The Investment Canada Act: Gateway to the Canadian Business Frontier
Kevin West and Andrea Hill of SkyLaw Professional Corporation discuss the application of the Investment Canada Act (ICA) to foreign investment.
Introduction
Canada has traditionally welcomed foreign investment and has a reputation as an attractive and trusted destination for investors.
However, consistent with the approach of most countries, the Canadian government may restrict the ability of a non-Canadian to acquire or start a business in Canada, in particular if the investment relates to a cultural business (for example, broadcasting and publishing) or raises national security concerns.
"Foreign investments in businesses involved in certain protected industries are likely to be subject to greater scrutiny."
The government may block proposed foreign investments, allow them to proceed with conditions, or order divestiture if an investment has already been made.
Significant recent amendments to the Investment Canada Act described below will require careful consideration at an early stage of a transaction.
Thresholds for Review Under the ICA
A transaction by a non-Canadian is reviewable if the enterprise value of the target business exceeds certain financial thresholds (for WTO investors that are not state-owned enterprises, the threshold is an enterprise value of CAD1.326 billion).
If a transaction is reviewable, the foreign investor must prove to the Canadian government that the transaction is of “net benefit” to Canada. If not reviewable, a notification under the ICA must be filed within 30 days after commencing a new business activity or acquiring control of an existing Canadian business.
Separately, the Canadian government may review any acquisition on national security grounds under the ICA, whether or not it is subject to a net benefit review. There is no definition of “national security” in the ICA, nor are there specific monetary thresholds that automatically trigger a national security review.
Required Filings
For any acquisition of control or commencement of a new business activity that does not meet the financial threshold for review set out above, a non-Canadian must file a notification within 30 days of the transaction.
With effect from 2 August 2022, a new voluntary pre-closing filing mechanism came into force, permitting certain non-Canadian investors to confirm in advance whether a proposed investment would be subject to a national security review. If a pre-closing filing is not made, the government will have up to five years after becoming aware of a transaction (changed from 45 days) to initiate a national security review.
In March 2024, amendments to the ICA were enacted that include:
- a new pre-closing filing requirement for certain investments in “prescribed businesses” (to be identified in upcoming regulations);
- new powers to extend the national security review of investments, impose interim conditions for investments and accept undertakings, and share information with foreign governments; and
- stronger penalties for non-compliance with the ICA.
Sensitive Industries
Certain Canadian business sectors are especially protected. Any foreign investments in businesses involved in the Canadian oil sands, the critical minerals sector, and certain other protected industries are likely to be subject to greater scrutiny.
In recent years, as part of a broader policy to shore up relationships with friendly states and respond to elevated national security risks to Canada from geopolitical events, the Canadian government has signalled that it is especially wary of investments from entities with ties to “non-like-minded” nations, including Russia and China.
In particular, the Canadian government has made it clear that:
- any investment (regardless of size or industry) into a Canadian business from an investor with direct or indirect ties to Russia, and any investment by any foreign state-owned enterprise into Canada’s critical minerals sector, will trigger a national security analysis;
- acquisitions of control by such investors will only be approved “on an exceptional basis”; and
- investments will raise significant red flags if they require an offtake agreement, any kind of control of shareholders, or significant board representation.
On 1 March 2024, the government announced that foreign investments in the interactive digital media sector (including online gaming) will be subject to enhanced scrutiny under the ICA, citing the risk, particularly from unnamed “hostile states”, of state-sponsored or influenced information manipulation, and noted the importance of maintaining the Canadian intellectual property and creative independence of such firms.
The ICA In Action
In November 2022, the government ordered three Chinese firms to divest their investments in Canadian lithium companies on national security grounds. Nevertheless, a University of Alberta study counted at least a dozen investments worth CAD2.2 billion in Canadian critical minerals firms during 2023 from new and existing investors based in China and Hong Kong.
More recently, a Canadian-based mining firm (SRG Mining Inc.) announced plans to redomicile in the United Arab Emirates in connection with a deal to sell nearly 20% of the company to a Chinese investor. On 4 March 2024, in general remarks at a Toronto mining conference, the Canadian Industry Minister warned companies not to try to circumvent foreign investment rules. SRG Mining announced the following day that it had cancelled the proposed investment.
"Watch for the list of prescribed businesses that must file pre-closing to be released by the Canadian government in the near future."
In late 2023, Vital Minerals, an Australian-based company that owns Canada’s only operational rare earths mine, sold a nearly 10% stake to Chinese investor Shenghe Resources for roughly CAD5.3 million. The deal remains subject to Canadian national security review because the mine is located in Canada. The Canadian government will need to balance the protection of critical minerals against the economic benefits of the deal.
In January 2024, Vancouver-based copper and gold exploration company Solaris Resources announced a CAD130 million share subscription by Chinese state-owned Zijin Mining Group. The investment is conditional upon approval under the ICA.
Takeaways
- Plan ahead: Consider whether to file your ICA notification in advance to increase deal certainty, particularly if you are investing in a potentially sensitive industry. Watch for the list of prescribed businesses that must file pre-closing to be released by the Canadian government in the near future.
- Know your investor: Ask for what you need to gain the necessary confidence that your stakeholder is not likely to raise red flags under the ICA.
- Remain flexible: If your firm is involved in a protected industry, cultivate sources of capital and business strategies early on to help keep your options open.
