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Investment Canada Act Amendments Increase Scrutiny on Foreign Investments

Investment Canada Act
Photograph : pexels.com/tim

In an era where economic boundaries are increasingly overshadowed by the global nature of trade and investment, Canada has taken a firm step to fortify its defences against potential threats to its national security and economic stability. The Canadian government has recently ushered in a new set of rules under the Investment Canada Act (ICA), designed to intensify the review process for foreign investments in critical sectors deemed sensitive.

Under these revised regulations, foreign entities will be compelled to proactively inform Ottawa about their intent to acquire Canadian companies within these vital sectors prior to finalizing any transactions. This measure serves two pivotal purposes: affording the government advanced insight into deals that may allow foreign investors undue control over essential assets and knowledge, and enabling swifter identification of investments that pose potential risks.

Echoing the nation’s steadfast commitment to safeguarding its interests, Innovation Minister Francois-Philippe Champagne strongly indicated the government’s readiness to act decisively against any deal that threatens the country’s well-being—be it national or economic. Significantly, the ICA revisions empower the innovation minister with expanded authority to prolong security reviews when necessary, a prerogative that until now necessitated formal government declaration.

Coinciding with these changes is an uptick in penalties aimed at those circumventing compliance measures. The clear message is that Canada is serious about controlling its key industries, among which are quantum science, robotics, and artificial intelligence—the frontier fields on which future economies will likely pivot.

Recent history has shown Canada wary of investments by Chinese state-owned firms in strategic sectors. This trend has been particularly evident with moves such as tightening regulations involving foreign stakes in critical minerals and pressing certain Chinese investors to divest from Canadian lithium companies.

Introduction of a New Pre-closing Filing Regime

Investments in key sectors, to be specified in the future, will now be screened through a new pre-closing filing process as per the Investment Canada Act (ICA). Unlike the previous system, where foreign investors could notify the government post-investment unless taking over a Canadian business, the updated regime introduces a mandatory notification before closing the deal. This applies especially to investments that don’t constitute taking full control but are in sensitive sectors.

Those who bypass this pre-closing obligation face severe penalties, up to C$500,000. The framework tends to target areas vital to national security, such as critical minerals and advanced technologies including AI and quantum computing. Forthcoming discussions aim to precisely outline these sectors before the law comes into effect.

Enhanced Ministerial Powers for National Security

The new legislation grants broader responsibility to the Minister of Innovation, Science and Industry to protect Canada’s national security interests concerning foreign investments. This shift is designed to streamline current procedures and provide the Minister with flexibility in responding to security concerns.

Notably, the Minister will hold the authority to enforce interim measures during a national security review. These measures can range from temporary restrictions on sensitive information and intellectual property access, which may apply even after investment completion. The ability for the Minister to accept undertakings from investors might result in faster reviews and less cabinet involvement. However, it also implies an expectation that investors may have to frequently propose undertakings to address potential risks proactively.

These changes signal Canada’s increasing diligence in monitoring and intervening in foreign investments that touch upon national security interests.

Increased Monetary Penalties for Non-Compliance

Under the Investment Canada Act (ICA), the government has always been able to impose sanctions for non-compliance. However, recent amendments seek to toughen these penalties significantly. Once characterized by moderate monetary fines of up to C$10,000 per day of non-compliance, the updated legislation introduces a drastic increment, raising the stakes to C$25,000 for each non-compliant day. Additionally, with the new Bill, an investor’s failure to fulfill pre-closing filing obligations concerning sensitive sector investments now carries an imposing fine that could reach up to C$500,000. To keep pace with economic fluctuations, these amounts may be subject to further increases via regulatory updates in the future.

Facilitated Information Sharing with International Counterparts

Previously known for its robust privacy safeguards around investor information obtained during foreign investment reviews, the ICA is now pivoting towards a looser confidentiality regime where circumstances warrant. The Bill proposes a more lenient structure permitting the dissemination of such details to peer entities in other jurisdictions engaged in national security analyses. This exchange, however, will be contingent on mutual national security interests and will likely be limited to sharing with partners who can reciprocate trust levels comparable to Canada’s—emphasizing a selective approach aligned with confidentiality and security concerns.

Protecting Sensitive Information in Court Proceedings

The Bill takes careful strides to preserve national security by cloistering classified and sensitive intelligence information from full exposure during legal contests arising from ICA enforcement. It equips the Minister with authority to earmark certain data as shielded from public court disclosures—a move designed to balance transparency with security needs. While judges will retain full access to this information for case consideration, investors and their legal teams will be provided only with summaries. This strategy ensures that legal proceedings remain informed without compromising crucial intelligence.

New Pre-Closing Filing Regime in the Investment Canada Act (ICA) Amendments

Impact on Transaction Planning

The recent Bill introduces a vital change to the ICA: a mandatory pre-implementation filing regime, particularly affecting Canadian businesses in sensitive sectors and foreign investors. The proposed pre-closing requirement is set to change how companies plan transactions. In 2021-22, only eight non-cultural investments underwent a mandatory pre-closing review for “net benefit” to Canada. With over 1,200 other investments not requiring such notification, businesses often opted voluntarily for pre-clearance to avoid national security risks. The updated Bill is expected to increase scrutiny on such investments, making the involvement of more transactions likely.

Defining Sensitive Sector Activities

Key to implementing the new filing regime is crafting precise definitions for activities within sensitive sectors that necessitate mandatory notice. The challenge lies in ensuring these terms are clear and specific without being overly restrictive or broad, thus avoiding excessive compliance burdens.

Scope of Non-Control Investments

The forthcoming regulations will also need clarity on what constitutes non-control investments subject to the new filing obligation. The Bill currently includes investments that allow access to sensitive information and some level of influence over the business’s management. Stakeholders are looking for regulatory guidance on exemptions for minor shareholdings that wouldn’t affect national security.

Administrative Process and Investor Communication

Efficient administration is crucial for the filing and review process under the new regime. There must be open communication channels with investors regarding their filings, as well as options for early termination of waiting periods where applicable. This streamlining is essential to reduce costs, administrative burdens, and uncertainties that could deter valuable investment into Canadian businesses.

In summary, careful consideration must be given to how these new regulations are structured and implemented—providing security without stifling investment is a delicate balance that will require thoughtful regulation crafting.

Limitations of the New Bill

Omissions in the Current Legislation

In our comprehensive evaluation of the new Bill, we must acknowledge certain omissions critical to its scope and influence. Despite thorough debates and various propositions by legislative bodies, the current text falls short in several respects.

Unincorporated Recommendations

Amidst the discourses preceding the Bill’s passage, notable are the exclusions regarding the suggestions from the House of Commons Standing Committee on Industry and Technology. The Committee’s significant proposal for a mandatory pre-closing net benefit review for foreign state-owned enterprises (SOEs) acquisitions has been overlooked.

National Security Reviews

Equally important is the government’s decision to bypass recommendations calling for all foreign SOEs – particularly those hailing from ‘authoritarian regimes’ – to undergo extensive national security assessments prior to investment approval.

Potential Impact on Enforcement

Looking forward, there are uncertainties about whether these legislative choices will affect the government’s enforcement efficacy – especially when there may be an uptick in early notification filings. Importantly, it is clear that current adjustments within the Bill do not modify existing protocols surrounding national security investment evaluations.

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