On February 2nd, 2022, the Director of Investments issued his annual report on the administration of the Investment Canada Act (“ICA”) for the fiscal year commencing April 1, 2020 and ending March 31, 2021. The Annual Report provides insight on key trends relating to foreign investment and national security reviews in Canada.

During the period covered by the Annual Report, a total of 826 filings were certified under the ICA, representing a 20% decrease from the 1,032 filings made in the previous year. Most notably, the number of applications for review (required in the case of high-value foreign acquisitions) dropped by 67% over the prior period.

It was suggested that the considerable decrease in foreign investment filings was not Canada-specific but rather attributable to the general decrease in global investment activity as a result of the COVID pandemic. The Director expects that the number of filings will rebound in the next year, but perhaps not to pre-pandemic levels.

In contrast to the overall decrease in ICA filings, the number of foreign investments subjected to national security reviews has continued to increase year-over-year. This trend is expected to continue as global investment activity increases, along with a sustained focus on security and critical infrastructure concerns highlighted by the pandemic.

Net Benefit Reviews

 Under the ICA, every acquisition of control of a Canadian business, whether direct or indirect, and every establishment of a new Canadian business, by a non-Canadian is subject to either notification or a ‘net benefit to Canada’ review where certain monetary thresholds are exceeded, and in each case, requires that a filing be made to the Investment Review Division of Innovation, Science and Economic Development Canada (“ISED”). When a transaction is subject to a ‘net benefit to Canada’ review, non-Canadian investors are required to obtain Ministerial approval by demonstrating to the Minister that their investment will likely be of net benefit to Canada, which essentially involves an evaluation of the potential economic benefits (versus any burdens) that such foreign ownership could generate for Canada.

Of the 826 filings made in the last fiscal year, only 3 investments were subject to a ‘net benefit to Canada’ review. Those 3 reviews required an average of 77 days from certification to completion. All 3 investments were approved by the Minister as likely being of net benefit to Canada.

The top five investors into Canada by number of investments were: (1) the United States, (2) the European Union, (3) the United Kingdom, (4) China, and (5) India (however, if ranked by the asset value of the Canadian business acquired, the European Union would actually be the top investor into Canada). Approximately half of the filings made in the past fiscal year were from US investors (448). Interestingly, the number of investments from the UK (2020/2021: 61) decreased significantly from the prior year (2019/2020: 184). The number of investments from China increased from 41 (2019-2020) to 61 (2020-2021) as did the enterprise value of the Canadian businesses acquired by Chinese investors.

Investments by country or region of origin

National Security Reviews

The national security review provisions of the ICA provide for a much broader review mechanism than the ‘net benefit to Canada’ review process described above. All investments, whether implemented or proposed, by non-Canadians into Canada may be subject to a national security review in situations where the Minister has reasonable grounds to believe that such an investment could be injurious to Canada’s national security.

All of the 826 investment filings made under the ICA in the last fiscal year and an unknown number of additional investments by non-Canadians that, because they did not represent an acquisition of control (and, as such, did not require a filing under the ICA) were scrutinized by Canada’s national security and intelligence agencies under the national security provisions of the ICA during the same period (other federal legislation, such as the Bank Act and the Insurance Companies Act, also provide for certain investments to be considered from a national security perspective. The statistics in the Annual Report do not include these reviews.)

23 of those foreign investments were subjected by the ISED Minister to an additional period of national security scrutiny and 11 of those investments were then subjected to the formal national security review process provided under section 25.3 of the ICA. Of those 11 investments, 4 were cleared to proceed, 4 were abandoned by the non-Canadian investors prior to the formal national security review being completed, 2 non-Canadian investors received orders to divest of the Canadian business, and 1 investment was blocked.

The average review period for those 11 reviews was 225 days from the date of certification (or where no filing was made, the date of first government action) to conclusion.

