In what appears to be a dramatic shift in Canada’s foreign investment review policy, the federal government has recently approved the acquisition of ITF Technologies Inc. (“ITF”), a Montreal-based technology firm, by O-Net Communications Holdings Limited (“O-Net”), a Chinese developer of optical networking components, which is said to be effectively controlled by the Chinese government. Applications for ITF’s technologies include directed-energy weapons.

The acquisition of ITF by O-Net first became newsworthy in July 2015 when the former Conservative government ordered O-Net to divest its controlling interest in ITF, which it had acquired through a bankruptcy auction after no other North American company offered to purchase ITF. The order was made under the authority of the Investment Canada Act’s (the “Act”) national security provisions. Under these provisions, the Governor in Council (the federal Cabinet) can, among other things, block—or in the case of O-Net—unwind a transaction if it is injurious to Canada’s national security. In this case, the acquisition was thought to undermine the technological advantages that Canadian and other western militaries had over China.

The notoriety of the transaction grew later in August 2015 when O-Net became the first investor to challenge the government’s decision to block a transaction on the basis of national security concerns. In its application for judicial review, O-Net argued that, among other things: (i) ITF was controlled by non-Canadians prior to the sale in 2015; (ii) its investment in ITF would not provide access to technologies or products to which it did not already have access; (iii) it had increased ITF’s revenues and added almost 50 new engineering jobs; and (iv) the federal government’s order was issued without providing O-Net with any details about the nature and extent of the national security concerns.

In response, the former Conservative government signalled its intent to oppose O-Net’s application. However, a federal election intervened and, after the Liberal Party came into power in October 2015, it engaged in settlement discussions with O-Net which culminated in the original Conservative government divestiture order being set aside and a new national security review being ordered.

Even more surprising was that the second national security review resulted in the Liberal government deciding to allow O-Net’s acquisition of control of ITF. While press reports indicated that conditions designed to limit the potential risk that could compromise national security had been attached to Canada’s approval, Minister Bains’ explanation for the reversal  was that “the government has acted on the full record of evidence and advice provided by Canada’s security and intelligence experts”.

The Conservative public safety critic’s response to this announcement was to suggest that the Liberal government has not “proved anything has changed that would merit reconsideration.”  The critic’s comments highlight two longstanding complaints about the Act’s national security review process: (i) it is opaque for both investors and the public; and (ii) the process is politically-driven. To address the first complaint, the federal government issued, for the first time, Guidelines on the National Security Review of Investments in December 2016 (see our previous post on those guidelines here). However, it appears that there is no easy fix to the second complaint.

Given that trade and investment ranks high in Canada’s China policy, it is likely that this decision is evidence of a new openness to Chinese investment in Canada, which should result in many more Chinese investments being made and very possibly in some of Canada’s sensitive industry sectors.