Jaime Auron, Peter Franklyn
Apr 4, 2017
In this Update
- In November 2016, the federal government agreed to revisit a July 2015 cabinet order issued by the previous Conservative government that sought to unwind Hong Kong-based O-Net Communications’ acquisition of Montréal-based ITF Technologies because it was deemed to be injurious to Canada’s national security.
- On March 27, 2017, O-Net announced that Cabinet had approved the acquisition and it appears that an order imposing conditions was issued.
- The national security review process under the Investment Canada Act may result in an order authorizing the investment in question, subject to certain conditions.
- While the conditions imposed remain unknown, the decision to permit a once-blocked investment is unprecedented and should be viewed positively by Chinese and other non-Canadian investors.
In November 2016, the Canadian federal government agreed to revisit a cabinet order issued by the previous Conservative government in July 2015 that sought to unwind a transaction deemed injurious to Canada’s national security. The implications of the decision to remit the matter to the Minister of Innovation, Science and Economic Development to undertake a new national security review of Hong Kong-based electronics company O-Net Communications’ (O-Net) acquisition of Montréal-based ITF Technologies (formerly Avensys Inc.) (ITF) were previously discussed in this Osler Update.
On March 27, 2017, O-Net announced that Cabinet had approved the acquisition, a decision confirmed by a government official’s anonymous comments to The Globe and Mail that the investment was allowed subject to certain undisclosed conditions. One possible outcome of the national security review process under the Investment Canada Act (ICA) is that Cabinet may issue an order authorizing the investment subject to conditions (whether unilaterally imposed or negotiated), pursuant to section 25.4(1)(b) of the ICA. It appears such an order was issued in this instance (the Order). Such conditions effectively impose limitations on the investor’s conduct or ownership of the business in question in order to offset or mitigate perceived national security concerns associated with the investor and/or the investment. The conditions may address a variety of issues, but would typically include stipulations relating to the investor’s scope of operations, security standards, employee hiring practices, reporting obligations and/or governance structures in Canada. In the O-Net review, it is not known whether the conditions contained in the Order were the result of mitigation measures negotiated by O-Net or whether they were imposed unilaterally by the government as a condition of approval and, if the latter, whether they have been or will be accepted by O-Net.
Interestingly, this decision comes just a few days after the Chinese ambassador to Canada, Lu Shaye, was quoted as saying that “China will regard as trade protectionism any attempt by Canada to invoke national security to block state-owned firms from buying Canadian companies or doing business with the federal government.” The ambassador, in the context of discussing Sino-Canadian free trade talks, warned that such restrictive actions against Chinese investment would reinforce existing Chinese skepticism about Canada’s willingness to truly forge closer investment and trade ties with China. O-Net is reported to be more than 25% owned by a subsidiary of a Chinese state-owned enterprise (SOE), China Electronics Corporation.
The unique facts of the O-Net case may limit its precedential value. It has been reported that ITF had no alternative buyer and may have faced dissolution without the O-Net investment. It has been suggested that, by allowing the acquisition, the government believed it is keeping the company – and its sensitive knowledge regarding fibre-laser technology – intact and in Canada. If this is in fact the case, it is an interesting possible justification and may encourage investors subject to national security review to think broadly and creatively during the investment review process to identify potential economic and policy-based arguments as to why an investment should be allowed under the ICA. It is also worth emphasizing that O-Net’s application for judicial review of the original divestiture order issued in 2015 was based largely upon procedural fairness grounds. Investors should be encouraged that it appears that the national security review process continues to evolve in favour of increased procedural fairness.
While the decision to permit a once-blocked investment is unprecedented and should be viewed positively by Chinese and other non-Canadian investors, given the unique circumstances of the O-Net case, it does not necessarily signal a broad change in government policy. As noted, the conditions that were reported to have been imposed under the Order remain unknown, and could well be very broad in scope and impose significant ongoing compliance obligations for O-Net. Nonetheless, this approval reinforces the notion that Canada is open to Chinese (and more broadly, SOE) investment and may be willing, in appropriate circumstances, to work with investors to find solutions where a viable path to approval previously may not have been possible.