Beware of New National Security Criteria at Investment Canada

In the fiscal year 2018-2019, Investment Canada received 962 notifications requiring a net benefit analysis. Most people are aware of the foreign investment review process by the Federal Government under the Investment Canada Act when non-residents seek to acquire a Canadian business.

Applicable when the acquisition transaction is greater than a general monetary threshold (such thresholds having been raised for transactions involving parties with whom Canada has a free trade agreement, i.e. USMCA, CETA) the review process seeks to establish that the proposed is to the net benefit of Canada.

Non-residents seeking to acquire a Canadian business? Beware of the Foreign Investment Review.

And What About the National Security Review?

Since 2016, year during which the Investment Canada Act was amended, a national security review forms part of the review of all notifications that are received under the Investment Canada Act. In the course of such reviews, the Government of Canada considers the potential effects of the investment on:

• Canada's defence capabilities and interests;
• the transfer of sensitive technology or know-how outside of Canada;
• the security of Canada's critical infrastructure;
• the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
• the ability to enable foreign surveillance or espionage;
• the ability to hinder current or future intelligence or law enforcement operations;
• the potential impact of the investment on Canada's international interests, including foreign relationships;
• the ability to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime; and also
• the involvement in the research, manufacture or sale of goods/technology that are controlled goods such as firearms and military equipment.

These national security reviews apply to the establishment of a new Canadian business or an entity carrying on operations in Canada, to the acquisitions of control of a Canadian business of any dollar value, and to acquisitions of all or part of an entity carrying on operations in Canada. In addition, special attention must be given to the Investment Canada impact if the potential investor is state-owned or subject to state influence.

In the past five years, the national security review process has ordered the divestiture from seven transactions, has blocked four transactions and has imposed conditions on four transactions – this represents a greater volume of barred transactions than under Committee on Foreign Investment in the United States (CFIUS).

In the fiscal year 2018-2019, nine proposed transactions were reviewed under the national security jurisdiction and the average length of time of the seven cases (two quickly did not warrant further investigation) that proceeded to an additional investigation was 161 days.

What’s New?

On March 24, 2021, the Government of Canada announced that it had amended the guidelines regarding national security reviews of foreign acquisition of Canadian businesses.

Firstly, the term sensitive technology and know-how was expanded to include a review in the case where the investment provides access to information not in the public domain and related to the research, design or manufacture of sensitive technologies in areas including those that have military, intelligence or dual military/civilian applications that may be developed in multiple fields, including the following non-exhaustive technology areas:

• Advanced Materials and Manufacturing
• Advanced Sensing and Surveillance
• Aerospace
• Biotechnology
• Medical Technology
• Next Generation Computing and Digital Infrastructure
• Quantum Science
• Space Technology
• Advanced Ocean Technologies
• Advanced Weapons
• Artificial Intelligence (AI)
• Energy Generation, Storage and Transmission
• Neurotechnology and Human-Machine Integration
• Position, Navigation and Timing (PNT)
• Robotics and Autonomous Systems

Secondly, the potential impact of the investment on critical minerals and critical mineral supply chains was added as a consideration on the 2016 list. Click here to review the Critical Mineral List: Critical Minerals List.

Thirdly, the definition of critical infrastructure was expanded to included processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government. Click here to review the list of Canada's critical infrastructure: National Strategy for Critical Infrastructure and Action Plan for Critical Infrastructure.

Finally, the 2016 list was updated to include the consideration measuring if the investment has the potential to enable access to sensitive personal data that could be leveraged to harm Canadian national security through its exploitation, including, but not limited to:

• personally, identifiable health or genetic (e.g., health conditions or genetic test results);
• biometric (e.g., fingerprints);
• financial (e.g., confidential account information, including expenditures and debts);
• communications (e.g., private communications);
• geolocation; or,
• personal data concerning government officials; including members of the military or intelligence community.

These modifications are in line with similar developments in the United States since 2018.

What Should you Take Away?

Those involved in cross-border mergers and acquisition need to take note of these expanded Guidelines:

• there are no monetary thresholds regarding a national security review;
• the expanded definitions of sensitive technologies and the sectors in which they are developed;
• the addition of critical minerals to the fields requiring national security notifications;
• the addition of sensitive personal data to the fields requiring national security notifications;
• an anticipated increase in national security notification and investigation volume given the broader scope of its application;
• before the modification of the Guidelines, the average time to deal with a matter was 161 days, with an anticipated backlog from an increased volume, that delay may grow;
• notifications are required to be sent to the Minister either before or within 30 days following the investment implementation – although with the Minister’s power to order a divestment, a prudent approach would dictate a notification prior to investment implementation; and
• the Minister has the power to investigate and compel the required information to be provided subsequent to a failure to notify.

Keep in mind the powers of the Minister under the Investment Canada Act:

• authorize the investment with specific conditions;
• disallow the investment; or,
• require the investor to divest itself of its Canadian investments.

At BCF, we are uniquely positioned to assist you in your foreign investments into Canada. Should you have any questions on the Investment Canada, do not hesitate to contact our International Trade team.