Canada’s New National Security Review of Foreign Investments under the Investment Canada Act
J. Anthony VanDuzer
Introduction
In 2009, Parliament passed the most extensive amendments to the Investment Canada Act[1] since its enactment in 1985.[2] Perhaps the most significant change was the introduction of a new national security review procedure that can be applied to investments made after 12 March 2009. The special review process is triggered when the Minister of Industry determines that an investment could be injurious to Canadian national security.[3]
Some process for screening investments that threaten Canadian security may well be necessary. Many other countries have such a process and, in its 2008 report, the Competition Policy Review Panel recommended that Canada should have one too.[4] The particular process that the 2009 amendments put in place, however, seems designed without much regard to its potential negative effects on foreign investors generally. The amendments provide no criteria to define what might be considered a national security threat. While investments raising national security concerns are likely to be rare, the absence of any guidance regarding what the Minister might consider a possible threat will create significant uncertainty for a wide range of foreign investors regarding the circumstances in which national security reviews of their investments may be conducted and what the results are likely to be. In this brief note, Canada’s new national security review procedure is described and some comments are made on its likely effects.
National Security Review
The scope for national security review is broader than that of the regular investment review process under the Investment Canada Act. Under the regular process, investment transactions in which a non-Canadian acquires control of or establishes a Canadian business are subject to review by the Minister of Industry if they exceed certain financial thresholds.[5] In most cases, in 2011 acquisitions are subject to review only where the Canadian business has assets exceeding $312 million.[6] Approval is granted if the Minister is satisfied that the investment is of “net benefit” to Canada.[7] Criteria to be taken into account in assessing net benefit are specified in the Act. As well, the Minister has issued guidelines identifying specific considerations applicable to the review of investments by foreign State-owned enterprises.[8]
National security review similarly applies to investments to acquire control of or establish a Canadian business but, unlike the regular review process, national security review extends to investments that are either implemented or proposed by a non-Canadian to “acquire in whole or in part, or to establish an entity carrying on all or any part of its business in Canada” so long as the entity has a minimal presence in Canada.[9] There are no minimum financial thresholds for national security review. Any investment that involves any interest in an entity with assets or employees in Canada is potentially subject to national security review.
If the Minister of Industry believes, on reasonable grounds, that such an investment by a non-Canadian investor could be injurious to national security, the Minister may send a notice to the investor that an order for a national security review may be made. The investment cannot be completed from the time the notice is received to the receipt by the investor of a notice indicating that no review will be undertaken or that the investment is authorized.[10] After the initial notice to the investor, the Minister can require information from the investor that the Minister considers necessary for the purpose of determining if the investment could be injurious to national security. A formal order for a national security review can only be made by the federal Cabinet on the basis of a recommendation by the Minister, after consultation with the Minister of Public Safety and Emergency Preparedness, in favour of a review. If a review is ordered, the Minister must advise the investor.[11] The Minister can then require any further information from the investor that the Minister considers necessary for the review and the investor has an opportunity to make representations to the Minister addressing national security concerns. If, after completion of the review and again consulting with the Minister of Public Safety and Emergency Preparedness, the Minister considers that national security concerns are unresolved, the matter can be referred to Cabinet with a report of the Minister’s findings. Cabinet may prohibit the investment or authorize it subject to specified conditions being satisfied or upon undertakings by the investor. Cabinet may also order divestiture by the investor if the investment has been completed where this is necessary to address any national security concerns.[12]
One reason for the adoption of a separate national security review procedure may have been the proposed 2008 acquisition by American defence contractor Alliant Techsystems of MacDonald Dettwiler, a Canadian firm that operated a satellite providing data to the Canadian government regarding Canada’s north. Concerns were expressed regarding the risk to Canadian security associated with the proposed sale.[13] Even though the firm would have continued to operate under a Canadian licence and the Canadian government would retain access to all data, Canadian parliamentarians, among others, worried that the security of the remote sensing data could not be assured. Ultimately, the Minister of Industry refused to approve the sale, concluding that he was not satisfied that the transaction would be a net benefit to Canada.[14] No reasons were given. This case appears to be the first in which a foreign investment was actually refused in an Investment Canada review. It drew attention to possible national security concerns that may arise with respect to some foreign investments and the limited scope of Investment Canada review in such cases. Only because the investment exceeded the applicable thresholds was review under the Investment Canada Act possible.[15]
Commentary
In enacting a specific process to review investments based on security considerations, Canada’s investment regime falls into line with those of many other states that provide for such a review, including the United States, the United Kingdom, China, Japan, Germany and Australia.[16] Nevertheless, the nature of the new Canadian process raises a number of concerns. There are no financial thresholds that must be met for such a review and no criteria for what will raise national security concerns. The government has indicated that it has no intention of clarifying what it considers a national security concern.[17] At the end of the review, Cabinet has an unlimited discretion both to determine whether the investment could be a threat to national security and, if it decides that a threat exists, to impose conditions on the acquisition, to prohibit it, or require a divestment if the investment transaction has already been completed. Given the recent enactment of these provisions, there is no experience to suggest how frequently or in what circumstances this procedure will be used. The undefined scope of the new national security review procedure creates a risk that it could be used to limit investment in a wide range of circumstances undermining predictability and certainty for investors.[18] It is conceivable, for example, that the Cabinet would consider that an investment that resulted in a substantial degree of foreign control over an industry that supplied food or some other product that would be needed in times of national emergency would threaten Canadian national security. Even though the government is likely to be restrained in the use of this procedure in practice, uncertainty regarding its potential application is likely to have a deterrent effect on prospective foreign investors.
