In its
2016 Fall Economic Statement, the Government of Canada announced forthcoming
changes to the review of foreign investments under the Investment
Canada Act. Namely, the government intends to significantly increase the financial
threshold above which foreign investments are subject to pre-closing “net
benefit” review under the ICA, and provide additional guidance regarding the
conduct of national security review.
Net Benefit Review Threshold
The ICA
applies to every acquisition of control of a Canadian business by a
non-Canadian investor. Transactions exceeding certain financial thresholds are
subject to pre-closing “net benefit” review; these transactions cannot be
completed until the responsible Minister or Ministers determine that the
transaction will be of “net benefit” to Canada.
Currently, for direct
acquisitions of non-cultural Canadian businesses, transactions are typically
subject to pre-closing review where the enterprise value of the acquired
Canadian business exceeds C$600 million. Until recently, this threshold had
been scheduled to increase to C$800 million in April 2017, and then to C$1
billion in April 2019 (and indexed annually to GDP growth beginning in January
2021).
As part of the Fall Economic
Statement, the government has committed to increasing the threshold for review
directly to C$1 billion in April 2017.
Raising the “net benefit” review
threshold will significantly reduce ICA compliance costs and risks for foreign
investments in Canadian businesses whose enterprise value is between C$600
million and C$1 billion. For investments that fall below the threshold, the ICA
requires only that the foreign investor provide post-closing notice of the
investment.
In addition to the across-the-board
threshold increase, investors from certain states will see the “net benefit”
review threshold rise to C$1.5 billion, due to the recently-signed
Comprehensive Economic and Trade Agreement between Canada and the European
Union. The C$1.5 billion threshold, which is to be indexed annually to GDP
growth, will apply not only to investments flowing into Canada from the
European Union and its member states but also to investments from the following
countries with which Canada has pre-existing free trade agreements: the U.S.,
Mexico, Chile, Peru, Columbia, Panama, Honduras and Korea. The precise timing
for the introduction of this increase remains unclear. However, Bill C-31, the
amending legislation to introduce the increase, received its first reading in
Parliament on October 31, 2016.
Not all foreign investors will
benefit from the new higher thresholds. In particular, the higher thresholds
will not apply to investments: (a) to acquire a Canadian “cultural business”;
(b) by a state-owned enterprise (which includes an entity influenced by a
foreign state); and (c) where neither the purchaser nor the seller is
ultimately controlled by nationals of WTO member countries.
National Security Reviews
Under the ICA, any foreign
investment, including those that do not meet the “net benefit” review
threshold, can be subject to a national security review if the government
believes that the investment could be injurious to Canadian national security.
The government has promised to make the national security review process more
transparent by publishing, by the end of 2016, guidelines according to which
such reviews will be conducted.
Currently, the national security
review process under the ICA is opaque. While the ICA allows for review of any
foreign investment that “could be injurious to national security,” national
security is not defined by the ICA and there are no published criteria
according to which such a review is undertaken. The forthcoming guidelines have
the potential to provide welcomed insight into the process and clarity to
prospective foreign investors.
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