On December 7, 2022, François-Philippe Champagne, the Minister of Innovation, Science and Industry (the Minister), announced several proposed amendments to the national security regime under the Investment Canada Act (ICA) through the introduction of Bill C-34: An Act to amend the Investment Canada Act. This new bill represents the most substantial update of the ICA since the introduction of the national security regime in 2009.

According to the Minister, the amendments are aimed at introducing new tools to ensure that Canada can "continue addressing changing threats that may arise from foreign investments." The amendments include:

1. A new pre-implementation filing requirement for investments in Canadian businesses engaged in prescribed business sectors, which have yet to be identified.
2. New ministerial authority to extend the national security review of investments.
3. New and increased fines for non-compliance with the ICA.
4. New ministerial authority to impose interim conditions during a national security review.
5. New ministerial authority to accept undertakings to mitigate national security risk.
6. The ability for the government to disclose specific information regarding national security reviews to foreign states.
7. New rules for the protection of information during the course of judicial review.

Of these, the most significant, in our view, is the new pre-implementation filing requirement for investments in designated business sectors. This new requirement will create a suspensory review for many investments that previously would, at most, have required a post-closing notification. For transactions with lengthy interim periods between signing and closing, such as those requiring other consents and approvals, this new filing requirement may have only a minimal effect. However, where no such other consents or approvals are required, and the interim period between signing and closing is short (or even non-existent as in a sign-and-close situation), this new pre-implementation filing requirement may have a significant impact on deal timing and transaction planning. Notably, the new pre-implementation filing requirement will also apply to certain non-controlling, minority investments, which very often do not require other consents or approvals, given there is no change of control.

Background to the Proposed Amendments:

These proposed amendments follow several important policies announced by the government in recent years, which have signaled a significantly increased degree of scrutiny for certain investments, particularly those involving foreign state-owned-enterprise (SOE) investors and investments in Canadian businesses engaged in the supply of critical goods and/or services. Below is a summary of these key recent developments, which have foreshadowed the proposed amendments.

• In April 2020, the government released its Policy Statement on Foreign Investment Review and COVID-19, which subjected all investments into Canada by SOEs or by private investors closely tied to foreign governments to enhanced scrutiny under the ICA.The Policy Statement also stated that foreign direct investments of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the government would be scrutinized with particular attention.
• In March 2021, the government updated its Guidelines on the National Security Review of Investments to state that some investments into Canada by state-owned enterprises may be motivated by non-commercial imperatives that could harm Canada's national security. The updated guidelines also state that the government will subject all foreign investments by state-owned investors, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny under the national security provisions of the ICA, regardless of the value of the investment. In addition, the government updated the non-exhaustive list of factors that the Minister or Governor in Council may take into account for the purposes of making determinations under the national security provisions of the ICA.
• In March 2022, the government released its Policy Statement on Foreign Investment Review and the Ukraine Crisis, where it specifically stated that any investment, regardless of its value, that has ties, direct or indirect, to an individual or entity associated with, controlled by or subject to influence by the Russian state, will support a finding by the Minister that there are reasonable grounds to believe that the investment could be injurious to Canada’s national security.
• On October 28, 2022, the government released its Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act, which states that applications for acquisitions of control of a Canadian business involving critical minerals by a foreign SOE will only be approved on an exceptional basis under a net benefit review, and that participation in an investment or proposed investment in a critical minerals sector by foreign SOEs or foreign-influenced state investors will support a finding by the Minister that the investment could be injurious to Canada's national security. On November 2, 2022, the government subsequently announced that it had ordered the divestiture of three investments by Chinese investors in Canadian critical mineral companies. For further information on this policy and the resulting divestiture orders, please see our Bennett Jones insight, Canadian Government Signals Enhanced Scrutiny of Foreign Investments in the Critical Minerals Sector.
• On November 28, 2022, the government announced its Indo-Pacific Strategy, in which it noted that Canada would be reviewing, modernizing and adding new provisions to the ICA, to defend Canada's national interests, oversee stronger enforcement and add more precautions to protect intellectual property and Canadian research. The Canadian government's evolving view of China as a "disruptive global power" is a critical part of the Indo-Pacific Strategy, and likely played a significant role in shaping the proposed amendments.

The Proposed Amendments

1. A new pre-implementation filing requirement for investments in Canadian businesses engaged in prescribed business sectors.

   Bill C-34 proposes to amend sections 11 and 13 of the ICA to require investors to file a notification on a pre-implementation basis where the investment involves a Canadian business engaged in a "prescribed business activity". Notably, this new filing requirement will apply to a broad range of investments, including acquisitions of control of Canadian businesses and certain non-controlling acquisitions where additional criteria are satisfied and irrespective of the investor's country of origin.

   The "prescribed business activities" have yet to be named and will be identified through regulations following the passing of Bill C-34. The government is using regulations to identify these prescribed sectors, rather than the ICA itself, to facilitate the periodic update of the list. The Minister has already stated that areas such as quantum computing, artificial intelligence, cybersecurity and semiconductors are possible candidates. Other possible areas include those described in paragraph 8 of the Guidelines on the National Security Review of Investments and perhaps more specifically in the list of sensitive technologies outlined in Annex A to the Guidelines.