It is not obvious why the government declined to clarify what it would consider a security threat when other jurisdictions, including the United States, have been able to provide at least some criteria.[19] In this context, the failure to specify any criteria at all reflects a surprising insensitivity to the perceptions of foreign investors and the impact that its approach would have on how Canada would be viewed as a destination for investment. In part, this may be due to the remarkable haste with which the amendments were pushed through Parliament. The amendments were introduced as part of the enormous Budget Implementation Act on 6 February 2009 and given Royal Assent less than five weeks later on 12 March 2009.[20]
Admittedly, the challenge of providing guidance regarding what is likely to raise national security concerns is a daunting one. The US criteria for what is considered a national security risk are broad and open ended reflecting the fact that national security is inherently difficult to define.[21] Nevertheless, there are other ways in which the government could have addressed the uncertainty created by the introduction of its national security review process. For example, in its comments on the draft Regulations that established the procedures and timeframes for the national security review process, the Canadian Bar Association recommended that investors should be able to obtain a quick preliminary assessment of whether their investments are likely to raise national security concerns.[22] Such a process, which is available in the United States,[23] would lend greater predictability and transparency to the national security review process for the benefit of foreign investors and the Canadian businesses in which they seek to invest without compromising Canadian national security interests. It is regrettable that the government’s significant initiative in establishing a national security review procedure did not include this kind of useful feature with a view to ensuring that disincentives to foreign investment generally were minimized.
J. Anthony Vanduzer is a professor of law, Common Law Section, University of Ottawa.
[1] R.S.C. 1985, c. 28 (1st Supp.).
[2] Budget Implementation Act, S.C. 2009, c. 2 [2009 Amendments]. The amendments also changed the thresholds for investment review, eliminated the application of a lower financial threshold for review of investments in the uranium and financial and transportation services industries and added a requirement for the Ministry of Industry to make an annual report on the operation of the Act. These amendments are discussed in J. Anthony VanDuzer, “Mixed Signals: What Recent Developments Tell Us About Canadian Foreign Investment Policy” (2010) 10 Asper Review of International Business and Trade Law 247.
[3] An earlier attempt to create a security review process failed. In June 2005, the Minister of Industry introduced a bill amending the Investment Canada Act to permit the review of foreign investments that might compromise Canada’s national security where such reviews were deemed necessary by the federal Cabinet acting on a recommendation of the Minister. Review could have been deemed necessary regardless of the size of the transaction. This bill never passed. See Bill C-59, An Act to Amend the Investment Canada Act, 1st Sess., 38th Parl., 2005, First Reading 20 June 2005.
[4] Competition Policy Review Panel, Compete to Win, Final Report – June 2008 (Public Works and Government Services Canada: Ottawa, 2008)[Compete to Win].
[5] Investment Canada Act, supra note 1, ss. 14-14.1. The time periods for national security reviews and some other matters are addressed in the National Security Review of Investments Regulations, S.O.R./2009-271.
[6] Investment Canada Act, ibid., s. 14.1(1). Annual amounts are reported on the Investment Canada Act web site, online: Industry Canada <http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/h_lk00050.html>. Lower thresholds apply in the case of acquisition in the cultural industries and those involving investors that are not of Members of the World Trade Organization (s. 14(1)).
