Amendments to the Investment Canada Act: Key Considerations for Investors and Foreign Entities
Introduction
Foreign investment is a cornerstone of Canada’s economic growth and innovation. As the global landscape evolves, so do the challenges facing economic security. In response, the Canadian government has undertaken a significant modernization effort of the Investment Canada Act (ICA), aimed at striking the delicate balance between attracting foreign investment and safeguarding national interests. In this blog, we’ll explore the recent amendments to the ICA and their implications for foreign entrepreneurs and investors in both private and public companies or seeking investment opportunities in Canada.
Understanding the Investment Canada Act
The ICA serves as the backbone of Canada’s regulatory framework for foreign investment. If you are a foreign entrepreneur with a plan to incorporate in Canada or to acquire equity in a Canadian business, the ICA requires mandatory disclosures by filing a notification form. For new businesses, the disclosure must be made either before or within the 30 days following the implementation of the investment.
The intended purpose is to provide mechanisms for both net benefit and national security reviews of foreign investments, ensuring that investments align with Canada’s economic and national security interests. While the Act aims to promote investment, it also reserves the government’s right to intervene in cases where an investment may not be of net benefit to Canada or may pose a threat to national security.
Recent Amendments
On March 22, 2024, Bill C-34 received royal assent, which is an act to amend the Investment Canada Act, marking a significant milestone in the modernization of the Act. This Bill will come into force on one or more dates to be fixed by the Cabinet, ushering in a new era of enhanced regulatory oversight and transparency in Canada’s investment landscape.
Let’s delve into the key amendments introduced by Bill C-34 and their implications for public and private companies:
- Pre-Implementation Filing Requirement:
One of the notable amendments introduced is the requirement for pre-implementation filings for investments in prescribed business sectors and non-completion of the investment until the review period under the ICA has terminated without triggering a national security review.
While these prescribed business sectors are not mentioned, based on the Government’s Guidelines on the National Security Review of Investment, we anticipate that such sectors may include defense industry, critical goods and services, and sensitive technology areas such as artificial intelligence[1]. This requirement intends to ensure that the government has early visibility on investments that may pose potential risks, such as access to sensitive assets or intellectual property.
- Interim Conditions and Undertakings:
In a bid to mitigate security risks during the review process, the amendments authorize the Minister of Innovation, Science, and Industry to impose interim conditions in respect of the investment, which may be amended or deleted in the Minister’s discretion. The companies have the opportunity to propose written undertakings to address the Minister’s concerns if they highlight risks in association with the investments.
- Sensitive Information:
The amendments will permit the Minister to identify sensitive information, such as classified intelligence information, that would be protected from disclosure in legal proceedings arising from enforcement action under the ICA, such as judicial reviews of orders to block or attach conditions on investments for national security reasons.
- IP & Asset Acquisitions:
In forthcoming net benefit reviews, the Minister will now weigh the impact of investments on intellectual property rights, particularly those developed with Canadian government funding, as well as the implications for the utilization and safeguarding of personal data of Canadians. Although these considerations are formally incorporated now, they have long been evaluated in net benefit assessments. Foreign investors must be ready to address any apprehensions concerning Canadian intellectual property and personal data in potential ventures.
Additionally, the amendments will extend the reach of the ICA’s security measures to encompass all asset acquisitions, regardless of the stake acquired in a Canadian enterprise. Previously, the national security framework applied solely to acquisitions of interests, such as minority equity stakes, in entities operating in Canada. Now, the provisions will encompass any form of asset acquisition, including transfers involving intangible assets like intellectual property.
- Penalties for Non-Compliance:
To deter non-compliance with regulatory requirements, the amendments introduce stronger penalties, including fines for failing to comply with pre-implementation filing requirements. These penalties underscore the importance of adherence to regulatory obligations for both private and public companies, signaling the government’s commitment to enforcing compliance across all sectors.
An investment subject to a review after it has been implemented can be unwound if the Governor in Council makes an Order directing the non-Canadian to divest itself of its investment or conditions could be imposed on it by Order of the Governor in Council.
Implications
Investors are strongly encouraged, particularly where they are state-owned or subject to state-influence, to contact the Investment Review Division at the earliest stages of the expansion of equity to foreign entities, to discuss the investment details and to file a notification (voluntary or mandatory) at least 45 days prior to planned implementation and at least 75 days prior to commercial closing where an application for net benefit review is required. The specific obligations of the non-Canadians may need to be discussed for the purposes of these amendments.
Conclusion
Previously, many foreign investors used to postpone involvement in the ICA process until after completing transactions. However, with the Bill’s changes, such as the upcoming pre-closing notification system and heightened national security scrutiny by the government, it becomes imperative for foreign investors and their advisors to give early and comprehensive attention to the ICA process. These amendments mark a significant advancement in Canada’s endeavor to harmonize economic expansion with national security concerns. Consequently, both private and public enterprises eyeing investment prospects in Canada can anticipate enhanced transparency, responsibility, and regulatory supervision.
[1] Sensitive Technology Areas also include medical technology, biotechnology, space technology, next generation computing and digital infrastructure.
