Frequently Asked Questions Concerning the Investment Canada Act

April 24, 2015

The following are some frequently asked questions (FAQs) concerning the application, administration and enforcement of the Investment Canada Act. These FAQs and responses are of a general nature, and cannot be regarded as legal advice.

  1. When does the Investment Canada Act apply?
  2. What are the thresholds for review?
    (a) Financial Threshold
    (b) Acquisition of Control Threshold
  3. What are the implications of the enterprise value threshold for investment reviews?
  4. Are there any exemptions from filing under the Investment Canada Act?
  5. If a transaction does not meet thresholds for review, is the investor required to obtain any kind of clearance, or take any action?
  6. Do specific considerations apply to investments involving a cultural business?
  7. What is considered a “cultural business”?
  8. Are there any other sensitive sectors besides culture?
  9. Can investors implement a proposed investment pending approval?
  10. When will the investor receive approval of a reviewable investment?
  11. What does “net benefit” mean?
  12. How many investments have not been approved?
  13. What happens once the Minister approves the investment?
  14. What considerations apply to an acquisition of control by a state-owned enterprise (SOE)?
  15. How many SOE investments have been approved?
  16. Which investments are subject to a national security review?
  17. What does “national security” mean?
  18. How do investors receive national security clearance?
  19. If a national security review has been ordered and referred to the Governor in Council, what measures may the Governor in Council take?
  20. What has been the experience so far with national security reviews?
  21. How does the Investment Canada Act review process relate to the Competition Act review process?

 

  1.  When does the Investment Canada Act apply?

The Investment Canada Act (ICA) applies when a non-Canadian (i.e., an individual that is neither a Canadian citizen nor a permanent resident, or an “entity” or government or agency thereof that is not Canadian-controlled) establishes a new business in Canada; proposes to acquire control of a Canadian business directly or indirectly; or acquires an interest in a Canadian business and the acquisition could be injurious to national security.

Note that “Canadian business” is a defined term in the ICA. The Canadian business being acquired need not be Canadian-controlled in order for the ICA to apply to an acquisition of control of that business.

Investments where the enterprise value of the assets of the Canadian business exceeds prescribed monetary thresholds, or those raising national security concerns, are subject to government approval. All other acquisitions of control and establishments of new Canadian businesses are subject to a notification process only.

  1. What are the thresholds for review?

(a) Financial Threshold

Effective April 24, 2015, a direct investment by a non-Canadian investor controlled by nationals of a World Trade Organization (WTO) member to acquire control of a Canadian business, or a sale of such a business when it is controlled by a WTO investor, is only reviewable on a pre-closing basis by the Minister of Industry if the enterprise value of the assets of the Canadian business exceeds  $600 million. The enterprise value threshold replaced the former book value of assets of the Canadian business threshold for this type of transaction.

Enterprise value is calculated differently, depending on whether the Canadian business is a publicly traded or privately held entity, or consists of assets.

Direct acquisition of a publicly traded entity – $600 million or more in enterprise value, based on the target’s market capitalization, plus its total liabilities excluding its operating liabilities, minus its cash and cash equivalents.

  • Market capitalization is calculated by using the average daily closing price of the target’s quoted equity securities on the entity’s principal market (i.e., where the greatest volume of trading occurred during the trading period) over the most recent 20 days of trading ending before the first day of the month that immediately precedes the month in which the application for review or notification is filed.
  • If there are unlisted equity securities, the fair market value of such securities, as determined by the board of directors of the investor or other person authorized to make that determination, is included.
  • Total liabilities, excluding operating liabilities, cash and cash equivalents are determined based on the most recent quarterly financial statements.

Direct acquisition of a privately held entity – $600 million or more in enterprise value, based on the total acquisition value, plus its total liabilities excluding its operating liabilities, minus its cash and cash equivalents.

  • Where the investor is acquiring 100% of the voting interests, total acquisition value is the total consideration payable. Where the investor is acquiring less than 100% of the voting interests, total acquisition value is the aggregate of the consideration payable by the investor, the consideration payable by any other investors, and the fair market value determined by the investor of any portion of the voting interests that are not being acquired.
  • In circumstances where the parties are non-arm’s length, or consideration is nominal or zero, total consideration payable is fair market value.
  • Total liabilities, excluding operating liabilities, cash and cash equivalents are determined based on the most recent quarterly financial statements.

