As discussed in our previous post, on April 18, 2020, the Minister of Innovation, Science and Industry released a policy statement announcing that, in light of the evolving COVID-19 pandemic, certain foreign investments into Canada will be subject to enhanced scrutiny under the Investment Canada Act (the “Act”).
National Security: Public Health and Critical Goods and Services
Canada intends to more closely scrutinize foreign direct investments, both controlling and non-controlling, of any value in Canadian businesses that are “related to public health or involved in the supply of critical goods and services to Canadians or to Canadian governments”. Presumably this increased scrutiny will involve greater use of the national security review powers granted under the Act.
Where a transaction involves a Canadian business “related to public health or the supply of critical goods and services” and regardless of whether the investment results in the acquisition of control of that Canadian business, the foreign investor should consider early engagement with the Investment Review Division of Innovation, Science and Economic Development Canada.
Investments by Foreign Stated-Owned Enterprises
Further, the Government will subject all investments, regardless of value, by foreign state-owned enterprises including foreign investors closely tied to or subject to direction from foreign governments “to enhanced scrutiny” under the Act. Such enhanced measures may involve additional requests for information and extensions of timelines for both net benefit reviews and national security reviews in order to ensure the Government can fully assess such investments. Additionally, this enhanced scrutiny will apply to investments that may not be subject to the mandatory filing obligations under the Act. Significantly, even the acquisition of a non-controlling interest in a Canadian business can be subjected to a national security review under the Act.
For such transactions, application of the Act should be an important consideration at the earliest stages of transaction planning and transaction agreements should be drafted to anticipate longer delays with appropriate protections built in.
Both of the above enhanced measures will continue to apply until “the economy recovers from the effects of the COVID-19 pandemic,” which at this stage, remains to be seen.
Are We in a New Reality — or Seeing Reality for the First Time?
National security has been commonly understood as dealing with espionage and terrorism. But it has always included very deliberate considerations of critical infrastructure – specifically, those goods, services, and institutions that underpin the first duty of the state: providing for the basic safety and security of its citizens. In the COVID-19 era, this means ownership of production or processing facilities for goods like food, key textiles, and ventilator parts (to name only a few) will be closely monitored by the Government to ensure that Canadian supply is guaranteed.
For non-Canadians who view Canada as a key destination for the safe and productive use of capital, this means deals that would never before have been scrutinized will now receive significant national security examination, if not full cabinet-mandated National Security Review under Part IV.1 of the Act. It also means that transactions involving even Canada’s closest friends and allies (often defined as either the majority of the 30-member NATO alliance or the more exclusive Five Eyes intelligence alliance) will no longer represent presumptively safer sources of investment dollars. This is a fundamental reality – but it is also one that, to varying degrees, we have been living with for far longer than many market observers realize.
Critical Infrastructure: Critical Goods and Services
As early as 2009, in a publication endorsed by all 14 Canadian jurisdictions, Public Safety Canada published a list of ten critical infrastructure categories:
|Energy and utilities||Information and communication technology|
Entire directorates of government exist to plan for the preservation of critical infrastructure and the continuity of constitutional government. For years, the officials who staff these offices have been planning for that proverbial “rainy day” on which their work would come to the forefront of government thinking. That day has arrived.
On April 2, 2020, in the midst of the COVID-19 crisis, Public Safety Minister, Bill Blair, published the specifics of the above in a news release that got very little attention relative to its significance, both to everyday Canadians and to the investment community. “Health” and “Food” are described in useful detail in that publication.
How Should Foreign Investors React?
- Mitigation will be everything. Offering supply guarantees will be key. There are methods for such guarantees to be enforced under the Act and ultimately in reserve is the “hammer” of the federal Emergencies Act which can authorize acts akin to nationalization.
- Fight for the right to engage government. There has been a perceived decline in the willingness of federal officials to engage in dialogue with investment proponents. Now is the time to openly and productively discuss how to deal with threats – both real and perceived.
- Jobs will be king. COVID-19 will be with us for some time to come. But our economy must also begin to spool up – and soon. Governments are aware of this fundamental contradiction: even as investment controls are tightened, the need for foreign direct investment has never been greater. This presents opportunities for investors – if they know how to package a deal for government consumption. That packaging must focus, to the largest extent possible, on jobs, ongoing capital investment, and funding Canadian-based research and development.
- Get “shovel-ready”. A corollary to job-creation will be the ability to leverage or “unlock” government financial support. As security threats are placed in the context of economic recovery, the ability of a transaction to connect with available federal funding and place it in the pockets of Canadians will significantly blunt the political risk for many ministers and propel them towards a “yes” when a firm “no” is recommended by officials.
- Gather the right allies and be ready for a challenge. The world is a different place than it was even three months ago and we are all making our way forward. Linking up with like-minded influencers, including provincial governments, unions, media, and civil society, will be very useful. Gather a team of advisors who are able to marshal and manage a coalition to support the deal, and run the gantlet of federal security agencies with you.
- Be realistic and be prepared. If a deal cannot plausibly be done, do not embark upon it. If it can be done, prepare a comprehensive end-game plan before getting underway. As Ben Franklin said, “[b]y failing to prepare, you are preparing to fail.”
If you have questions about Canada’s foreign investment laws and regulations, please reach out to a member of Fasken’s Antitrust/Competition Marketing group. Our group has significant experience advising foreign investors, including state-owned enterprises, on the national security implications of Canada’s foreign investment regime.
The information and guidance provided in this blog post does not constitute legal advice and should not be relief on as such. If legal advice is required, please contact a member of Fasken’s Antitrust/Competition Marketing group.