacy of the national security review process, though it is unclear how the Proposed Amendments will actually achieve this given that it appears more likely than not that the timeline for reviews is set to increase.

As is, the process is notoriously protracted, consisting of several phases that can together span over 200 days. Where the Minister, based on his preliminary review, makes a determination that there are probable grounds to believe an investment may be injurious to national security, the matter must be referred to the federal Cabinet, to decide whether to order a national security review. Once Cabinet orders a review, the investor may make representations to the Minister and the Minister can require persons to provide information as necessary. The Minister must then decide whether to dispose of the matter unconditionally or, where the investment is deemed harmful, and refer it to Cabinet for its determination. The Cabinet is the only decision-maker empowered to block the investment, issue a remedial order, or allow the investment subject to conditions. In practice, where a matter is referred to Cabinet highlighting the Minister’s concerns, the transaction is typically blocked or unwound. It is highly unusual that a harmful investment is allowed to proceed with conditions, known as “mitigation”.

a. Stated Desire to Streamline the Review Process

The stated aim of certain of the Proposed Amendments is to accelerate the national review process where possible. For instance, instead of relying on Cabinet approval to launch a full national security review under section 25.3 of the ICA, the Minister will now have the ability to unilaterally order “further review”. This grants the Minister jurisdiction to bypass a current procedural hurdle, which appears to serve little purpose in practice.

Another amendment facilitates improved international cooperation over the course of a review, by explicitly permitting Canada to share case-specific information with international counterparts, where statutory privilege previously prevented disclosure. This is critical for ISED, especially in the context of multi-jurisdictional transactions where the Canadian operations are simply a piece of the national security puzzle. Interestingly, ISED has historically taken the position that it already has the authority to collaborate with foreign jurisdictions over the course of its national security review. However, the inclusion of this amendment would encourage a greater degree of collaboration with allied agencies, and potentially enable more detailed information sharing. This could have implications for investors that anticipate national security concerns to arise in multiple jurisdictions due to the nature of the target’s business.

b. Interim Measures

While some amendments are aimed at streamlining the process, others are geared toward improving its efficacy. As currently drafted, the Minister cannot secure interim relief under the ICA to mitigate potential national security harm while its review is ongoing and no decisions have been made. As a result, it is typical for investors to notify post-closing, even where there exists a significant risk of an ensuing national security review. This is particularly common in the context of multi-jurisdictional transactions. As it waits for the government to conduct its review, the investor can proceed to operate as it sees fit. With interim conditions at its disposal, investors may no longer be able to proceed in the normal course until such time as a national security decision is reached. 

The stated rationale for this change is to increase government visibility over transactions where there is a risk of the investor acquiring access to sensitive assets, information, intellectual property or trade secrets on closing, making post-closing national security enforcement ineffective in the eyes of the government.

When coupled with mandatory pre-implementation notification for “prescribed business sectors”, the government is clearly seeking to halt any national security harm that cannot be effectively remedied through ex post relief, like the transfer of sensitive data and technology.

c. Conditional Approval by the Minister

One of the most substantial changes contained within the Proposed Amendments concern the substance of the review process itself. As is, only Cabinet has the jurisdiction to accept undertakings or impose terms and conditions (a power that has almost never been used). As there is no opportunity for an investor to interact with Cabinet, this is an entirely one-sided and inflexible process. Recently, however, in our experience, the Minister has been requesting that investors commit to “soft undertakings” – that is, non-binding representations from the investor concerning its future conduct, providing the Minister with sufficient comfort to resolve his national security concerns without having to refer the investment to Cabinet.

Once in force, the Proposed Amendments would empower the Minister to negotiate binding undertakings with the investor, and to clear an investment on the basis of those undertakings. This approach has the potential to act as a flexible middle-ground, allowing the Minister formulate appropriate conditions through discussions with the investor, rather than relying on Cabinet to approve their conclusion and impose mitigation, resulting in more tailored remedies overall. An order from Cabinet would still be required to block the transaction or order divestitures. We understand that the recently-announced policy to make public Cabinet national security outcomes will not apply to mitigation negotiated with the Minister.

As a final note, separate and apart from the amendment itself, the government’s backgrounder sets out baseline conditions that could mitigate perceived national security risk in certain cases. These requirements include: government approval of the Canadian business’s geographic locations moving forward to ensure distance from sensitive Canadian asset; corporate security protocols (e.g., providing information on cybersecurity, visitor logs); and compliance inspections.

3. Amendments Anticipating a Contentious Process

Finally, the Proposed Amendments set out an additional change that tips the government’s hand as to what it expects moving forward: a national security review process characterized by more frequent judicial review of ministerial decision-making.

While national security orders cannot be appealed on the merits, the opportunity for judicial review is expressly contemplated by the ICA’s national security provisions. However, the ICA is silent on the evidentiary record in such proceedings. As a matter of practice, the national security (section 38) and cabinet privilege (section 39) provisions of the Canada Evidence Act apply to applications for judicial review of national security orders under the ICA.

The Proposed Amendments introduce protections that bear resemblance to section 38 of the Canada Evidence Act – both allow for the introduction of potentially injurious evidence in the absence of non-government parties, including the applicant. The intent behind this change appears to be simplifying the government’s claim of national security privilege, forgoing the separate proceeding required under section 38.04 of the Canada Evidence Act.

While this change may appear to be a procedural tweak, it could be indicative of something more significant. Applications for judicial review of national security orders under the ICA are rare. Procedural housekeeping of a seldom-used section, given the focus of the Proposed Amendments, would be unusual. Rather, this may signal anticipation of more litigation, and potentially more contentious national security reviews generally, as the government downloads greater responsibility onto the Minister from Cabinet.

4. Key Takeaways

  • The government’s posture as it pertains to foreign investment in certain industries remains vigilant and, with the codification of its recent national security policies, an increasingly assertive approach will be the status quo for the foreseeable future. The enactment of the Proposed Amendments likely remains some months away, but the new rules are likely to come into force in 2023.
  • Foreign investors establishing a presence in Canada or making investments in Canadian entities, particularly where it pertains to sensitive sectors (as currently defined), should engage Investment Canada Act counsel early to determine whether a notification or review is required, including whether a filing will be required pre-closing and therefore will need to be incorporated into transaction documentation. Moreover, the potential repercussions for non-compliance will be more costly post-amendments.
  • Foreign investors looking to invest in Canadian businesses that operate in sectors mentioned in the National Security Guidelines should anticipate pre-implementation notification requirements if/when the Proposed Amendments become law. Such investors should also understand that interim measures may be deployed to limit integration of the Canadian target business into their operations, until such time that the national security review is concluded.
  • If the Proposed Amendments become law, investors subject to national security scrutiny should anticipate that the Minister’s office will be more engaged moving forward, and that conditional approvals not involving Cabinet will become more frequent. This should be welcome news for certain foreign investors, particularly in sensitive sectors, as the likelihood of a complete block or divestiture of their Canadian investment is likely to be lower post-amendments, given the increased availability of mitigation strategies.

Authored by McCarthy Tétrault’s Competition/Antitrust & Foreign Investment Group

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