   The stated purpose of this amendment is to provide the government with increased visibility of investments in sensitive sectors, and therefore to prevent national security injury. This change will prevent the transfer of know-how/IP/trade secrets during the interim period between the implementation of an investment and a subsequent order by the Governor in Council (GiC) requiring a divestiture. The government's concern is that certain assets and knowledge could be transferred to non-Canadian investors before the government is able to complete its review of the investment, thus causing irredeemable harm to Canada's national security.

   Importantly, the proposed amendments prohibit the implementation of these prescribed investments until the prescribed periods for the government's review of the investment have lapsed. Further, failure to provide the required pre-implementation notice will attract a significant financial penalty (discussed further below). The government has said that it will publish administrative guidelines to assist investors in determining whether they are required to make this filing.

2. New ministerial authority to extend the national security review of investments

   Bill C-34 proposes to introduce the ability for the Minister, after consultation with the Minister of Public Safety and Emergency Preparedness, to make an order for further review of an investment under section 25.3 of the ICA. Currently, the GiC makes the order for review under section 25.3 "on the recommendation of the Minister". As such, these amendments would put the ability to extend a review directly in the Minister's hands.

   The purpose of this amendment is to simplify the administrative process (by eliminating the need to seek a GiC order) for obtaining an order under section 25.3, thus providing the government more time to complete its substantive review of the investment.

3. New and increased fines for non-compliance with the ICA

   Bill C-34 proposes to increase the maximum penalties for contraventions of the ICA or its regulations to the greater of $25,000 and any "prescribed amount" for each day of the contravention. The amendment is designed to (a) adjust the existing penalty amount ($10,000) to account for inflation and (b) allow for the periodic review and increase of the penalty through regulations revising the "prescribed amount."

   The proposed amendments would also create a new $500,000 penalty for failing to provide the required pre-implementation notice in connection with an investment in a Canadian business or entity engaged in a "prescribed business activity". This amount would also be subject to periodic review/increase through regulation.

4. New ministerial authority to impose interim conditions during a national security review

   The amendments propose to create a new section 25.3(1.1), which will provide the Minister, after consultation with the Minister of Public Safety and Emergency Preparedness, with the ability to impose interim conditions on investments, which would apply until the government's review of the investment is complete. The proposed amendments would also permit the Minister to amend any such interim conditions where it is necessary to prevent injury to national security that could occur during the review. Further, the Minister may also remove a condition if it is determined that the condition is no longer necessary to protect national security.

   The government has said that the only conditions that will be considered are those that will mitigate the specific national security harm that may occur during the review period. For example, the Minister may use this provision to prevent the transfer of intangible assets (IP, trade secrets, know-how, sensitive personal information, etc.) to a non-Canadian before a decision has been made in respect of an investment.

5. New ministerial authority to accept undertakings to mitigate national security risk

   Bill C-34 proposes to provide a new authority for the Minister, with the concurrence of the Minister of Public Safety and Emergency Preparedness, to accept binding undertakings from investors, in order to mitigate national security risks. These amendments provide additional flexibility – previously, the imposition of undertakings with respect to a transaction to mitigate national security risks could only occur through a GiC order.

   The amendments also provide for the ability to amend or, in the right circumstances, remove any such undertakings, if the Minister is satisfied, with the concurrence of the Minister of Public Safety and Emergency Preparedness, that the undertakings are no longer necessary. The government has stated that it intends to monitor compliance with any such undertakings and that it will only accept undertakings that address the specific national security concerns raised by the investment.

6. The ability for the government to disclose specific information regarding national security reviews to foreign states

   The proposed amendments will now explicitly permit the Minister to communicate or disclose case-specific, privileged information to the government of a foreign state, for the purpose of national security reviews. Previously, the Minister had very limited ability to share case-specific information with its foreign counterparts. The Minister has indicated that this amendment is intended to facilitate international co-operation and information exchange to address common national security threats.

7. New rules for the protection of information during the course of judicial review

   The proposed amendments will create new rules for judicial reviews of decisions or orders made pursuant to a national security review. The amendments include the ability for the Minister to request that a judge hear submissions on evidence or other information in the absence of the public (and the applicant and their counsel) where the judge finds that the disclosure of the evidence or other information could be injurious to international relations, national defence or national security or could endanger the safety of any person. The judge must provide summaries of the evidence to the applicant to enable them to be reasonably informed of the government's case but without disclosing any sensitive information. The decision of the judge may be based on evidence even if a summary of it has not been provided to the applicant.

   The stated purpose of this new closed proceeding is to allow the government to rely on highly sensitive information to defend its decisions in court without risking the disclosure of such information, including to the applicant. The government notes that these provisions are the same as those for judicial reviews proposed in Bill C-26 for the amendments to the Telecommunications Act on the security of the telecommunications system.

Key Takeaways:

While much remains to be determined in respect of these proposed amendments to the ICA, below are three key takeaways for foreign investors:

1. These proposed amendments represent the most significant changes to the ICA in over a decade.
2. The amendments were foreshadowed by several policy announcements by the Canadian government in recent years signaling an increased focus and attention on national security concerns relating to certain investments.
3. While the amendments are country-agnostic, Chinese and Russian investors are likely to continue to face the most scrutiny moving forward.