Acquisition of assets – $600 million or more in enterprise value, based on the total consideration payable, plus the liabilities that are assumed by the investor (other than operating liabilities), minus the cash and cash equivalents that are transferred to the investor.

  • In circumstances where the parties are non-arm’s length, or consideration is nominal or zero, total consideration payable is fair market value.

Direct acquisition by a state-owned enterprise (SOE) investor – book value of assets of the Canadian business is $369 million or more (in 2015; indexed annually).

The case of a direct acquisition must be distinguished from that of an indirect acquisition, where the WTO investor acquires shares of a non-Canadian corporation, which in turn owns shares in a Canadian corporation representing the Canadian business. An indirect investment by a WTO investor, or a sale by a WTO investor, is not reviewable either on a pre-closing or a post-closing basis, except if the Canadian business is a “cultural business” (see question 6 below).  

(b) Acquisition of Control Threshold

An investment by a non-Canadian must involve an acquisition of control in order for the ICA to apply (except in cases involving a cultural business, an SOE investor or national security where a control in fact test applies; see questions 6, 14 and 16 below).

An acquisition of less than one-third of the voting shares of a corporation, or less than a majority of the voting interests of a non-corporate entity such as a partnership or joint venture, is deemed not to be an acquisition of control.

  1. What are the implications of the enterprise value threshold for investment reviews?

The shift from the book value of assets threshold to the enterprise value threshold has several implications:

  • Some transactions that would not have been subject to review based on the previous threshold of $369 million in book value of assets may trigger the $600-million enterprise value threshold due to relatively large market capitalization, liabilities or purchase price. 
  • For public bids, there is a greater element of strategy in deciding when to make an ICA filing. The time period for calculating the average share price used to calculate market capitalization is determined with reference to the point in time at which an ICA filing is made.  The first bidder may file a notification based on enterprise value which is below the threshold (i.e., no ICA review would be required for that bidder). Where the announcement of this first bid has the effect of increasing the target’s share price, this has the potential to result in an uneven playing field amongst foreign bidders.  While the first bidder would not be subject to ICA review, if there is a significant time gap in between bids such that enterprise value must be calculated to take into account the impact on share price as a result of the first offer, subsequent bidders may be subject to ICA review if the enterprise value has increased above the threshold. 
  • SOE and private sector investments are subject to different thresholds. As a result, it is possible that a private sector investment may trigger a review as a result of the target’s enterprise value exceeding the $600-million threshold, while that same investment by an SOE would not trigger a review if the book value of the target’s assets is below the $369-million asset value threshold.
  • Consideration payable and fair market value determinations in acquisitions of privately-held entities and assets have ICA filing implications.
  1. Are there any exemptions from filing under the Investment Canada Act?

The ICA exempts several types of transactions, for example, an acquisition of control of a branch business, an acquisition of control in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the ICA, and a corporate reorganization following which the ultimate control of the Canadian business remains unchanged.

  1. If a transaction does not meet thresholds for review, is the investor required to obtain any kind of clearance, or take any action?

If a direct or indirect investment by a non-Canadian does not meet the review thresholds set out above, the investor must file a notification with the Investment Review Division of Industry Canada (IRD). A notification must be filed at any time prior to the implementation of the investment or within 30 days after its implementation. Investments to establish a “new Canadian business” also must be notified.

  1. Do specific considerations apply to investments involving a cultural business?

Review thresholds for investments involving a cultural business are $5 million for direct investments and $50 million for indirect investments. For an indirect acquisition of a cultural business, where the value of the worldwide assets of the Canadian business exceeds 50% of the value of all assets acquired, the review threshold is $5 million. Unlike non-cultural businesses, such indirect investments in the cultural sector are reviewable on a post-closing basis. If the assets of the cultural business fall below the thresholds for review, the Governor in Council (i.e., the federal Cabinet) may still order a review on a discretionary basis. Cultural investments are reviewed by the Department of Canadian Heritage.

