FI Monitor Issue 7, 2023
Trends and tensions: navigating Canada’s foreign investment regime
With a stable economy, abundant natural resources and a predictable legal framework, Canada is a desirable destination for foreign investors. However, investing in Canada is not without its complexities. Foreign investments in the country are subject to comprehensive regulatory oversight to ensure that investments contribute to Canada's economic and social well-being and national security interests.
The Investment Canada Act (ICA), which is federal legislation of general application, serves as the cornerstone for the review of foreign investments in Canada. The ICA enables the government to review foreign investments both for: (i) their “net benefit” to Canada; and (ii) their potential injury to national security.
The “net benefit” regime, which focuses on socio-economic matters, establishes mandatory filing requirements. These apply to every acquisition of control of a Canadian business (as defined in the ICA) and to the establishment of a new Canadian business, in each case by a non-Canadian. Non-controlling investments in an entity with operations in Canada may be notified voluntarily. Where an acquisition of control of a Canadian business is made directly and prescribed financial thresholds are exceeded, the investment is subject to net benefit review, which is suspensory and must complete before the transaction can close. All other filings can be made either before or within 30 days after closing and do not generate any formal, substantive review process.
The national security regime applies to a wider category of investments by non-Canadians, including non-controlling investments into businesses conducting all or part of their operations in Canada. Currently, national security review commences using the government’s call-in powers. This intervention is subject to prescribed limitation periods, which vary depending on the extent to which an investment is notifiable.
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Net benefit reviews
Due to the nature of the ICA’s financial thresholds, only a small minority of investments (5 out of 1,010 notified transactions in fiscal year 2023) require net benefit review and approval prior to closing. The government assesses the likely net benefit of these investments to Canada under several socio-economic factors, including:
- employment impact, including job creation and retention;
- effects on Canada’s economic activity;
- degree and significance of participation by Canadians in the Canadian business;
- utilization of Canadian resources and impact on exports from Canada;
- impact on competition and the competitiveness of Canadian firms on the global stage; and
- contribution to Canadian productivity, industrial efficiency, technological development and product innovation and variety.
In almost all cases, the foreign investor must negotiate binding undertakings to obtain approval. A net benefit review typically takes 45–90 days, and potentially longer in complex cases. The reviewing minister may refer transactions undergoing net benefit review that potentially pose national security concerns for national security review, pausing the net benefit review pending completion of the national security process.
National security reviews
National security reviews assess whether an investment will be injurious to Canadian national security and focus primarily on the nature of the business to be acquired and the parties involved, including the potential for the investor to be influenced by foreign states. Government guidelines identify target activities and investor profiles raising potential concerns. State-owned enterprises (SOEs) and private investors connected to or influenced by non-allied jurisdictions present a higher risk of intervention. Targets with operations in sectors such as defense, dual-use technology, critical minerals, critical infrastructure and supply chains, or which have access to sensitive personal data regarding Canadians, tend to attract greater scrutiny.
National security reviews are commenced via government intervention. Where a transaction is subject to mandatory notification or review under the net benefit regime, the responsible minister has 45 days from filing to commence a national security review, which is suspensory if intervention takes place prior to closing. If the transaction is not notified mandatorily or voluntarily, the government may call it in for review within five years after closing. Including all possible review periods and a window for final Cabinet action, the process can exceed 200 days in total. During the fiscal year 2023, the average duration of review for the 22 investments subject to a full national security review was 174 days, which is shorter than historical norms.
Evolving geopolitical concerns
Recent geopolitical developments have led to stricter national security reviews, particularly for sensitive industries (e.g. critical minerals) and foreign investors with ties to non-allied governments. New government guidance and policy statements evidence the recent shift in enforcement, especially for SOEs.
Traditionally, the government considered an SOE to be a firm directly owned or significantly influenced by a foreign state, but this definition has been expanded to cover private enterprises operating in countries where governments can exert extra judicial influence.
While inbound Russian investment into Canada has been relatively rare, the Russian invasion of Ukraine amplified scrutiny on investors with direct or indirect ties to the Russian state. Such investments are now presumptively considered to be injurious to national security.
Similarly, Canada’s more strained relations with China in recent years have led to increased scrutiny of Chinese investments, a phenomenon not unique to Canada. In November 2022, the Canadian government ordered the divestiture of investments by three Chinese firms in Canadian-headquartered companies with critical minerals operations. These investments were likely minority investments of relatively low value by Chinese firms with no apparent state ownership. They likely did not trigger mandatory notification under the ICA, and it is probable none were notified to the government, given that they occurred before the new voluntary notification regime took effect. These steps confirm the expansive approach to national security enforcement for investors considered to have connections with non-allied governments.
Government data from fiscal year 2023 illustrates this heightened regulatory focus. While the rate of national security intervention remains low relative to the total number of foreign investments notified (32 interventions versus 1,010 notified transactions), last year’s 32 interventions represents a significant increase versus 2021–22’s total of 24 and more than three times the number in 2019–20.
