Oliver Borgers and Erin Keogh (McCarthy Tétrault LLP) authored this publication

The Foreign Investment Review and Economic Security (FIRES), which is part of the Ministry of Innovation, Science and Economic Development Canada (ISED), is the government department responsible for the administration of the Investment Canada Act (ICA), the statute that regulates FDI and indirect foreign investments in Canadian businesses by non-Canadians.

FIRES also interfaces with investors and other parties as part of a preliminary (informal) review of an investment to determine whether there are potential national security concerns. Where concerns arise, FIRES will work with the Minister of ISED, in consultation with the Minister of Public Safety and Emergency Preparedness, who may refer investments to the Cabinet (the Canadian Prime Minister and his appointed ministers, formally known as the Governor in Council), who may institute a formal review of whether the investment could be injurious to Canada's national security.

The national security review process is supported by Public Safety Canada, Canada's security and intelligence agencies and other investigative bodies described in the National Security Review of Investments Regulations.

Who files?

The ICA is a statute of general application that applies to any acquisition of control of a Canadian business by a foreign investor. An acquisition of control is defined generally as an acquisition of greater than 50 percent of the equity or voting interests of an entity, although in certain cases an acquisition of greater than one-third of the voting interests of a corporation will be considered an acquisition of control.

If the relevant financial threshold under the ICA is exceeded (subject to certain exceptions), the statute provides for a process of pre-merger review and approval of foreign investments to determine if they are of net benefit to Canada, also referred to as "net benefit review." The indirect acquisition of a Canadian business through the acquisition of a foreign non-Canadian parent is typically exempt from having to obtain approval.

Where approval is required, the investor must file an application for review and the transaction must be approved by the relevant minister. A key element in the application for review is the requirement to set out the investor's plans for the Canadian business, including plans related to employment, participation of Canadians in the business and capital investment. An application for review is a much more detailed document than a notification.

Where approval is not required, the investor has an obligation only to file a simple administrative notification form, which can be filed up to 30 days after closing. In either case —filing of an application for review or just a notification —the Canadian government has jurisdiction for 45 days after receipt of such a filing to order a national security review if there are concerns.

The entry point for national security review screening will usually be the obligatory filing under the ICA (either an application for review if the financial threshold is exceeded and approval is required, or a simple administrative notification form in other cases). The government also has the power to subject non-controlling minority investments to a national security review.

As of 2022, non-controlling investments in Canadian businesses or establishing new Canadian entities that do not qualify as Canadian businesses under the ICA may be notified voluntarily, either before or after closing, pursuant to amendments to the National Security Review of Investments Regulations. For non-notifiable investments for which no voluntary notification is filed, the government has five years following implementation to initiate action.

Types of deals reviewed

It is important to keep in mind that the Canadian government has the power to review any transaction, including minority investments, in which there are "reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security." Unlike the net benefit review process under the ICA, there is no financial threshold for investments under the ICA's national security review regime.

Further widening the potential scope of the national security review regime is the fact that there is no statutory definition of "injurious to national security." This lack of definition creates wide discretion for the minister and some uncertainty for foreign investors.

The types of transactions that have been the subject of formal review under the national security lens include those relating to critical minerals (including lithium), satellite technology, telecommunications, computer systems and software, fiber-laser technology and critical infrastructure, as well as where a non-Canadian investor proposed to build a factory located in close proximity to Canadian Space Agency facilities. Investors subject to Canadian national security reviews have included American companies, although ultimately controlled outside the US, as well as investors from emerging markets, but particular scrutiny can be expected for state-owned investors and investors from so-called "non-like-minded" countries.

Scope of the review

A national security review will generally focus on the nature of the business to be acquired and the parties involved in the transaction, including the potential for third-party influence. In assessing whether an investment poses a national security risk, the Canadian government has indicated that it will consider factors that focus on the potential effects of the investment on defense, intelligence, sensitive technology and know-how, sensitive personal data, critical minerals and critical infrastructure and supply. The Canadian government will also focus on transactions related to public health or involved in the supply of critical goods and services to Canadians or to the Government of Canada.

Review can occur before or after closing. Transactions that run the risk of raising national security concerns can seek clearance by making any ICA filings well before the proposed time of closing —at least 45 days plus one business day in advance, although giving the officials more time to review would be prudent. Under section 25.3 of the ICA, it is incumbent on the government to notify the investor of an order for a national security review "without delay after the order has been made." When considering filing and closing timelines, it is therefore recommended that the investor allow for at least one additional business day following the expiry of the 45-day waiting period.

