Enhanced scrutiny of foreign investments during COVID-19

Burtley Francis

In a statement issued on April 18, 2020¹, the federal government (through Innovation, Science and Economic Development Canada) signalled that certain foreign investments into Canada will now face enhanced scrutiny under the Investment Canada Act as Canada continues to grapple with the impacts of COVID-19. The enhanced scrutiny comes as the national health and security of Canadians and the economy is now of paramount concern to the Canadian Government.

What transactions are subject to scrutiny?

The statement recognizes that in the current economic climate many businesses have experienced declines in their valuations, which may make them an investment or acquisition target for foreign investors.  Where the foreign investment has potential to introduce new risks into Canada those transactions will garner additional scrutiny, which will likely result in a detailed assessment and prolonged review periods. Transactions of particular concern are those involving foreign direct investments in the following circumstances:

• In connection with the target Canadian business: the business is related to public health; or the business is related to or involved in the supply of critical goods and services; or
• In connection with the foreign investor: the investor is owned by a foreign government; or the investor, even if it is an otherwise private entity, is assessed as being closely tied to or subject to direction from a foreign government.

This enhanced scrutiny will be applied once any of the above circumstances are met, regardless of the transaction value, and whether or not the transaction results in the foreign investor having a controlling interest in the Canadian Business.

How will this be applied?

Even prior to the issued statement, the federal government had the ability under its national security review powers to block a proposed investment, to allow an investment with conditions (which can be imposed pre- or post-implementation), or order the divestiture of a completed investment. This is unchanged. How the government exercises its national security powers remain somewhat of a black box, without much insight on the applied analysis of challenged investments. What the statement clarifies, though, is that there will be a particular heightened focus on investments involving public health and the supply of critical goods and services.

Unfortunately, the statement does not provide detail on what is captured within the scope of “critical goods and services”. However, guidance may be taken from the federal government’s published policy on critical infrastructure ² which provides a list of 10 critical sectors, namely:

• Energy and utilities
• Finance
• Food
• Transportation
• Government
• Information and communication technology
• Health
• Water
• Safety
• Manufacturing

There may be additional consideration of provincial designations of industries or businesses as essential services as well. Even so, the statement leaves the door open for this higher review standard to apply to transactions beyond just those involving businesses active in Canada’s supply chains for essential medical supplies or personal protective equipment, which may otherwise have been implied by virtue of the statement being tied to the current COVID-19 pandemic.

How long will this policy be in place?

The duration of this approach to enhanced review is indefinite as it will apply until the economy recovers from the effects of COVID-19.

What does this mean for transactions going forward?

Even in light of the statement, the same financial thresholds for review and triggers for prescribed cultural businesses ³ under the Investment Canada Act continue to apply, and the majority of foreign investment transactions will likely be subject only to notification. While review officers are working remotely following personal distancing directives, they continue to accept and review notifications and adhere to the usual service standards and timelines.

However, this statement likely will result in more foreign investment transactions being subject to a higher level of review particularly where the Canadian business operates in a critical sector. Given the uncertainty in scope it is recommended that investors seek clearance prior to close (at least 45 days prior to intended closing date) even where ordinarily a post-closing notice would be allowed.⁴ In this way the parties will have certainty that the deal will not be challenged after it has closed.

¹ https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81224.html
² The National Strategy for Critical Infrastructure is available at https://www.publicsafety.gc.ca/cnt/ntnl-scrt/crtcl-nfrstrctr/esf-sfe-en.aspx, together with guidance on designated essential services and functions (which are subject to amendment).
³ Cultural businesses include those involved in the publication, distribution or sale of books, magazines, periodicals, newspapers or music in print or machine readable form as well as businesses involved in the production, distribution, sale or exhibition of film or video products or audio or video music recordings.
⁴ The 45 day recommendation corresponds with the timelines under the Investment Canada Act, pursuant to which notice of any national security concerns must be raised within 45 days of the initial filing.

This article is provided for general information only. If you have any questions about the above, please contact a member of our Commercial Transactions/Agreements group.

Click here to subscribe to Stewart McKelvey Thought Leadership articles and updates.