  1. What is considered a “cultural business”?

“Cultural business” is defined in the ICA. A cultural business is a business that carries on any of the following:

(a) the publication, distribution or sale of books, magazines, periodicals or newspapers in print or in machine readable form (but excludes businesses involved only in the printing or typesetting of these items);
(b) the production, distribution, sale or exhibition of film or video recordings;
(c) the production, distribution, sale or exhibition of audio or video music recordings;
(d) the publication, distribution or sale of music which is in print or machine readable form; or
(e) any business activities involving radio communication intended for direct reception by the general public; any radio, television and cable television broadcasting undertakings; and any satellite programming and broadcast network services.

Notably, there are special policies which prevent or restrict investments in the film distribution, and book publishing and distribution sectors. However, the government appears to be gradually adopting a more flexible and pragmatic approach to enforcement of these policies. For example, in 2010, Amazon.com was permitted to establish a Canadian fulfillment centre and Apple Canada was granted approval to establish iBookstore Canada, in return for certain commitments to strengthen the Canadian book sector. In 2012, Target received approval to sell cultural products, including books, when it launched its stores in Canada. In 2014, the Department of Canadian Heritage approved Torstar Corporation’s sale of the Harlequin book business to HarperCollins Publishers, a subsidiary of News Corp.

  1. Are there any other sensitive sectors besides culture?

Until 2009, the lower review thresholds which still apply to acquisitions of control of cultural businesses also applied to acquisitions of control of Canadian businesses involved in financial services, transportation services, and uranium production. These industries are no longer subject to these lower thresholds. In addition to specific sectoral review legislation, however, acquisitions in these sectors may be subject to national security review in the same way as all other sectors of the economy (see question 16 below).

  1. Can investors implement a proposed investment pending approval?

With very limited exceptions, the direct acquisition of a Canadian business cannot be implemented until the Minister of Industry (or Minister of Canadian Heritage for cultural transactions) is satisfied that the investment is likely to be of net benefit to Canada. In a global transaction where the Canadian business is being acquired directly, it may be necessary on closing to “carve out” the Canadian portion until the transaction is approved by the Minister.

As mentioned above (see question 2), indirect transactions involving WTO investors or sellers are not reviewable, and even indirect cultural transactions may be implemented pending approval on a post-closing basis by the Minister of Canadian Heritage (see question 6).

  1. When will the investor receive approval of a reviewable investment?

Investors must file an application for review with the IRD prior to implementation of the investment, and allow sufficient time for review by the IRD and the Minister’s office before closing. The Minister has up to 45 calendar days (which he/she may extend by an additional period of 30 calendar days) to determine whether the investment should be approved. The review period may be extended past 75 days for an additional period which is determined by agreement between the IRD and the investor. Although it is possible to obtain approval within the initial 45 day review period, it is prudent to allow at least 75 days (and potentially longer) for approval. The average review time from April 1, 2013, to March 31, 2014 was 71.5 days.

  1. What does “net benefit” mean?

Net benefit is not defined in the ICA. However, the Minister will consider the following factors (which are not necessarily weighted equally) to determine whether an investment is likely to be of “net benefit”:

  • effect of the investment on the level and nature of economic activity in Canada;
  • degree and significance of participation by Canadians in the Canadian business;
  • effect of the investment on productivity, industrial efficiency, technological development, product innovation, and product variety in Canada;
  • effect of the investment on competition with any industry in Canada;
  • compatibility of the investment with national industrial, economic and cultural policies; and
  • contribution of the investment to Canada’s ability to compete in world markets.

Furthermore, foreign investments in cultural businesses are subject to an enhanced net benefit test in addition to the considerations set out above. In practice, this means that the investor will have to set out details in its application for review on its plans for three to five years post-closing for Canadian employment, capital expenditures in Canada, Canadian management participation and responsibilities for the business, R&D activity in Canada, production in Canada and exports, and other relevant information. In addition, the investor typically must submit binding undertakings to the Minister confirming its commitment to perform the key elements of these plans.