While the ICA protects the confidentiality of the foreign investors and their specific investment proposals, the Director of Investments provided the following information with respect to countries of origin of the investors, industry sectors involved, and the decisions made:

# Origin Industry Sector Outcome
1 China Metal Ore Mining Blocked
2 China Highway, Street and Bridge Construction Withdrawal
3 Taiwan Pharmaceutical and medicine manufacturing No further action under the ICA
4 Russia Software publishers No further action under the ICA
5 China Computer systems design and related services No further action under the ICA
6 China Computer systems design and related services No further action under the ICA
7 United Arab Emirates Computer systems design and related services Divestiture
8 China Scientific research and development services Withdrawal
9 United Kingdom Financial transaction processing Withdrawal
10 China Business support services; and Telecommunications Divestiture
11 China Medical and diagnostic laboratories Withdrawal

Key Take-aways

While relatively few investments will be subjected to full national security reviews, if a formal national security review is ordered by the federal cabinet under section 25.3 of the ICA, the review process will be a lengthy one and there will be considerable uncertainty regarding whether the proposed investment will be allowed to proceed.

In accordance with the ‘enhanced scrutiny’ policy statement (the “Enhanced Scrutiny Policy”) issued by the Canadian government in April 2020, there has been an expanded use of the national security review provisions of the ICA to protect Canada’s essential security interests in light of the evolving pandemic. Under this Enhanced Scrutiny Policy, the Canadian government more closely scrutinizes: (i) 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”; and (ii) investments of any value by foreign state-owned enterprises and private investors assessed as being closely tied to or subject to direction from foreign governments. In this context, it is unsurprising that the number of formal national security reviews of investments from Chinese investors has more than doubled – up from 3 to 7 – since the previous fiscal year, and that a proposed Chinese investment in the metal ore mining industry was blocked under section 25.4 of the ICA by the Government this year (by process of elimination, we know this to be the Shandong | TMAC transaction involving the Hope Bay gold mine in Nunavut). While these statistics may lead some investors to conclude that their investments will be challenged as a matter of course, the recent clearance of Chinese state-owned Zijin Mining Group Co., Ltd’s acquisition of Neo Lithium Corp (a Canadian lithium brine exploration company developing a mine in Argentina) supports a conclusion that the national security risk of all investments, regardless of their origins and subject matter, will be assessed by the government on a case-by-case basis.

While the term “injurious to Canada’s national security” is not defined in the ICA, the Minister of ISED helpfully released updates to the Guidelines on the National Security Review of Investments (the “Guidelines”) which expand on the list of factors the Government will consider during the national security review process. The Guidelines appear to respond to widely expressed concerns about the sanctity of personal information, vulnerability of Canadian intellectual property, and the growing importance of things like critical minerals to Canada’s geopolitical positioning and the basic health and safety of citizens in a post-pandemic world. A more detailed outline of the updated Guidelines is covered in a prior blog post titled “A Step in the Right Direction: Updated Guidelines on Canada’s National Security Review Bring Greater Clarity”.

Getting the right advice at the earliest opportunity can not only help investors make the critical “go/no-go” decision, but propel a transaction to successful conclusion, even against current odds.

Going Forward

With substantial pandemic recovery still uncertain, the Enhanced Scrutiny Policy is expected to be an enduring part of Canada’s foreign investment review process for the foreseeable future. Non-Canadian entities that are state-owned or likely to be viewed as state-influenced, and foreign investors seeking to invest in sensitive sectors of the Canadian economy, are encouraged to seek advice from legal counsel for the purpose of developing a strategy to address national security concerns early and to make ICA filings in such a way as to avoid delays in satisfying closing conditions.

National security scrutiny of investments is expected to increase with possible amendments to the ICA on the horizon. The Prime Minister of Canada has directed the ISED Minister  to “[c]ontribute to broader efforts to promote economic security and combat foreign interference by reviewing and modernizing the Investment Canada Act to strengthen the national security review process and better identify and mitigate economic security threats from foreign investment.” Further, the ISED Minister has been directed to “use all tools, including the Investment Canada Act, to ensure the protection and development of our critical minerals.” With that in mind, foreign investors may wish to consider timing issues in relation to upcoming investments as the national security review process is likely to become even more arduous in the near future.

If you have questions about the Investment Canada Act or the regulation of foreign investment more generally, please reach out to any member of Fasken’s Competition, Marketing & Foreign Investment group or Fasken’s National Security group. Both groups have significant experience advising clients on all aspects of Canadian foreign investment law.

The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member of Fasken’s Competition, Marketing & Foreign Investment group or Fasken’s National Security group.