On April 18, 2020, the Minister of Innovation, Science and Industry (the Minister) issued a policy statement (the COVID-19 Policy) announcing a shift in the Federal Government's approach to foreign investment review during the COVID-19 pandemic: Certain foreign investments will be subject to enhanced scrutiny under the Investment Canada Act (ICA). The stated aim of the COVID-19 Policy is to support Canada's economy during and after the pandemic and to ensure that "in-bound investment does not introduce new risks to Canada's economy or national security". This is in line with the approaches to foreign investment taken by many other countries as a response to the pandemic.
Under the COVID-19 Policy, the following foreign investments will now be subject to enhanced scrutiny "until the economy recovers from the effects of the COVID-19 pandemic":
- "...direct investments of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government"; and
- "...investments by state-owned enterprises (SOEs), regardless of value, or private investors assessed as being closely tied to or subject to direction from foreign governments..."
The COVID-19 Policy references the global economic downturn and recent decline in the value of many Canadian businesses. This will result in a corresponding decline in the enterprise value of businesses, which is the trigger for reviews under the ICA. The COVID-19 Policy does not lower the applicable investment thresholds to subject more investments to review or otherwise amend the powers granted under the ICA. It is expected that the government will likely rely on part IV.1 of the ICA to review investments that may be injurious to national security. The government has broad discretion to exercise national security reviews— a national security review may be conducted on investments regardless and regardless of whether the foreign investor has acquired control of the Canadian business.
In addition, on June 11, 2020, Time Limits and Other Periods Act (COVID-19) was introduced in Parliament as part of Bill C-17, which is entitled An Act respecting additional COVID-19 measures. Pursuant to the Time Limits and Other Periods Act (COVID-19), the Minister would have the ability to issue an order temporarily extending or suspending time limits applicable to the national security review provisions of the ICA (Sections 25.2 and 25.3) for up to six months, from the current time limit of 45 days. While the Time Limits and Other Periods Act (COVID-19) is not currently law, it provides additional legislative support for implementing the COVID-19 Policy as it relates to "enhanced security" under the national security provisions of the ICA.
Investments related to public health and critical goods and services
Prime Minister Justin Trudeau addressed the COVID-19 Policy at a press conference on April 19, 2020, and elaborated on the rationale behind increased scrutiny for investments related to public health and critical goods and services:
"As we look at challenges around supply chains for essential medical supplies and personal protective equipment, as we strengthen our own domestic industry and production, we wouldn't want a foreign investor to be able to take that production that is being made for Canadians in this moment of crisis and send it overseas."
The COVID-19 Policy does not specify which businesses fall into the "public health" category, nor which goods or services are considered "critical goods and services". We note that the Federal Government's "Guidance on Essential Services and Functions in Canada during the COVID-19 Pandemic", may provide signals as to which goods and services fall within the scope of the COVID-19 Policy. For example, the guidance categorizes food and medicines as "critical goods" and lists services relating to health, the supply of food and water, information and communication technologies, energy and utilities, transportation, manufacturing, finance, safety, and government as essential services.
Investments by state-owned enterprises
The Federal Government is concerned that certain SOEs may be motivated by "non-commercial imperatives that could harm Canada's economic or national security interests." Prime Minister Trudeau indicated that the government predicts that "some businesses, which will be important to the country's recovery from the pandemic, may be especially susceptible to foreign purchases". He specifically pointed to start-ups with liquidity concerns, saying they could be "exposed to predatory foreign investors".
Investments by SOEs are already subject to a lower review threshold and more rigorous review policies, and the Federal Government is taking steps to increase scrutiny of such investments, or even pause them altogether. On June 1, 2020 the Standing Committee on Industry, Science and Technology passed a motion to study the extent to which strategic Canadian industries have been devalued as a result of COVID-19, the extent to which foreign buyouts may occur, and whether the current ICA valuation thresholds are adequate to trigger a net benefit review given this devaluation (the Standing Committee Study). The motion also provides that that the Committee will study whether Canada should place a temporary moratorium on acquisitions from SOEs of authoritarian countries. The study is scheduled to be completed on June 21, 2020.
The announcement of the COVID-19 Policy and the Standing Committee Study puts foreign investors on notice that they can expect a higher degree of scrutiny for foreign investments involving critical goods / infrastructure and / or SOEs, and potentially a moratorium on investments by certain SOEs. Short of a moratorium, additional scrutiny may include the time limit extension contemplated by the COVID-19 Policy (if the proposed legislation becomes law) and requests for additional information—which are current powers of the Minister under the ICA. Such scrutiny may affect parties' ability to close transactions, because once a notice of a potential national security review is issued, parties cannot complete the transaction until they receive an approval or the national security review process is terminated.
However, the government has indicated that it "remains open to investment that benefits Canadians". The statement accompanying the COVID-19 Policy encourages foreign investors to consider the new policy early in their investment planning. In particular, foreign investments whose value exceeds the review thresholds are urged to engage with Investment Review Division to obtain a measure of regulatory certainty 45 days prior to closing an investment transaction. Companies who are considering engaging in a transaction involving a non-Canadian purchaser are encouraged to consult with legal counsel in the early stages of the transaction to consider whether this policy announcement will have any implications on the desired transaction.
The Federal Government has indicated that the COVID-19 Policy will remain in place until the economy recovers from the effects of the pandemic.
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