After concluding that the Investment Canada Act applies to an investment, the next step is to determine the appropriate screening procedure. As discussed in question 3, where a new Canadian business is established or an investment below the applicable review threshold is made, an administrative notification form must be filed. Whereas higher financial value acquisitions (and acquisitions of cultural businesses) require a more onerous review procedure. To determine whether a review is required (versus an administrative notification form), one must examine the size of investment, whether the investor or the vendor is controlled in one or more countries that are members of the WTO, whether the investment is a private sector trade agreement investment, whether the investor is an SOE, whether the acquisition is direct or indirect, and whether the target’s business is cultural or gives rise to national security concerns.
Review under the Investment Canada Act
Subject to certain exemptions, where a transaction involves the acquisition of control of a Canadian business by an acquirer controlled, directly or indirectly, by non-Canadians (see question 4) and the enterprise value (for WTO investments by non-SOE investors) or the gross book value of the assets (for SOE investors, Canadian cultural businesses or non-WTO investments) of the acquired business exceeds certain threshold amounts, the transaction may be reviewable by Industry Canada pursuant to the Investment Canada Act. The Act sets out an extensive list of activities that are exempt from the operation of the statute, including ordinary course acquisition of voting shares by a trader in securities, acquisition in the course of realising on security for a loan, and corporate reorganisation where the ultimate control does not change. Exempt transactions, of course, do not incur any review or notice obligations.
If a direct acquisition is reviewable, it cannot be completed without the approval of the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions).
Acquisition of control
The acquisition of control of a Canadian business is effected by acquiring:
- substantially all of the assets of a Canadian business; or
- the majority of the voting interests in an entity such as a corporation, partnership, joint venture or trust that carries on, or controls, a Canadian business.
The acquisition of a third or more of the voting shares of a corporation that controls, or carries on, a Canadian business will give rise to a rebuttable presumption that control has been acquired. The acquisition of less than a third of the voting shares of such a corporation is deemed not to be an acquisition of control. For any entity (whether a corporation, partnership, joint venture or trust) the acquisition of a majority of the ownership interests is deemed to be the acquisition of control. Notwithstanding these deeming and presumption provisions, in the case of cultural industries, the minister can look at control-in-fact evidence and make a determination that an acquisition of control has taken place.
Thresholds for review
Generally, one of two thresholds will apply to most direct acquisitions of control of Canadian businesses by non-Canadian, non-SOE investors from WTO member states: C$1.5 billion in enterprise value of the target for private sector trade agreement investors under the Canada-EU Comprehensive Economic and Trade Agreement or C$1 billion in enterprise value of the target for other non-SOE investors from WTO member states. The Investment Canada Act provides for complex formulas for calculating the enterprise value of Canadian businesses acquired by way of share (public or non-public entities) or asset acquisition. As discussed in question 4, a non-Canadian includes a Canadian-incorporated entity that is ultimately controlled from outside Canada.
Higher reviewable thresholds
Canada-EU Comprehensive Economic and Trade Agreement
As mentioned, pursuant to the Canada-EU Comprehensive Economic and Trade Agreement, the threshold for review of acquisitions of Canadian businesses by non-state owned investors from EU member states, the United States, Mexico, South Korea, Chile, Peru, Columbia, Honduras and Panama is C$1.5 billion.
Comprehensive and Progressive Agreement for Trans-Pacific Partnership
In 2018, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, formerly known as the Trans-Pacific Partnership prior to the United States pulling out). Among other things, the CPTPP agreement contemplates that investors from CPTPP countries (other than state-owned enterprises) will benefit from a higher review threshold of C$1.5 billion under the Investment Canada Act.
The CPTPP comes into force on 30 December 2018 after six countries (Australia, Canada, Japan, Mexico, New Zealand and Singapore) ratified the agreement. The CPTPP will come into force for the remaining five countries when they ratify.
Lower reviewable thresholds
Lower reviewable thresholds apply for certain investments. For direct acquisitions (see ‘Indirect acquisitions’, below), if both the purchaser and vendor are each ultimately controlled in a non-WTO member state, the review threshold is C$5 million in asset value.
Also, where the Canadian business being acquired is a cultural business and is directly acquired, the reviewable threshold is C$5 million in asset value regardless of whether the purchaser or vendor is ultimately controlled in a WTO member state. A ‘cultural business’ is a business that carries on any of the following activities:
- publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form;
- production, distribution, sale or exhibition of film or video products;
- production, distribution, sale or exhibition of audio or video music recordings; or
- publication, distribution or sale of music in print or machine-readable form.