  1. How many investments have not been approved?

Between June 30, 1985 and March 31, 2015, the Minister reviewed and approved 1,703 investments. During this period, only three major proposals outside the cultural area have been disallowed by the Minister of Industry (i.e., Macdonald Dettwiler and Associates Ltd./Alliant Techsystems Inc. in May of 2008, BHP Billiton plc’s proposed hostile takeover of Potash Corporation of Saskatchewan in November 2010 and Accelero Capital Holdings’ proposed acquisition of the Allstream division of Manitoba Telecom Services Inc. in October 2013). Of the 98 cultural investments identified up to June 2008, only three proposals were disallowed. Note that these statistics do not reflect proposed investments which were withdrawn before the Minister reached a decision.

  1. What happens once the Minister approves the investment?

After receiving approval and implementing the investment, the investor must comply with its undertakings. The investor is also required to submit a “progress report” to the IRD approximately 12-18 months after closing and every 12-18 months thereafter for the duration of the undertakings, so that the IRD may assess whether the investor is complying with its undertakings.

The Minister is empowered to demand that an investor comply with its undertakings. If an investor fails to comply with a demand issued by the Minister, the Minister may apply to a superior court for an order directing the investor to comply with the undertakings, requiring it to divest itself of the acquired business and imposing a penalty not exceeding $10,000 for each day of contravention. In 2009, for the first time in the history of the ICA, the Minister brought court proceedings in relation to alleged shortcomings in an investor’s undertakings (the U.S. Steel case). In 2011, the Minister reached an out-of-court settlement with U.S. Steel, in return for U.S. Steel’s commitment to significantly enhanced undertakings. Typically, however, an investor will reach an agreed solution with the Minister concerning a failure to fulfill undertakings.

  1. What considerations apply to an acquisition of control by a state-owned enterprise (SOE)?

Investments by SOEs, including sovereign wealth funds, are analysed under the usual “net benefit” factors in the ICA, as well as special guidelines which refer to the nature and extent of control by the foreign government, the SOE’s corporate governance, operating and reporting practices, the SOE’s adherence to free market principles, the effect of the investment on the level and nature of economic activity in Canada and whether the acquired Canadian business will retain the ability to operate on a commercial basis. The Minister will consider requesting undertakings such as appointing independent Canadian directors, employing Canadians in senior management, incorporating the business in Canada and listing shares of the SOE or the Canadian business on a Canadian stock exchange.

In December 2012, following the Minister’s approval of Malaysian-controlled PETRONAS’ $6-billion acquisition of Progress Energy Resources Corp. and CNOOC’s $15.1-billion acquisition of Nexen Inc., the Canadian government announced it was taking a more restrictive approach to reviewing investments in Canada by SOEs. Although the government stated that it continues to welcome and encourage foreign investment in Canada, it indicated a clear preference for private foreign investment over investment by SOEs, minority SOE investments over acquisitions of control by SOEs, and a lower tolerance for SOEs acquiring control of, or material influence over, leading firms in any sectors of Canada’s economy.

Further, the government stated that future investments in the Canadian oil sands by SOEs will only be permitted in “exceptional” circumstances. The ICA was amended to introduce an expanded definition of SOE to include entities “influenced directly or indirectly” by a foreign government, and to allow the Minister to determine whether an entity is controlled by a SOE or whether there has been an acquisition of control by a SOE, or that an otherwise Canadian-controlled entity is “controlled in fact” by a SOE.

  1. How many SOE investments have been approved?

Prior to the government’s December 2012 announcements, numerous acquisitions of control by SOEs had been approved. For example, in 2011, the government approved Korea National Oil Corp.’s (KNOC) acquisition of producing and undeveloped assets from Hunt Oil Company of Canada, Sinopec’s acquisition of Daylight Energy and CNOOC Limited’s acquisition of OPTI Canada Inc.; in 2010, it approved Sinopec’s acquisition of ConocoPhillips’ stake in Syncrude; and in 2009, it approved International Petroleum Investment Company’s acquisition of NOVA Chemicals Corp., KNOC’s acquisition of Harvest Energy Trust, and PetroChina International Investment Company’s acquisition of a 60% interest in two oil sands projects from Athabasca Oil Sands Corp.

