In addition to certain industry sector regulations that may apply, both the Investment Canada Act and the Competition Act subject foreign investments to review in Canada. While the Canadian government encourages foreign investment, foreign investors need to understand the legislation at the early stages of any proposed investment so as to manage the review process and facilitate such investment.
Investment Canada Act
The Investment Canada Act (ICA) governs foreign investments in Canada. The purpose of the ICA is to review significant investments, with the goal of encouraging foreign investment, economic growth and employment opportunities in Canada. The ICA applies to foreign investments to acquire control of a Canadian business, establish a new Canadian business or acquire an interest in a Canadian business, where such acquisition may be “injurious to national security.”
Review Threshold & Process
A direct acquisition will generally be subject to review if the book value of the Canadian business’ assets exceeds CDN$330 million. This threshold is reduced to CDN$5 million if the investor or vendor is not a World Trade Organization (WTO) member or if the Canadian business relates to Canadian cultural heritage.
Recent draft regulations would increase the threshold to initially CDN$600 million (rising to CDN$1 billion), with the value to be based on the assets’ “enterprise value” (not book value). Acquisitions of control of Canadian businesses by non-WTO foreign investors will continue to be subject to book value tests.
An indirect acquisition (i.e., the acquisition of a non-Canadian parent) is generally not reviewable if either the foreign investor or the vendor is a WTO investor.
An acquisition of control of a Canadian business not subject to review, as with the establishment of a new Canadian business, is subject only to a notification, which may be filed at any time prior to the closing or within 30 days thereafter.
If subject to review, the investment may only be completed once the Minister of Industry is satisfied that the investment is of “net benefit” to Canada. Investments in Canadian businesses that relate to Canada’s cultural heritage are reviewed by the Department of Heritage.
Net Benefit
In assessing the (undefined) “net benefit” to Canada, the Minister considers the effect of the investment on economic activity, efficiency, innovation and competition; Canadian participation going-forward; and the compatibility of the investment with national policies.
Foreign investors are required to provide contractual undertakings to support the claim of “net benefit.” Undertakings typically relate to capital and other expenditures, R&D, employment, head-office location and Canadian participation. Investors may be required to provide security to support such undertakings.
State-Owned Enterprises
A foreign investor that is a state-owned enterprise must demonstrate that its corporate governance and reporting structure are typical of a public Canadian company. It must also demonstrate the commerciality of its decision making and provide contractual undertakings to support these standards.
Timing of Review
The ICA provides for an initial 45-day review period which may be extended for an additional 30 days; any further extensions must be agreed upon by the investor. The timing of the Minister’s review may extend beyond 75 days for more significant investments that involve complex issues to be addressed with additional (negotiated) undertakings.
National Security Review
Foreign investment in Canada may also be subject to a separate review process if there are reasonable grounds to believe that the investment could be injurious to national security. Where the Canadian government concludes an investment would be injurious to national security, it may take any measure considered advisable to protect national security, including blocking the investment.
Only two investments have (publicly) raised national security issues under the ICA; both of these investments occurred prior to the introduction of the current national security review provisions in 2009.
Competition Act
The Competition Act (CA) is federal legislation that authorizes the Commissioner of Competition to review mergers and requires notification of certain larger transactions. The purpose of the CA is to maintain and encourage competition in Canada.
Substantive Review under the Merger Provisions
The Commissioner may review any merger to assess the impact on competition resulting from such merger. A merger is defined broadly to include the direct or indirect acquisition or establishment of control over a significant interest in the whole or part of a business. The Competition Tribunal, on application of the Commissioner, may make an order to block or make other remedial orders in respect of mergers that are determined to prevent or lessen competition substantially.
Whether a merger would likely prevent or lessen competition substantially depends on the competitive dynamics of the affected markets, including (among other factors): the presence of barriers to entry, the availability of acceptable substitutes, the degree of remaining competition, whether the entity acquired was a vigorous competitor, and efficiencies arising from a transaction.
The Commissioner endeavors to complete reviews within 14 to 45 days from receipt of all relevant information, depending on the complexity of a transaction from a competition perspective. Reviews may extend beyond this period if there are competition concerns or the Commissioner requires additional information to complete her review.
Pre-Merger Notification
The acquisition of more than 20 percent or 35 percent of the voting shares of a public or private corporation, respectively, the acquisition of more than 35 percent of an unincorporated entity, an amalgamation and other combinations will generally be subject to notification where certain financial thresholds are satisfied. These threshold tests are (generally):
(a) the size of the transaction test: the aggregate value of the assets in Canada to be acquired exceeds CDN$77 million, or the gross revenues from sales in or from Canada generally from these assets exceeds CDN$77 million; and
(b) the size of parties test: the parties (together with their affiliates) have assets in Canada that exceed CDN$400 million in aggregate value, or had gross revenues from sales in, from or into Canada that exceed $400 million.
If subject to notification, the parties must file a notification with the Commissioner, the cost of which is $50,000.
Statutory Waiting Period
The parties may not close the transaction until the statutory waiting period of 30 days expires, provided that the Competition Tribunal has not granted an order prohibiting closing. A request for supplementary information extends the waiting period by another 30 days once all requested information has been submitted.
Although the parties may close the transaction by the end of the waiting period, the Commissioner may not have completed her substantive review by then. The parties may wish to delay closing until the Commissioner has completed her review and determined that the transaction will not raise any substantive issues under the CA.
Typically, parties will request an Advance Ruling Certificate (ARC) concurrent with (or in lieu of) filing a pre-merger notification. The Commissioner will only issue an ARC on completion of her review and if the transaction does not raise any substantive issues under the CA. If an ARC is issued, the parties are not required to file a pre-merger notification and the Commissioner is prohibited from challenging the transaction. Where the Commissioner does not issue an ARC but has concluded that there are not sufficient grounds to challenge the transaction, she will issue a no–action letter.
Conclusion
While the Canadian government encourages foreign investment, foreign investors are strongly encouraged to consult with legal counsel in the early stages of any proposed transaction/investment. Such counsel can assist in managing any issues which would otherwise arise and expedite and focus the review process under both the ICA and the CA.
Bennett Jones Antitrust, Competition and Foreign Investment Group
The Bennett Jones Antitrust, Competition and Foreign Investment Group advises national and international clients on a full range of complex Canadian and international merger transactions and other investments in Canada. We advise on the coordination of pre-merger strategies in Canada and across multiple jurisdictions; preparation and filing of pre-merger notifications under the CA and applications for review under the CA; and securing requisite regulatory approvals in Canada. Among other state-owned investments, Bennett Jones LLP secured the approval of Statoil ASA’s acquisition of North American Oil Sands – the first SOE investment in Canada – and SINOPEC’s acquisition of Daylight Energy Ltd. – the first Chinese SOE acquisition of a viable oil and gas corporation in Canada. Our excellent working relationships with competition counsel worldwide, the Competition Bureau and the Canadian government allow us to lead negotiations and advocate competition and investment issues effectively on behalf of clients whose interests span the globe.
