Canadian Government Announces COVID-19 Related Enhanced Scrutiny of Investments by Non-Canadians in Canadian Businesses Involved in Public Health or the Supply of Critical Goods and Services

April 20, 2020

On April 18, 2020, the Investment Review Division (“IRD”) of Innovation, Science and Economic Development Canada announced policy developments in respect of assessing the national security implications of investments by non-Canadians in Canadian businesses related to public health or involved in the supply of critical goods and services to Canadians or to the Government of Canada (the “Government”) .

The IRD stated that under the extraordinary circumstances of the COVID-19 pandemic, and sudden declines in business valuations that could lead to opportunistic investment behaviour, the Government will subject certain foreign investments into Canada to enhanced scrutiny under the Investment Canada Act (the “ICA”). The IRD stated that while each investment will continue to be examined on its own merits, the Government will scrutinize foreign direct investments of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government. Among other things, the IRD is making it clear that even non-control transactions that are not subject to a filing requirement and where the parties may not consider national security to be a material issue will be examined to ensure that they do not raise national security concerns.

The IRD did not provide any details of what would be considered to be critical goods. In this regard, it should be noted that the sensitive areas already identified in the IRD’s pre-existing Guidelines on the National Security Review of Investments include critical infrastructure related to “processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security… of Canadians”. Those Guidelines also reference the National Strategy for Critical Infrastructure which identifies 10 critical infrastructure sectors: energy and utilities, finance, food, transportation, government, information and communication technology, health, water, safety, and manufacturing. The scope of the areas subject to greater scrutiny is likely to be determined on a case-by-case basis in the context of specific proposed transactions.

By way of background, the ICA contemplates two types of review in respect of foreign investments: economic review and national security review.

  • Economic reviews only occur in respect of control transactions exceeding certain financial thresholds, which thresholds are generally very high; the announcement of April 18 results in no changes whatsoever to such thresholds or the limited circumstances under which a transaction is subject to economic review.
  • National security reviews, on the other hand, have never been and still are not subject to any control test or financial thresholds, but rather may be commenced by the government in its discretion. The Government’s announcement therefore does not alter the pre-existing discretion that is already available to the Government to commence a national security review in respect of any transaction whereby a non-Canadian invests in a Canadian business, nor does it create any new filing requirement that does not already exist. Rather, it is guidance to foreign investors and their advisors that closer scrutiny should be expected in relation to transactions that are relevant to public health or the supply of critical goods and services. It is also important to note that the Government does not state that any sort of blanket prohibition will apply in these areas, but rather that they will be subject to closer scrutiny

The IRD also stated that some investments into Canada by state-owned enterprises may be motivated by non-commercial imperatives that could harm Canada's economic or national security interests, a risk that the IRD stated is amplified in the current context. The IRD said that all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments, will be subjected to enhanced scrutiny under the ICA and that this may result in additional information being requested or longer review periods. While the IRD has long stated that SOE investments may raise concerns, the new policy statement emphasizes this point in the context of the COVID-19 crisis. It also emphasized the broad definition of SOEs in the ICA as including entities that are influenced by foreign governments.

Going Forward

The IRD stated that the enhanced scrutiny of certain foreign investments under the ICA will apply until the economy recovers from the effects of the COVID-19 pandemic and it is therefore reasonable to expect enhanced scrutiny for the foreseeable future. In an essay by our partners Shawn Neylan and Marc Barbeau published on April 14, 2020 we predicted enhanced national security scrutiny by the Government of investments in the areas noted in the new IRD policy statement and discussed considerations for businesses that are involved in transactions that may raise issues regarding Canada’s national security.  

The IRD’s policy statement underlines the importance of assessing national security issues early in transaction discussions and developing a plan for engagement with the Government in cases where national security issues may arise. Early consideration of the potential for national security issues will assist in identifying transactions that may need to be discussed with the Government as well as in developing mitigation plans where appropriate and feasible.  While the Government is expected to continue to strongly support foreign direct investment and to permit most transactions to proceed without a national security intervention, it is clear that the trend of greater scrutiny of transactions for potential national security issues will continue.

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