In the past week, the Government of Canada has twice asserted a more aggressive posture towards investments by state-owned enterprises (“SOE”) in Canada’s critical minerals sector: first, announcing a new policy applying stricter scrutiny to such investments and, days later, announcing that it has ordered the divestiture of investments by three Chinese firms in Canadian-headquartered companies that have actual or potential operations in lithium and, in certain cases, other critical minerals. These steps, each of which we discuss in more detail below, are the latest in a series of measures the Canadian government has taken to strengthen Canada’s national security regime, in particular with respect to investments by SOEs or private companies with ties to nations of higher sensitivity (which the government regards to constitute a SOE), such as Russia or China. As well, these steps represent a notable change in enforcement policy compared with Canada’s decision earlier in 2022 to allow an investment by a different Chinese investor in a Canadian company that had lithium operations outside of Canada.

These most recent developments are consistent with a global trend towards increased scrutiny of foreign investment in areas of geo-political sensitivity – such as critical minerals – by investors with ties to non-allied governments. In Canada, the latest developments build on both:

• a substantial increase in the number of national security reviews under the Investment Canada Act (ICA), which has been sustained over the past two years and arisen most frequently in connection with Chinese investments; and

• the introduction this summer of a voluntary notification regime under the ICA, which serves as a complement to the mandatory filing regime by enabling investors to notify their investments that are not otherwise subject to mandatory reporting, such as because they involve a non-controlling stake, or where a target Canadian company does not constitute a “Canadian business” (e.g. because it is engaged in only exploration activities and thus does not have current prospects to generate revenues), or where control is not being acquired in a prescribed manner (e.g. where a Canadian business that is being acquired indirectly operates in Canada only through an unincorporated branch or division of a foreign corporation). This mechanism is intended to encourage investors to identify transactions with a higher national security risk profile proactively, and investors arguably have some incentive to do so: investments voluntarily notified to the government benefit from a short 45-day period from filing after which time, if the government does not commence the national security process it is statutorily barred from doing so thereafter (akin to mandatorily reported transactions); whereas for investments that are not notified, a five-year limitation period applies from closing.

The government has now signaled a clear intention to lean heavily on the review mechanisms prescribed under the ICA, whether it be the provisions addressing economic reviews or those governing national security reviews, as applicable to a particular investment, to address Canada’s strategic objectives as they relates to critical minerals.

Policy Regarding Foreign Investments from SOEs in Critical Minerals

On October 28, 2022, the Government announced a new policy setting out a stricter framework for evaluating foreign investments in both Canadian entities and Canadian assets in the critical minerals sector by both SOEs and private investors considered to be “closely tied to, subject to influence from, or who could be compelled to comply with extrajudicial direction from foreign governments, particularly non-likeminded governments.”

Notably, the policy applies intense scrutiny to such investments under both the ICA’s economic regime, pursuant to which investments that exceed prescribed thresholds are subject to ministerial approval on the basis of a “net-benefit” to Canada test, and separately the ICA’s national security regime:

• Net-Benefit Regime: While net benefit reviews under the ICA regime remain relatively rare due to the significant financial thresholds applicable to investors, including SOE investors, the policy states that investments in the critical minerals sector by SOEs and state-linked private investors pose “inherent economic risk” and will be approved on only an “exceptional basis.” This suggests that many transactions (in particular from more sensitive jurisdictions) are likely to be blocked, a historically rare occurrence under the net-benefit regime, and that those that are approved can likely expect to be subject to strict conditions (as a general matter, conditions – referred to as undertakings – are required to obtain net-benefit approval, but the nature of the conditions required in these cases may be more stringent than is typical and focus on the corporate governance standards and commercial independence of the SOE investor).

• National Security Regime: Under the policy, the participation of an SOE or foreign-influenced private investor in an investment in a critical minerals business in Canada will “support a finding” that there are reasonable grounds to believe that the investment could be injurious to Canada’s national security. This is a clear signal that not only will all such investments be subject to in-depth national security review, but also that the government will likely find it necessary to prohibit or unwind those transactions. Consistent with the government’s already-broad jurisdiction to intervene on national security grounds, the policy applies broadly, capturing “investments regardless of value, whether direct or indirect, whether controlling or non-controlling, and across all stages of the value chain.”

While the Government of Canada has previously signaled some caution with respect to SOE investments in Canada’s natural resources sector, the critical minerals policy asserts a notably more interventionist approach. For example, the government’s 2012 policy regarding SOE oil sands investments pertained only to net-benefit reviews under the ICA and was focused on acquisitions of control by SOEs; this stands in contrast to the current policy’s utilization of both the net-benefit and national security regimes and its explicit application to both control and minority investments. The critical mineral policy’s expansiveness indicates the strategic importance that the government is placing on critical minerals to Canada’s and its allies’ economic and military well-being.