The Canadian government may deny the investment, ask for undertakings and/or provide terms or conditions for the investment (similar to mitigation requirements in the US), or, where the investment has already been made, require divestment.

Trends in the review process

In March 2021, the Canadian government released revised national security review guidelines, which confirmed that state-owned entities (SOEs) will receive enhanced scrutiny, provided a non-exhaustive list of sensitive technologies, and expanded the list of national security factors to include critical minerals and sensitive personal data. The sensitive technologies were described as having military, intelligence or dual- military/civilian applications, and included a non-exhaustive list of technology areas. These included: advanced materials and manufacturing; advanced ocean technologies; advanced sensing and surveillance; advanced weapons; aerospace; artificial intelligence; biotechnology; energy generation, storage and transmission; medical technology; neurotechnology and human-machine integration; next-generation computing and digital infrastructure; position, navigation and timing; quantum science; robotics and autonomous systems; and space technology.

On October 28, 2022, the government announced a further policy, setting out an even 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-like-minded governments."

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" under the net benefit provisions. Further, 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.

Within days of the announcement of the critical minerals policy, in November 2022, the government made the announcement that it had ordered the divestiture of three investments completed in 2022 by Chinese investors. These were three unrelated transactions. These Canadian businesses are active with respect to lithium and, according to the government, other critical minerals. As would be expected, the announcement did not provide any meaningful insight into the nature of the government's concerns. The announcement did come days after the government's release of its critical minerals policy, which highlighted the strategic importance of critical minerals to Canada's and its allies' economic and military well-being.

On December 7, 2022, the Canadian government tabled Bill C-34: An Act to amend the Investment Canada Act, which would mark the first significant legislative changes to the ICA since 2009. The amendments are designed to increase detection of potentially harmful acquisitions prior to implementation (including through mandatory pre-merger notification of investments in certain industries) and to render the review process more efficient and effective (including by empowering the minister to impose interim relief). The amendments are still before Parliament and are expected to be implemented in 2024.

How foreign investors can protect themselves

Where a transaction gives rise to national security risks, non-Canadian investors should consider filing notice of the transaction with the minister at least 45 days plus one business day prior to closing to obtain pre-clearance (assuming the minister does not seek further time under the national security review regulations). For an investment that does not require notification —such as a minority investment —the Canadian government encourages non-Canadian investors to contact FIRES at the earliest stage of the development of their investment projects to discuss their investment.

As in other jurisdictions, it is therefore critical for foreign investors to consider Canadian national security review issues in planning and negotiating transactions. In particular, an investor should ensure that it secures a closing condition predicated on obtaining national security clearance in Canada, where appropriate. It may also be appropriate for merging parties to allocate the national security risk.

Review process timeline

Obtaining approval under a net benefit review can take anywhere from 45 days to a number of months, depending on the complexity of the investment.

The national security review process can take up to 200 days —or longer with the consent of the investor —from the date the initial notice of the transaction is sent to the Minister of ISED. The minister has 45 days, which can be extended by up to an additional 45 days, after an application or notification under the ICA has been certified, or after the implementation of a minority investment that does not require notification, to refer an investment to the Governor in Council for an order for national security review. If an order is made, it can take 110 more days —or longer with the consent of the investor —for the review to be completed.

2023 update highlights

• Amendments to the ICA were tabled in December 2022, and remain before parliament. The amendments are designed to strengthen the ICA's national security regime
• As of 2022, investments that are not subject to mandatory review or notification (such as the acquisition of a non-controlling investment or setting up new Canadian entities that do not qualify as "businesses") may be notified voluntarily to obtain national security clearance
• Non-notifiable investments for which no voluntary notification is filed are subject to review for up to five years following the investment

Outcomes

In its Investment Canada Act Annual Report (2022 - 2023), the Canadian government reported that 59 national security reviews were ordered from 2018 to 2023. Of these 59 reviews, one was blocked, ten had divestitures, 21 investors withdrew their investments, 25 reviews were discontinued and an unknown number had conditions imposed. The investors that were subject to reviews were ultimately controlled in China, Russia, the United Arab Emirates, Belarus, Taiwan, Singapore, the UK, Czech Republic, Cyprus, Jordan, the US, France and Finland.

Over the last year covered by the most recent annual report, the officials disclosed that only 22 of the 1,005 investments (about 2 percent) for which notifications and applications were made were subject to a national security review, with the government subsequently discontinuing ten of the reviews. This confirms that, ultimately, very few investments into Canada are impacted, never mind blocked, by the national security review regime.

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