Of the 32 investments subject to national security intervention, well over half (22 in total) were subject to extended review. Of these 22 extended reviews, investors from non-allied jurisdiction accounted for a large majority: 16 investors were from China, a clear sign of the prevailing geopolitical conditions. Importantly, the other six extended reviews related to investors from countries such as the United States, France and Czech Republic, demonstrating that the investor’s country of origin is not the only factor in a national security risk assessment. The final outcomes of these 22 extended national security reviews were similar in scope to recent trends: ten were cleared unconditionally, eight resulted in investor withdrawal (i.e., abandoning the transaction), three investments resulted in a divestiture order and one review was ongoing.
Reforms focus on national security
In response to the dynamic geopolitical landscape and increased national security concerns, the Canadian government has proposed amendments to the ICA to complement its hardening enforcement stance and empower the Minister in safeguarding Canada’s national security interests. The enactment and implementation of these amendments, anticipated to occur in 2024, would usher in a new era of intensified enforcement, targeting specific classes of non-Canadian investors and transactions, particularly within sensitive sectors, aiming to identify and enforce against perceived national security threats earlier in the transaction process.
- Pre-implementation notification: To fix a perceived enforcement gap in respect of transactions that can generate national security harms immediately upon closing, the amendments would mandate pre-implementation notification for all transactions involving “prescribed businesses” (currently undefined) where investors could gain access to “material, non-public technical information or material assets” (also undefined). These investments would be prohibited from closing until 45 days after filing, affording the government ample time to assess and potentially intervene on national security grounds (extending the suspension of closing for the duration of that review).
- Increased fines: To incentivize compliance with the pre-implementation notification regime, the proposed amendments introduce new fines, starting at a minimum of C$500,000 for failing to make a mandatory filing before implementation. Fines for ICA violations (such as filing late) would increase from C$10,000 to C$25,000 per day, underscoring the government’s commitment to compliance.
- Ministerial power for further review: The Minister would gain the unilateral authority to order a “further review” of investments, eliminating the need for Cabinet approval to take this step, thereby expediting the review process. This change highlights the government's determination to act swiftly in response to evolving threats.
- Interim measures: The Minister would be granted the ability to impose interim conditions on investments undergoing national security reviews (such as requiring information and assets to be held separate from the investor), providing greater flexibility to protect national security interests while a review is ongoing. This departs from the current system, where investors can freely integrate target Canadian businesses during the review process if closing has occurred prior to government intervention.
- Conditional approval by the Minister: The proposed amendments empower the Minister to negotiate binding undertakings with investors, potentially clearing investments based on these undertakings – a role previously reserved for Cabinet. This shift reflects the government’s intention to take a more active role in shaping investment outcomes and raises the possibility that the ICA will feature more conditional approval decisions akin to the U.S. CFIUS regime in the future.
- Judicial review and confidentiality: The amendments introduce a mechanism allowing the Minister to assert privilege more easily over sensitive documents during a judicial review of a national security decision without disclosing them to the applicants or their counsel, thereby enhancing confidentiality in the process.
These proposed amendments will enable earlier detection of potentially harmful transactions than current legislation, where a remedy may not be in place until 200 days or more after closing. Additional amendments are being considered during the legislative process, including by enabling the government to commence net benefit review for investments by SOEs even where they do not meet the prescribed financial thresholds.
How investors respond
Foreign investors eyeing the Canadian market, especially in sensitive sectors, should seek counsel proactively from experts well-versed in the intricacies of the ICA. Early engagement is crucial to determine whether a mandatory filing may be required, whether there is any risk of national security intervention and, if so, how to integrate those scenarios into transaction documentation. This assessment will become more complex once the proposed amendments are enacted.
Foreign investors considering investments in sensitive sectors should be prepared to face interim measures requiring the target to be held separate until the national security review concludes. This possibility will likely adjust some investors’ filing strategies, as the benefits of making a filing post-closing may be outweighed by the inconvenience of navigating a national security review with onerous hold separate measures imposed.
With global geopolitical conditions likely to remain unpredictable in the short- to medium-term, Canada’s active enforcement posture and increasing collaboration with peer agencies in allied countries should ensure the ICA remains at the forefront of the foreign investment landscape.
Please get in touch with us or your usual Freshfields contact if you would like to discuss these or any other regulatory issues in more detail.
Alastair Mordaunt Partner
London, Hong Kong
Aimen Mir Partner | Foreign Investment and National Security | Head of CFIUS Practice
Dr. Frank Röhling Partner
Rafique Bachour Managing partner
Ignacio Borrego Of Counsel
Colin Costello CFIUS and National Security Advisor
Pascal Cuche Public Law
Dr. Stephan Denk Partner
Ninette Dodoo Partner
Dr. Maria Dreher-Lorjé Partner
Dr. Juliane Hilf Partner
Álvaro Iza Partner
Sarah Jensen Counsel
Winfred Knibbeler Partner
Christine Laciak Special Counsel
Dr. Jérôme Philippe Partner
Alex Potter Partner
Dr. Uwe Salaschek Counsel
Ermelinda Spinelli Partner
Paul van den Berg Partner
Dr. Andreas von Bonin Partner
Kaori Yamada Partner