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 (“ICA”) since 2009. The ICA is Canada’s foreign direct investment statute, establishing notification regimes for a wide range of investments in businesses that operate in Canada. Certain investments must be notified and approved prior to closing, having satisfied the federal government that they will be of net benefit to Canada. As well, the ICA incorporates a national security review regime, which provides the government with the power to call in and review on national security grounds any investment into a business carrying on all or a part of its operations in Canada. The Minister of Innovation, Science and Industry (the “Minister”) administers the national security provisions in the ICA.
While national security reviews remain rare overall (for example, in 2021-2022, there were 12 extended reviews but almost 2,000 investments otherwise notified to the Investment Review Division, “IRD”), the federal government’s enforcement posture has hardened in recent years, especially towards investors from non-like-minded jurisdictions, such as China, and in respect of investments touching on sensitive industries, such as critical minerals, dual-use technologies, and critical infrastructure.
The Proposed Amendments must be seen as one part of the federal government’s enhanced focus on national security review; an acknowledgement that, in addition to using the existing legislative framework more assertively, the government also wishes to expand the scope of the regime to fix perceived flaws in its operation. In differing ways, the Proposed Amendments seek to strengthen the government’s jurisdiction to detect, review and restrict foreign investments deemed likely to be injurious to Canadian national security. In this article, we highlight some of the more significant changes that could be introduced pursuant to Bill C-34.
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”. All other investments, if notifiable, can currently be notified up to 30 days after closing.
The Proposed Amendments would expand the categories of investments subject to pre-implementation notification, in this instance to enable national security review to take place prior to closing. The new regime would require pre-implementation notification for all investments that are currently subject to the national security review regime (other than the establishment of a greenfield entity) where:
- the entity carries on a “prescribed business activity”. This definition is not yet proposed, but is anticipated to align with the higher risk industry sectors identified in the governments Guidelines on National Security Review of Investments, such as dual-use technology, critical minerals, businesses involved in the supply of critical goods or critical infrastructure and any products subject to defence-related export controls.
- the investment could result in the investor obtaining access to, or direct the use of, “material, non-public technical information or material assets”. In other words, the investor would obtain access to sensitive know-how as a result of closing the investment.
- 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. This limb is designed to exclude from mandatory pre-implementation notification minority investments that are purely passive in nature.
It is not yet apparent how many investments per year will be captured by the new pre-closing notification regime, but the Investment Review Division has acknowledged that additional resources will be needed to review notifications and take action – if appropriate – in a timely manner.
Bill C-34 encompasses a range of other amendments to the national security review regime, many of which are designed to render the review process more efficient and adaptable. In particular, the Proposed Amendments would:
- allow the government unilaterally to impose interim relief (i.e. injunctions against the investor) to mitigate potential national security harm while a review is ongoing;
- to allow for conditional approval without referring an investment to federal Cabinet, meaning the Minister would be able to negotiate binding undertakings with the investor, and to approve an investment on the basis of those undertakings;
- allow the Minister to take the decision to launch an extended national security review under section 25.3 of the ICA, which order must currently be made by Cabinet.
Other amendments, focused on the management of evidence in the event of an investor judicially reviewing a national security decision, suggest the federal government is contemplating an uptick in contested national security review orders (which cannot be appealed on the merits).
- As regards foreign investment in certain industries, the government 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.
- Foreign investors establishing a presence in Canada or making investments in Canadian entities, particularly where it pertains to sensitive sectors, 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.
Bill C-34 is currently being scrutinized at the committee level within the House of Commons; therefore, a number of steps remain to be completed in order for the Proposed Amendments to be enacted. It is likely that legislation will not be enacted until 2024, and the new pre-implementation notification regime will likely come into force until such date as various substantive terms are codified in accompanying regulations.