Canada's Foreign Investment Review Threshold Increased
While foreign investment review thresholds have been increased, the scope and application of Canada's foreign investment legislation remains unchanged.
The Canadian government has increased the foreign investment review threshold in respect of all transactions closing in 2006 that involve acquisitions of control of Canadian businesses. Specifically, the monetary threshold for review of investments by WTO investors based in WTO-member countries has been increased from $250 million1 to $265 million, unless one of the exceptional circumstances discussed below applies.
The increased threshold is thanks to the inflationary indexing formula prescribed under the Investment Canada Act (the ICA), rather than a liberalization of Canada's foreign investment policy per se. In fact, the "rules" of foreign investment review have not changed. All acquisitions of control of a Canadian business (i.e., a business carried on in Canada that has a place of business in Canada, an individual or individuals in Canada who are employed or self-employed in connection with the business and assets in Canada used in carrying on the business) by a "non-Canadian" are subject to the provisions of the ICA - even where the Canadian business is already foreign-controlled (e.g., a Canadian subsidiary of a U.S. corporation). One common misconception is that the use of a Canadian-incorporated acquisition vehicle takes the transaction outside the scope of the ICA. This is not the case; the nationality of the persons ultimately controlling the acquisition vehicle is determinative for ICA purposes.
Depending upon the nationality of the investor, the nature of the Canadian business, and the book value of the assets of the Canadian business, a foreign investment may be subject either to advance review and Ministerial approval, or merely to ex poste notification. A notification is essentially an administrative formality, constituting notice of the investment (with certain required information in respect of the investment) to be filed within thirty days of closing. A review application, on the other hand, is more onerous and may constitute a bar to closing until receipt of requisite approval(s) under the ICA. That said, investments are only reviewable where certain monetary thresholds are met.
Assuming that either the purchaser or the vendor is a non-Canadian "WTO investor," a review application is required for direct acquisitions (i.e., acquisitions of the Canadian business itself) if the value of the assets (as set out in the financial statements for the most recently completed fiscal year) of the Canadian business(es), and all other entities in Canada the control of which is being acquired, exceed(s) $265 million (up from $250 million). It should be noted that purchase price has no bearing on this determination. Moreover, it is the book value of all the global assets used in connection with the Canadian business - regardless of whether or not the assets themselves are located in Canada - that is relevant. Indirect acquisitions (i.e., the acquisition of an entity outside Canada that controls a Canadian business) are exempt from review if either the purchaser or the vendor is non-Canadian and WTO-controlled.
There are some very significant exceptions to the review thresholds mentioned above. Investments made in certain "sensitive" industries, including uranium production, financial services, transportation services and cultural activities are subject to special restrictions. In such situations the $265 million threshold in respect of direct acquisitions is reduced to $5 million, and indirect acquisitions are reviewable where the value of the relevant assets exceeds $50 million. Also, the higher thresholds apply only to acquisitions by so-called WTO investors (i.e., those controlled by persons in WTO-member countries), or to sales by non-Canadian WTO-controlled sellers.
As previously noted, the filing of an application generally gives rise to a statutory bar against implementation of a proposed transaction until a government review of the transaction has been completed and it has been determined to be of "net benefit" to Canada based on a number of criteria set out in the ICA (including, for example, the likely effect on Canadian employment and management participation, capital expenditure, investment in research and development, etc.. The process of obtaining a net benefit ruling usually takes a minimum of forty-five days, but can take longer, and usually involves the entering into of legally binding undertakings regarding the future conduct of the acquired business for the purpose of satisfying the Minister(s) that the proposed investment will be of net benefit to Canada.
The ICA foreign investment rules and review process can be difficult to navigate. If you have any questions about the application of Canada's foreign investment regime to a particular transaction, please contact a member of Stikeman Elliott's M&A or Competition practice groups.
FOOTNOTE
[1] All dollars are Canadian. The current exchange rate with the U.S. dollar is approximately CDN$1.15=USD$1.00.
