The Competitor : Canada Competition / Antitrust Blog by Stikeman Elliott Lawyers & Attorneys

The sole exception to this rule, at present, applies to foreign investment in Canadian businesses that have business activities "related to Canada's cultural heritage or national identity." In such cases, the Governor in Council can exert jurisdiction pursuant to paragraph 15(a) of the Investment Canada Act, regardless of the value of the assets of the Canadian target. However, the concept of "cultural business" is defined under the Act,2 thereby inherently limiting the scope for such discretionary review.

In contrast, the proposed amendments do not define "national security," nor do they provide any guidance as to the types of investments that may be deemed to impact national security. As a result, Bill C-59 significantly broadens the Government's ability to review-and potentially block-a host of foreign investments that may have historically been beyond its jurisdiction.

Following a review, the Governor in Council would have the power, pursuant to the proposed amendments, to prohibit a proposed investment entirely (or, in the case of an implemented investment, order a divestiture of all or part of the Canadian business), or to authorize the investment subject to terms, conditions or undertakings deemed necessary for the "protection of national security." Currently, reviewable transactions must be found to be likely to be of "net benefit" to Canada; while this is arguably an imprecise standard, at least there is a list of factors on which such an assessment is to be based. Bill C-59 contains no such guidance regarding "national security."

The nebulousness of the concept of "national security," coupled with the Governor in Council's proposed remedial latitude, suggest that Bill C-59 could have far-reaching implications for foreign investors. At best, the Bill introduces a significant "wild card" into the calculation of completion risk by foreign investors. At worst, it presents a potential forum for politically motivated protectionism.

Second reading of Bill C-59 is expected to occur sometime in the fall.

FOOTNOTES

[1] The financial threshold for review of direct acquisitions by World Trade Organization (WTO) member-countries is $250 million in assets of the Canadian business for transactions that close in 2005.  Industry Canada has determined that indirect acquisitions, whereby control of the Canadian business is acquired by virtue of the acquisition of an offshore parent, by WTO investors are not reviewable.  A lower threshold ($5 million for direct acquisitions and $50 million for indirect acquisitions) applies for certain sensitive sectors (i.e., uranium production, certain financial services, transportation services and cultural businesses), or where the buyer and seller are from countries that are not members of the WTO.

[2] A "cultural business" for purposes of such jurisdiction is defined in Schedule IV to the Investment Canada Regulations to include a Canadian business that carries on any of the following activities:

1. Publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine readable form.
2. Production, distribution, sale or exhibition of film or video products.
3. Production, distribution, sale or exhibition of audio or video music recordings.
4. Publication, distribution or sale of music in print or machine readable form.