Changes in Canada’s Foreign Investment Laws — What It Means For Chinese Companies Investing In Canada
Canada welcomes foreign investments but also believes that appropriate laws should be in place to regulate certain investments by non-Canadians. In March 2009, important changes to the Investment Canada Act (the “ICA”) and the Competition Act (the “CA”) that impact foreign investors were passed by the Canadian Parliament.
The changes to the ICA are intended to reduce the number of foreign investment transactions that are subject to Canadian government review in two major respects. First, before the recent changes become effective, the threshold for reviewable transaction was C$312million for WTO investors (which include investors from China). The recent changes will increase the reviewable threshold to C$600 million for WTO investors (initially intended to be coming into effective in late 2009 but until now, this still has not been put into effect yet. The current threshold for WTO investors in 2010 is $299 million) and thereafter, the threshold will be increased to C$800 million and C$1 billion 2 years and 4 years after the 2009 effective date respectively (with annual increase after 2013 based on an inflation based index). Second, the recent changes also remove most of the sensitive sector industries that are subject to the special reviewable threshold of C$5 million for WTO investors. Before the changes, the C$5million threshold applied to investments in transportation businesses, financial services businesses, uranium businesses and cultural businesses (whether the investor was from a WTO country or not). As a result of the recent changes, the only industry left under the C$5 million threshold for WTO investors is cultural businesses. However, it should be noted that investments in transportation businesses that raise public interest issues and exceed the pre-notification thresholds under the CA may still be subject to pre-closing review under CA and certain sensitive investments in uranium businesses may also trigger a review under the new national security review (discussed below).
The change to the ICA also introduced the right of the Canadian government to review a proposed investment (including minority investments) where the responsible Minister has "reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security." No financial threshold will apply to a national security review and there is no clear definition of "national security". After a review, the Minister may deny the investment, ask for undertakings, provide terms or conditions for the investment or, where the investment has already been made, require divestment. Review can occur before or after closing and may apply to corporate re-organizations where there is no change in ultimate control. The major concern for foreign investors in the introduction of such review for “national security reason” is that a number of the important terms are not defined in the recent legislative change and thereby creates a wide discretion for the Minister and some uncertainty for foreign investors. Hopefully, additional clarity will be provided by additional regulations published in the near future.
Apart from changes under the ICA, the recent changes also increased the pre-notification threshold for merger transaction under the CA from C$50 million to C$70 million (with further increases annually), although the "size of the parties" threshold is still maintained at C$400 million. The recent legislative changes also reduced the post-closing challenge period for a merger transaction by the Competition Bureau from 3 years to 1 year. Other changes to the CA in March 2009 in respect of mergers mainly relate to updating the review process.
Other than the legislative changes in March 2009, it is also worth noting that in late 2007, the Canadian government published an administrative guideline under the ICA in relation to investment by State Owned Enterprises (“SOE”). A SOE is defined as an enterprise that is owned or controlled directly or indirectly by a foreign government. The guidelines provide that in determining whether a reviewable acquisition of control in Canada by a SOE is of net benefit to Canada, the Minister will examine, as part of the assessment of the factors enumerated in ICA, the corporate governance and reporting structure of the non-Canadian investor. This examination will include whether the non-Canadian adheres to Canadian standards of corporate governance (including, for example, commitments to transparency and disclosure, independent members of the board of directors, independent audit committees and equitable treatment of shareholders), and to Canadian laws and practices. The examination will also cover how and the extent to which the investor is owned or controlled by a state. Furthermore, the Minister will assess whether a Canadian business to be acquired by the SOE will continue to have the ability to operate on a commercial basis regarding:
- where to export;
- where to process;
- the participation of Canadians in its operations in Canada and elsewhere;
- support of on-going innovation, research and development; and
- the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.
To ensure that such acquisitions of control are of net benefit to Canada, the Minister may request the SOE to submit specific undertakings, for example, undertakings to appoint Canadians as independent directors on the board of directors, the employment of Canadians in senior management positions, the incorporation of the business in Canada, and the listing of shares of the acquiring company or the Canadian business being acquired on a Canadian stock exchange. The Guidelines in respect of SOE will only apply in situation where the transaction is a reviewable transaction under the ICA. If the transaction is below the applicable thresholds discussed above, then the transaction would still not be reviewable even if the investor is a SOE.
Given the 2009 changes to the ICA and the CA and the SOE Guidelines referred to above, we believe that it is very important for a Chinese enterprise to develop an appropriate government relations strategy early on when making an investment in Canada that may be reviewable (including considering pre-filing consultations with government officials). Strong government relationship capabilities and antitrust law experience of your advisors is critical in coming up with a successful strategy to manage the uncertainties and risks arising from possible review under the ICA and CA.