Non-Canadian secured lenders should be aware that they may have a filing obligation under the Investment Canada Act (Act) if they acquire control of a Canadian business in connection with the realization on security granted for a loan or other financial assistance.
Until 2009, such transactions were entirely exempt from the Act. Specifically, paragraph 10(1)(c) of the Act classified a transaction involving “the acquisition of control of a Canadian business in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of this Act” (Realization Exemption) as an exempt transaction to which no provision of the Act applied.
However, when the Act was amended in 2009 to add a separate review process for foreign investments potentially impacting on Canada’s national security, the Realization Exemption was amended to add the following condition: “if the acquisition is subject to approval under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act”.
Effectively, the amendment changed the law to require a non-Canadian lender to provide notice under the Act when the realization of security granted for a loan or other financial assistance results in the direct or indirect acquisition of control of a Canadian business. Transactions involving approvals under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act remain exempt from this requirement because such approvals take national security into consideration as a part of the approval processes that take place under those other acts.
Presumably the reason that notifications under the Act are required in connection with realizations by non-Canadians is to permit Canada’s security services to consider whether the non-Canadian lender’s acquisition of control of the Canadian business raises any potential national security issues. Under the Act, the Minister of Innovation, Science, and Economic Development (Minister) has 45 days, unless extended, from the date that a notification is certified as complete to initiate a national security review in respect of a transaction. If a notification is not filed, the 45-day period commences on the date that the transaction first comes to the Minister’s attention.
Should the Minister have reasonable grounds to believe that the realization of security could be injurious to Canada’s national security, he can issue a notice commencing a formal national security review process pending the conclusion of which the transaction, if it has not already taken place, may not be implemented.
While the Act does not provide for a penalty for the failure to provide a notification, should a realization ultimately be determined by the Governor in Council to require action to protect Canada’s national security, the Governor in Council may make any order that it considers advisable to protect Canada’s national security, including prohibiting the realization or, if the realization has occurred, requiring a divestiture of the Canadian business.
Filing a notification under the Act will not prevent a national security review where the realization could be injurious to national security. But filing a notification in advance of realizing on the security may still be advantageous as it would open a dialogue with the Minister at an earlier stage and demonstrate a willingness to comply with the Act. Note that investors are given the opportunity to make representations to the Minister in a national security review. Such pre-acquisition dialogue may allow for more flexibility in negotiations toward less burdensome or costly measures to address the national security concern(s).