[7] Investment Canada Act, ibid., s. 16. While voluntary filings are not permitted, it is possible for an investor to seek a binding interpretation regarding the applicability to the investor of any provision of the Investment Canada Act or the regulations under the act (s. 37).
[8] The Guidelines can be accessed on the Investment Canada Web site, online: Industry Canada <http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/h_lk00066.html>.
[9] Investment Canada Act, supra note 1, s. 25.1. The entity must have a place of operations in Canada, at least one employee or assets in Canada used in carrying on the entity’s business.
[10] Investment Canada Act, ibid., s. 25.2
[11] Investment Canada Act, ibid., s. 25.3.
[12] Investment Canada Act, ibid., s. 25.4.
[13] Campbell Clark, “Space division sale no threat to Arctic sovereignty, CEO says,” The Globe and Mail (1 April 2008), online: The Globe and Mail <http://www.theglobeandmail.com/news/technology/space-division-sale-no-threat-to-arctic-sovereignty-ceo-says/article675718/?cmpid=tgc>.
[14] Industry Canada, “Minister of Industry Confirms Initial Decision on Proposed Sale of Macdonald, Dettwiler and Associates Ltd. to Alliant Techsystems Inc,” online: Industry Canada <http://www.ic.gc.ca/eic/site/ic1.nsf/eng/04219.html>.
[15] An exception to this limitation applies to investments in cultural industries as defined in Schedule IV to the Investment Canada Regulations, S.O.R./85-611. Even if the thresholds for review are not exceeded, the establishment of a new Canadian business or the acquisition of a Canadian business in these industries may be reviewed if an Order-in-Council directing a review is made and a notice is sent to the investor within 21 days following the receipt of a complete notification (Investment Canada Act, supra note 1, s. 15).
[16] Compete to Win, supra note 4, at 31.
[17] Douglas C. New, “Investment Canada Act Amendments May Increase Foreign Investor Uncertainty” (2009) Antitrust/Competition & Marketing Bulletin, online: Fasken Martineau <http://www.fasken.com/files/Publication/3299b170-e7a2-4ae8-82af-01842c87e8ad/Presentation/PublicationAttachment/72cf4361-df63-4cba-8fc5-0e0822ed2531/DM_TOR-%233099039-v1-Doug_New_May_2009_Bulletin_Investment_Canada_Act__Amendments_.pdf>; Mark Katz, “Canada’s new foreign investment review standard raises concerns” Lawyers Weekly (15 May 2009), online: Lawyers Weekly <http://www.lawyersweekly.ca/index.php?section=article&articleid=918>.
[18] This concern was widely expressed at the time the amendments were enacted. See, for example, Davies, Ward, Phillips & Vineberg, “Amendments to the Investment Canada Act: What Do They Mean For You?” 13 March 2009, online: Davies, Ward, Phillips & Vineberg <http://www.dwpv.com/en/17620_23425.aspx>; New, ibid.
[19] See the so-called Exon-Florio amendment which is s. 5021 of the Omnibus Trade and Competitiveness Act of 1988, P.L. 100-418 (1988), codified as 50 U.S.C. App. §2170(f), as amended by Foreign Investment and National Security Act of 2007, Pub. L. 110-49, 121 Stat. 246 (2007), codified as 5 U.S.C. 5315 and 552b [Exon-Florio].
[20] LEGISinfo: 40th Parliament – 2nd Session, online : <http://www2.parl.gc.ca/Sites/LOP/LEGISINFO/index.asp?Language=E&Chamber=N&StartList=A&EndList=Z&Session=22&Type=0&Scope=I&query=5697&List=stat>.
[21] For example, Exon-Florio, supra note 19, includes the following criteria among others: “the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security” and “such other factors as the President or the Committee may determine to be appropriate, generally or in connection with a specific review or investigation”.
[22] National Competition Law Section of the Canadian Bar Association, Investment Canada Regulation Amendments and National Security Review of Investments Regulations, August 2009, online: The Canadian Bar Association <http://www.cba.org/CBA/submissions/pdf/09-44-eng.pdf> (CBA Submission) at 9-10.
[23] In the U.S., pre-closing clearance can be obtained under Exon-Florio, supra note 19, from the Committee on Foreign Investment in the United States [CBA Submission, ibid., at 10].
Friday, November 25, 2011 at 01:00PM