Significant national security amendments coming to the Investment Canada Act

Canada’s Minister of Innovation, Science and Industry (the Minister) recently announced significant legislative reforms to the Investment Canada Act (the Act) to bolster national security reviews. The proposed changes focus on foreign investments in Canadian businesses with access to critical assets and/or information, and increase the government’s national security review powers.

What you need to know

The proposed amendments:

• follow recent related developments including the government’s Critical Minerals Policy, Indo-Pacific Strategy, and divestiture orders issued to three Chinese companies;
• introduce a mandatory pre-closing notification filing requirement for investments in certain sensitive sectors and significant penalties for non-compliance; and
• are expected to become law by mid-2023, although parts, including the mandatory reporting requirements, will come into effect later.

What’s changing

Pre-closing notification filing

The proposed amendments introduce a new mandatory pre-closing notification filing and approval regime for non-Canadian investments in Canadian businesses carrying on a “prescribed business activity”. This applies to all foreign investors and regardless of the size of the Canadian business. It also applies to both controlling interests and minority investments.

However, mandatory filings for minority investments will only be required if the investment provides the foreign investor with i) access to material assets or material non-public technical information; and ii) the power to appoint senior leadership (e.g., board of directors, trustee, general partner, etc.) or “special rights”. Minority passive investments not meeting these criteria are not caught.

The prescribed business activities have not yet been defined. But, we can likely expect they will resemble those in similar regimes such as the United States, the United Kingdom, and Australia which include businesses with key data or important IP and/or that operate in critical industries/sectors such as: critical minerals, cybersecurity, transportation, and sensitive technology areas, such as advanced weapons, aerospace, artificial intelligence, energy (generation, storage, and transmission), medical technology, and robotics and autonomous systems.

Investments subject to the new requirements will be prohibited from closing for at least 45 days. Longer reviews and higher scrutiny (including likely rejections) should be expected for investors from, or with ties to, China and Russia. Foreign investments from allied or “like-minded” countries are less likely to be highly scrutinized.

Additional amendments

New and increased penalties. Failure to file could result in a penalty of $500,000 or more. Failure to comply with any other provisions or regulations in the Act could be penalized $25,000 per day, per infraction, with no limit.

Interim and final conditions. The proposed changes give the Minister power to extend national security review timelines and impose interim and permanent investment conditions. The interim conditions could limit pre-closing information sharing, potentially impacting transaction diligence.

Information sharing. The proposed amendments also expand Ministerial power to share information with allies to assist and coordinate national security reviews, and introduce new rules for the protection of information during the course of judicial review.

What’s next

Given the government’s heightened scrutiny of foreign investments and sensitivity to national security concerns, foreign investors and Canadian businesses alike should engage counsel early in the transaction planning process to assess filing requirements and risks.