Even if an acquisition by a non-Canadian of a cultural business does not trigger the statutory reviewable threshold, a review may, nonetheless, be ordered where the ‘Governor in Council considers it in the public interest’.
The review threshold for investments by SOEs is C$398 million (2018) in asset value that will be adjusted annually to reflect the change in nominal gross domestic product in the previous year.
The above thresholds relate to direct acquisitions. If the investment is an indirect acquisition (acquisition of control of a corporation outside Canada that controls an entity carrying on a Canadian business) the following thresholds apply:
- if the target is a cultural business or if purchaser and target are each ultimately controlled in a non-WTO member state (or Canada in the case of the target), the threshold for review is C$50 million in asset value. However, if the Canadian assets being acquired comprise more than 50 per cent of all of the assets being acquired, the threshold for review is C$5 million in asset value; and
- if the purchaser or target is from a WTO member state and the target is not a cultural business, the investment is not reviewable. Instead, only notice of their proposed activities must be given to the Canadian government (see ‘Notification under the Investment Canada Act’, below).
Transactions that could be ‘injurious to national security’
The Canadian government has the power to review all proposed investments (including minority investments) where the relevant minister (Minister of Innovation, Science and Economic Development or Minister of Canadian Heritage for cultural transactions) has ‘reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security’. There is no statutory definition of ‘national security’. No financial threshold will apply to a national security review. A national security review can also apply to minority investments. This means that any transaction that involves a non-Canadian is potentially subject to a national security review. After a review, the minister may deny the investment, ask for undertakings, provide terms or conditions for the investment or, where the investment has already been made, require divestment. A national security review can occur before or after closing and may apply to corporate reorganisations where there is no change in ultimate control. The major concern for foreign investors under a review for ‘national security reasons’ is that a number of important terms regarding the ‘national security’ review scheme have not been defined in the legislation. This lack of definition creates a wide discretion for the minister and some uncertainty for foreign investors. At the end of 2016, the Canadian government released its highly anticipated Guidelines on the National Security Review of Investments, which shed some light on circumstances that may draw investors and parties involved in the investment into the realm of a national security review. The guidelines provide a list of factors that the Canadian government considers when assessing whether an investment poses a national security risk. These factors focus on defence, technology and critical infrastructure and supply. The Canadian government may take into account:
- the potential effects of the investment on Canada’s defence capabilities and interests;
- involvement in the research, manufacture or sale of goods and technology identified in section 35 of the Defence Production Act;
- the potential of the investment to enable foreign surveillance or espionage;
- the potential of the investment to hinder current or future intelligence or law enforcement operations;
- the potential impact of the investment on Canada’s international interests, including foreign relationships;
- the potential of the investment to involve or facilitate the activities of terrorists, terrorist organisations or organised crime and other illicit actors;
- the potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
- the potential impact of the investment on the security of Canada’s critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government;
- the potential impact of the investment on the supply of critical goods and services to Canadians; and
- the potential impact of the investment on the supply of goods and services to the government of Canada.
Since the national security review process was introduced in March 2009, formal national security reviews have been ordered at least 13 times. The outcomes of these reviews include: investor was directed to not implement the proposed investment (three cases), investor was ordered to divest control of the Canadian business (five cases), investment was authorised with conditions that mitigated the identified national security risks (four cases) and, in one case, the investor withdrew its application prior to a final order being made. Many more investments have been the subject of informal national security review that, for the most part, resulted in clearance.
Notification under the Investment Canada Act
If the relevant financial thresholds for review under the Investment Canada Act are not met, an administrative notification form must be filed by the investor any time before the implementation of the investment or within 30 days of the implementation.
Some of the more onerous reporting requirements include providing information in respect of the investor’s board of directors, five highest paid officers and individuals that own 10 per cent or more of the investor; whether the investor is influenced by a foreign state; and sources of funding for the investments.
Following receipt of the notice, the Investment Review Division, the Cultural Sector Investment Review of Canadian Heritage, or both, assess it for completeness and issue a receipt. Eventually, basic details identifying the investor, the target and the nature of the target’s business will be disclosed on the Ministry’s website.
There are circumstances in which an investment that would not otherwise be reviewable (in other words, subject to notification) is subject to review under the Investment Canada Act. See question 15.
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