Canada, like many other countries, has adopted a regime for reviewing foreign investment. The regime was established in the 1970's as an express response to concerns about perceived American domination of the Canadian economy. In 1985 the regime was significantly transformed, becoming much less protectionist in tone and substance. While the system was originally designed to protect against foreign control, it is now transforming, primarily, into a national security review mechanism, like the CFIUS system in the United States.1 In this brief we provide an overview of the Canadian national security review system and some practical tips for navigating through it.
Decreased General foreign investment Review Concern
The first significant point to note with respect to developments in Canada is that the review system under the Investment Canada Act (ICA) has been amended to intentionally remove the vast majority of foreign investments from the traditional review. That traditional review is focused on whether such an investment provides a 'net benefit' to Canada. While all acquisitions of Canadian businesses by entities controlled by foreign persons must be notified to the Investment Canada authorities, only those exceeding certain thresholds require approval, and those approval thresholds have increased markedly.
In 2015 the mechanism for determining the value of transactions subject to review was switched from an asset value (at least for most transactions) to an enterprise value (except for acquisitions by non-WTO investors or State Owned Enterprise (SOE) investors and acquisitions of cultural businesses) and the threshold went from C$369 million in asset value to C$600 million in enterprise value. Subsequently due to a scheduled ramp up, due to inflationary increases, and due to free trade agreements (including those with EU members, the United States, Mexico, the CPTPP members, as well as others), the enterprise value threshold has risen to C$1.568 billion for trade agreement investors and C$1.045 billion for WTO non trade agreement investors. These thresholds will continue to increase annually based on Canada's annual nominal GDP growth rate.
The result has been that a significant number of transactions have been removed from the traditional 'net benefit' review. For the most recent year for which statistics are available, 10 transactions met the threshold and applied for review, as opposed to 22 the year before. Consequently, for truly large transactions review as to whether a transaction is of net benefit to Canada will continue to be required, but the vast majority of transactions now fall beneath the review thresholds. The opposite is true with regard to National Security Reviews.
More National Security Issues
Before 2009 there was very little expressed concern in Canada with respect to national security issues in foreign investment. One transaction, the proposed acquisition of MacDonald Dettwiler and...