Divestiture Orders in Three Lithium Company Investments

The broad manner in which the government appears poised to apply this policy is evidenced in the second recent announcement, made on November 2, 2022, concerning the government’s decision to require the divestiture of three separate and unrelated investments completed in 2022 by Chinese investors; the Canadian companies are active with respect to lithium and, in certain cases, other “critical minerals”, with some of their operations being located exclusively outside of Canada. The announcement did not provide any information on the nature of the government’s concerns or specifically identify whether the government considered the investors involved to be SOEs or otherwise state-influenced. 

However, all three investments appear to be minority investments of relatively low dollar value by Chinese firms without publicly-obvious state ownership. Significantly, one of the divestiture orders relates to a Canadian-headquartered company listed on the Toronto Stock Exchange that appears to have mining operations only outside of Canada. Based on the nature of all three investments, it is unlikely that they were subject to a mandatory notification requirement under the ICA (though we cannot be certain) and, while the government introduced a voluntary filing regime in August of this year, it is most likely that none of these three investments were notified to the government given the transactions took place before the new regime came into effect. Accordingly, the government most likely initiated the national security process on its own initiative which confirms that it is closely monitoring the critical minerals sector.

It is likely not a coincidence that the government released its critical minerals policy statement and announced these divestiture orders within the same week. It is relatively uncommon for the government to take this kind of coordinated action under the ICA.

While the government’s announcement reiterated that investments in the critical minerals sector will be subject to enhanced national security scrutiny, it also made a point to note that “Canada continues to welcome foreign direct investment” and that the “federal government is determined to work with Canadian businesses to attract foreign direct investments from partners that share our interests and values.” This is a clear indication that the government will continue to exercise some discretion in national security interventions, and that the SOE investor’s country of origin is as important a consideration as the sector involved in the investment.

Policy Regarding Disclosure of National Security Orders

The publication of limited details regarding investments subject to in-depth national security review represents a significant departure from historic practice.

Until now, the government has not made public any details of orders made under the ICA’s national security provisions. Rather, disclosure by the government of its national security orders has been limited to anonymized summary data published in an Annual Report, identifying an investors’ country of origin and the industry of the target business. Accordingly, the November 2, 2022 announcement that limited details on national security reviews that result in a decision by the Federal Cabinet will be published moving forward is a signal that the government is committed to increasing the transparency with which it administers the ICA

While the degree of consistency with which the policy will be applied remains to be seen, the government has indicated that the disclosure in each case will identify, by name the investor, the target business and the nature of the order being made (i.e., decisions to block or unwind a transaction, or to impose conditions on the investment). This new policy will not be retroactive.

Key Takeaways

These recent developments provide strong signals on the government’s current foreign investment policy and are noteworthy for both Canadian businesses and foreign investors. In particular:

• Same Facts, Different Outcomes: The government’s decision to require three lithium company divestitures stands in marked contrast to the government’s apparent decision earlier in 2022 not to initiate a national security review process in respect of Zijin Mining Group Ltd.’s acquisition of Neo Lithium Corp, a TSX-listed company with an Argentinian lithium mine. The Neo Lithium transaction has clear parallels with at least one of the transactions where divestitures were recently ordered, in that it involved a business with no mining operation inside of Canada. The Government of Canada’s passive approach on Neo Lithium gave rise to sharp criticism and resulted in a Parliamentary hearing on the matter. This experience appears to have influenced the government’s approach to these transactions.

• Low Bar for Intervention: The federal government now appears willing to take strong, interventionist action even where there is only a limited nexus to Canada. For example, the government’s divestiture order with respect to Lithium Chile Inc. provides the starkest indication of this; while Lithium Chile is traded on the TSX-V and headquartered in Calgary, its mineral deposits are exclusively in South America and its presence in Canada is limited to a small corporate footprint to service its Canadian listing.

• Increasing Global Coordination: The federal government’s heightened sensitivity to certain foreign investments in critical minerals appears to align with that of many of its closest allies. Indeed, Canada has joined with the US, UK, EU and other peer jurisdictions in the recently established Minerals Security Partnership, an initiative intended to bolster critical mineral supply chains deemed essential for the clean energy transition. Consistent with Canada’s efforts at cross-border coordination, the critical minerals policy explicitly notes that it applies to minerals considered critical to Canada and its allies and includes as a national security review consideration an investment’s potential impact on “allied relations”.

Both state-owned and private investors with an existing interest in, or considering a future investment of any size in, a critical minerals business with any nexus to Canada should take note of these developments and carefully consider their ownership structure for links to SOEs from nations viewed as “unfriendly” to Canadian interests. As Canadian businesses and foreign investors continue to adapt to and navigate the current policy landscape, it is important to consider these enhanced national security risks at an early stage in transaction planning.

Authored by McCarthy Tétrault’s Competition/Antitrust & Foreign Investment Group