Although the pace of SOE investment slowed following the December 2012 announcements, SOEs continue to make significant investments in Canada. For example, in March 2014, Talisman Energy sold Montney acreage to Progress Energy for $1.5 billion. In April 2014, Thai SOE PTTEP secured approval from the Minister to acquire the remaining 60% interest (that it did not already own) in the Thornbury, Hangingstone and South Leismer areas in the Alberta oil sands from Statoil, a Norwegian SOE. In October 2014, Chevron Corp. announced that it had agreed to sell 30% of its interest in its Duvernay shale operations to a subsidiary of state-run Kuwait Petroleum Corp. for US$1.5 billion.  

Acquisitions by SOEs which do not confer control are not reviewed under the SOE guidelines, but may be subject to review under the national security jurisdiction (see question 16 below).

  1. Which investments are subject to a national security review?

An investment is subject to national security review if the Minister considers that the investment could be injurious to national security and if the Governor in Council (i.e., the federal Cabinet, on the Minister’s recommendation) makes an order for review. Notably, even investments which do not involve an acquisition of control of a Canadian business may be subject to national security review (see question 17 below).

  1. What does “national security” mean?

National security is not defined in the ICA or regulations. The ICA does not indicate whether investments involving certain industries are likely to raise concerns in relation to national security. Nor does the ICA specify the origin or types of investors which are more likely to be subject to the national security provisions.

  1. How do investors receive national security clearance?

For an investment involving an acquisition of control, an investor may obtain comfort on national security issues only by submitting the legally required notification or application for review. There is no prescribed clearance process for transactions which do not involve an acquisition of control, even though such transactions may be subject to review under the ICA on the basis of national security.

The Minister has 45 days after the certified date (if a notification or application for review is filed) or after the date of implementation of the investment to: (i) issue an order for national security review; or (ii) give notice that an order for national security review may possibly be issued.

Including all of the interim review periods and the final period in which the Governor in Council may take action with respect to the investment, it could take up to 200 days (or longer, if the investor and the Minister agree to an extension) for a full national security review.

  1. If a national security review has been ordered and referred to the Governor in Council, what measures may the Governor in Council take?

The Governor in Council may, by order, take any measures it considers advisable to protect national security. Measures include: (i) directing the investor not to implement the investment; (ii) authorizing the investment on the condition that the investor provide undertakings or implement the investment on specified conditions; or (iii) requiring divestiture of the investment (if previously completed).

  1. What has been the experience so far with national security reviews?

The Macdonald Dettwiler case mentioned above was decided under the general net benefit to Canada jurisdiction of the ICA before the national security jurisdiction was enacted in early 2009. It also appears that, in mid-2009, the government took steps to prohibit George Forrest International Afrique from acquiring Forsys Metals Corp. (a Canadian publicly traded company with uranium interests in Africa).

In June 2013, Orascom Telecom Holding S.A.E. (Orascom), a subsidiary of Vimpelcom Ltd., announced that it was withdrawing its application under the ICA to acquire control of Globalive Wireless Management Corp. and its subsidiary, Wind Mobile (Wind). Although Orascom gave no specific reasons for its withdrawal and the Minister did not issue a final decision under the ICA, media reports suggested that the proposed transaction had been abandoned because it had become subject to a national security review.

Media reports also suggested that a contemplated sale of BlackBerry Ltd. to Beijing-based computer manufacturer Lenovo Group Ltd. in late 2013 did not formally proceed because the Canadian government informed the parties that it would disallow the transaction on national security grounds.

In October 2013, the Canadian government rejected Accelero Capital Holdings’ proposed acquisition of the Allstream division of Manitoba Telecom Services Inc., which represented the first transaction to be expressly disallowed on national security grounds since the creation of the national security regime in 2009.

  1. How does the Investment Canada Act review process relate to the Competition Act review process?

The ICA review is undertaken separately from the review of a proposed transaction on competition law grounds under the Competition Act (CA). The CA review is undertaken by the Competition Bureau. However, the Minister may choose not to approve a proposed transaction until the Competition Bureau has cleared it under the CA: one of the net benefit factors listed in the ICA is the effect of the investment on competition within any industry in Canada. 

 

By Peter Glossop, Jordan Giurlanda