New Canadian National Security Rules will Impact M&A Deal Timing and Risk Allocation

The Canadian government is enhancing its national security scrutiny of foreign investments, and pending changes to the Investment Canada Act (ICA) are likely to impact deal timing and risk allocation in transactions with a nexus to Canada.

Canada’s national security reviews of foreign investments generally resemble CFIUS reviews before Congress passed the Foreign Investment Risk Review and Modernization Act of 2018 (FIRRMA).

Under the ICA, the Canadian government can review any investment by a non-Canadian that it believes could be injurious to Canada’s national security.

Canadian national security reviews may occur when, among other factors, a transaction raises the following issues:

Non-Canadians are required to notify the Canadian government when acquiring control of a Canadian business, or establishing a new Canadian business in the form of ICA filings. Presently, the large majority of ICA filings are permitted to be filed post-closing, and pre-closing notification and approval is only required in a small subset of transactions.

After an ICA filing is made, the Canadian government has 45 days to either take steps towards a national security review, or otherwise be barred from taking further action.

The Canadian government may also review minority interest transactions, though ICA filings are only required in specific instances (e.g., the acquisition of more than one-third of the shares of a corporation with a Canadian business). When no ICA filing is made, the Canadian government has up to five years from closing to commence a national security review. However, minority interest investors may make voluntary ICA filings, and in such cases, the government may only commence a process within 45 days of that filing. In other words, investors that choose to make voluntary ICA filings gain the benefit of significantly reducing the government’s opportunity to challenge a transaction (i.e., from five years post-closing to 45 days post-filing). As a practical matter, voluntary notifications raise strategic questions for parties to minority interest transactions: purchasers can de-risk the possibility of a post-closing national security review by making voluntary filings followed by refraining from closing for 45 days, however, a voluntary ICA filing risks drawing the regulator’s attention to a transaction that may otherwise have gone unnoticed.

The length of a national security review can vary depending on the nature of the Canadian government’s concerns. Between April 2021 and March 2022, the Canadian government launched in-depth reviews of 24 investments, lasting an average of 133 days. While some reviews can be resolved in less than 90 days, other in-depth reviews may last 200 days or longer.

Consistent with trends in the US and Europe, Canada is trending towards greater enforcement of its national security review laws in respect of countries with which Canada is not aligned, and, in particular, investors from, or with close ties to, Russia and China.

In March 2022, in response to Russia’s invasion of Ukraine, Canada announced a new policy to apply the ICA in a manner that puts greater scrutiny on investors owned or influenced by the Russian state.

In October 2022, Canada announced a further new policy to apply the ICA in a manner that restricts the ability of certain state-owned enterprises to invest in Canadian businesses participating in the critical minerals sector. Days later, the Canadian government ordered three Chinese companies to divest their recently acquired interests in Canadian lithium mining businesses. Notably, these included:

In December 2022, the Canadian government introduced proposed legislation that significantly expands its powers relating to national security reviews.

Bill C-34 is a draft amendment to the ICA that proposes two significant changes: (1) mandatory pre-notification of certain foreign investments, which will require parties to observe a minimum 45-day waiting period before closing transactions; and (2) an array of new enforcement powers for the regulator.

 

While presently, ICA filings are commonly made post-closing, Bill C-34 proposes to require that investors pre-notify the Canadian government of investments in Canadian businesses that participate in certain sectors and activities, regardless of the size. The proposed changes resemble US rules expanded under FIRRMA relating to “covered transactions” that require pre-notification of certain transactions to CFIUS.

The Canadian government has not specified which sectors and activities will be subject to pre-notification. However, regulators have signalled that they expect these to include critical minerals, access to personal data of Canadians, critical Canadian infrastructure (including relating to supply chains) and sensitive technology areas. 

Minority (non-controlling) investors in Canadian businesses active in specified sectors will be subject to mandatory pre-notification if their investment allows them access to sensitive information and assets, and if they have special minority investor rights such as the right to nominate or appoint directors.

Importantly, transactions subject to mandatory pre-notification will be prohibited from closing for at least 45 days. There is a likelihood that this new waiting period will be the “long pole in the tent” of many transactions with a nexus to Canada. For example, the waiting period under Bill C-34 will extend beyond the 30-day antitrust waiting periods that are observed for US HSR filings (where no Second Request is issued) and Canadian Competition Act filings (where no Supplementary Information Request is issued).

The impact on deal timing will be particularly acute if the Canadian government prescribes sectors and activities in a broad or vague manner. For example, the Canadian government’s current list of sensitive technology areas (which regulators have signalled may bear resemblance to the sectors that will require pre-notification) includes categories such as advanced manufacturing, digital infrastructure, medical technology and robotics, which might capture a very large number of transactions, including those that do not raise obvious national security concerns. 

In addition to pre-notification, Bill C-34 proposes to enhance powers available to Canadian regulators in conducting national security reviews and implementing orders and conditions. These include:

Transacting parties and their counsel will need to consider how Bill C-34 could impact deal timing and risk allocation in transactions with a nexus to Canada.

For further information on Canada’s foreign investment regime, including national security review laws and the proposed amendments, please contact any member of Goodmans Competition and Foreign Investment Group.