Burtley Francis

Recently, the Government published for public comment draft legislation referred to as the Time Limits and Other Periods Act (COVID-19). The underlying purpose of the draft legislation, which was published on May 20, is to allow various timelines and other review periods under certain existing statutes to be extended or suspended up to an additional six months in light of COVID-19. A critical aspect of the proposed legislation is that as drafted, it would allow the Government to exercise this discretion to extend retroactively, to as far back as March 13, 2020. Any notice of extension would have to be provided by September 30, 2020.

The Investment Canada Act (“ICA”) is included among the list of statutes to which the draft legislation would apply, specifically, the periods related to the national security review process under sections 25.2 and 25.3. As discussed below, this discretion of the Minister of Innovation, Science and Economic Development (the “Minister”) to potentially extend or suspend an already nebulous national security review process by up to six months would have serious  implications on foreign investors who are in the process of completing (or who are even contemplating) investments in Canadian businesses.

Background

The ICA applies to all “non-Canadian” investors (which includes any entity that is ultimately controlled by one or more non-Canadians) and requires them to notify the Minister if they intend on (i) establishing a new Canadian business or (ii) acquiring an existing Canadian business. If the ICA applies, then notification is required. The obligation to file a notification falls solely on the non-Canadian investor and must be filed no later than 30 days after the implementation of the investment. Once the notification is received, at the Minister’s discretion, there may be a full review of the transaction.

While notification may be made after the investment transaction has been completed, the non-Canadian investor may not implement an investment or acquisition that is reviewable under the ICA until the investment or acquisition has been reviewed and the Minister conducts and completes a review.

There are two separate review processes under the ICA. The reviews are subject to differing thresholds and different procedures, and consider different factors. These reviews are:

• Net Benefit Review: Involves a review of investments over certain specified financial thresholds based on World Trade Organization membership status. This process considers whether such investments will be of “net benefit to Canada”.
• National Security Review:  Applies generally to any investment by a non-Canadian in or into Canada, regardless of size, and considers whether the investment might reasonably be expected to injure Canada’s national security. As noted in our prior update, how the national security powers are exercised has been a black box, however in light of COVID-19 a policy statement was issued in April advising that there is a particular heightened focus on investments involving public health and the supply of critical goods and services. Nevertheless, the key point is that a national security review can apply to any transaction with a foreign investor, even those that would not require notification or trigger a net benefit review.

The proposed legislation would apply to the regulatory time periods in connection with a national security review.

Current National Security Review Time Periods Under ICA

Currently, the Minister has 45 days after filing of the notification to give notice that a national security review may be required (under section 25.2) (the “Initial Notice”). When such an Initial Notice has been issued, the Minister has another 45 days to decide whether to proceed with a national security review (section 25.3) (a “Review Notice”).

Extended Time Periods Under Proposed Legislation

If this draft legislation is passed in its current form, the Minister would be able to extend the existing 45 day period for the Initial Notice (i.e notice of a potential review) for up to a maximum of six months. This means the Minister could have up to six months and 45 days to decide whether to issue an Initial Notice of a possible national security review. Although, it is not entirely clear whether under the proposed legislation the Minister could extend both the period for the Initial Notice (under section 25.2) for a maximum of six months as well as the period Review Notice (under section 25.3) for a maximum of six months in connection with the same transaction.

Implications on Foreign Investments

September 30, 2020 is now the most significant date because even if the 45 days passes from filing the ICA notice the parties will need to wait until September 30 to be sure that the Government will not give notice of a potential national security review. Even if the legislation is not enacted before a transaction closes, there is a risk that it could come into force sometime after, and as drafted the extension could be applied retroactively to the transaction.

Clearly then, this proposed legislation if enacted would create uncertainty and cause significant disruption to any transaction involving foreign investment. To illustrate the implications on transaction timing consider the following example:

• Assume a foreign investment transaction subject to notification only closed on May 1 (prior to the proposed legislation being enacted), and the corresponding notification was also filed May 1. Furthermore, assume the proposed legislation is enacted July 1, 2020.
• The Minister would have 45 days (to June 15, 2020) to send the Initial Notice that a national security review is being considered. However, even if 45 days pass without receiving a notice, the Minister would have until September 30, 2020 to decide to extend the 45 day review period by another six months.
• If the Minister decides to extend for the full six months, then he would have until December 15, 2020 (6 months and 45 days from filing the ICA notice on May 1, 2020) to send the Initial Notice that it is considering a national security review.
• If an Initial Notice is sent on December 15, 2020 (the latest possible date), then the Minister would have another 45 days (up to January 29, 2021) to send a Review Notice.

As shown in the above example, instead of the transaction being free to close as early as June 15 (i.e. once the 45 day review period passes without receiving an Initial Notice), as a result of the draft legislation the parties will have to wait until at least September 30 to know whether the Minister will exercise his discretion to extend the review period, which could mean the parties need to wait until December 15 (compared to June 15). Furthermore, if the Minister decides to issue an Initial Notice the timelines could be drawn out to January 29, 2021 before the parties have certainty whether the transaction will be subject to a national security review.

The extension of these periods could also significantly affect transactions that have yet to close. If the parties are pro-active and agree to file the notification in advance of closing, if notice of a potential national security review is issued, the parties are prohibited from closing until the national security review process ends or an approval is obtained. During an extended review period, there is an increased risk that a material event occurs that adversely impacts the deal.

For now, given the we recommend that parties engage with the Investment Review Department as early as possible to identify any potential concerns that could be raised in respect of a transaction investors seek clearance even where ordinarily a post-closing notice would be allowed.

The period for public comment on the draft legislation ends May 30. We will continue to monitor the progress of this proposed legislation.

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.

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