Government Releases much-awaited National Security Review Guidelines

Michael Kilby - 

On December 19, 2016, the Minister of Innovation, Science and Economic Development issued Guidelines on the National Security Review of Investments under the Investment Canada Act (ICA).

Overview of the Guidelines

Most significantly, the Guidelines list factors that will be taken into account by the government in determining whether foreign investments into Canada could be injurious to national security. These factors are:

  1. The potential effects of the investment on Canada's defence capabilities and interests;
  2. The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
  3. Involvement in the research, manufacture or sale of goods/technology relating to certain controlled goods noted in the Defence Production Act, including firearms, military training equipment, certain types of aircraft, weaponry and defence systems, etc.;
  4. The potential impact of the investment on the security of Canada's critical infrastructure. Critical infrastructure refers to 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;
  5. The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
  6. The potential of the investment to enable foreign surveillance or espionage;
  7. The potential of the investment to hinder current or future intelligence or law enforcement operations;
  8. The potential impact of the investment on Canada's international interests, including foreign relationships; and,
  9. The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

The Guidelines represent the first time any such disclosure has been made since the ICA was amended in 2009 to provide for a national security review process. It also represents the second time in 2016 that the government has provided eagerly sought-after details regarding the national security review process, signaling significantly enhanced transparency in relation to the administration of the national security review process. (Earlier in 2016, the government for the first time published certain statistics on the frequency and outcomes of national security reviews.)

Insights from the Guidelines

The Guidelines are notable in at least three respects.

First, they set out nine factors that will be considered in assessing the national security implications of a foreign investment. While these factors are not intended to be exhaustive, and while some of them are capable of broad interpretation, others are more precise and provide meaningful information to investors contemplating investment into Canada. It is certainly true that some of these factors may already have been, broadly-speaking, self-evident to foreign investors and their counsel; nevertheless, the specifics identified in the guidelines are useful, particularly as this type of disclosure was previously non-existent. Most notably, the factors reveal a core focus on defence, technology and intelligence-related concerns.

Second, the Guidelines recommend that foreign investors file their ICA notifications “early” and prior to the deadlines set out by statute. By way of context, the ICA sets out that the only filing requirement in respect of the vast majority of foreign “control” investments into Canada (i.e., 95%+) is to file a form known as a notification, which may be filed up to 30 days after closing. However, where an investor desires certainty regarding the application of the national security provisions to its investment, it may voluntarily file this notification early, prior to closing, and, if 45 days elapse following the filing of such notification, with no action being taken, the investor can proceed with closing knowing that the period within which a national security review could be ordered has expired.

The Guidelines encourage investors to file their notifications early – even though this is not required by law – particularly in cases where the assessment factors described above may be present. In the past, we believe it would have been accurate to characterize the government as largely indifferent as to when a foreign investor filed its notification – certainly the statute itself is formally indifferent. We believe that recent, complicated situations in which the government has sought post-closing divestitures of Canadian businesses on national security grounds have led the government to conclude that it is far easier to manage national security concerns on a pre-closing basis, before ownership has transferred, and hence to formalize the recommendation to file early.

Third, the Guidelines set out that Investment Review Division officials are ready to meet with and engage in consultations with foreign investors in relation to their transactions with a view to facilitating national security assessments and clarifying information requirements, “at the earliest stages of the development of their investment projects”. While it has always been open to foreign investors to engage with the Investment Review Division, the Guidelines go further in actively encouraging early engagement. Foreign investors and the Canadian businesses in which they propose to invest may previously have been reluctant in some cases to engage in this manner with governmental authorities; the Guidelines may on balance lead to earlier and more involved engagement. 

Canadian Government announces higher thresholds for Foreign Investment Review and more transparency for National Security Reviews

 Michael Laskey and Gideon Kwinter

In its 2016 Fall Economic Statement, the Government of Canada announced forthcoming changes to the review of foreign investments under the Investment Canada Act. Namely, the government intends to significantly increase the financial threshold above which foreign investments are subject to pre-closing “net benefit” review under the ICA, and provide additional guidance regarding the conduct of national security review.

Net Benefit Review Threshold

The ICA applies to every acquisition of control of a Canadian business by a non-Canadian investor. Transactions exceeding certain financial thresholds are subject to pre-closing “net benefit” review; these transactions cannot be completed until the responsible Minister or Ministers determine that the transaction will be of “net benefit” to Canada. Currently, for direct acquisitions of non-cultural Canadian businesses, transactions are typically subject to pre-closing review where the enterprise value of the acquired Canadian business exceeds C$600 million. Until recently, this threshold had been scheduled to increase to C$800 million in April 2017, and then to C$1 billion in April 2019 (and indexed annually to GDP growth beginning in January 2021).

As part of the Fall Economic Statement, the government has committed to increasing the threshold for review directly to C$1 billion in April 2017.

Raising the “net benefit” review threshold will significantly reduce ICA compliance costs and risks for foreign investments in Canadian businesses whose enterprise value is between C$600 million and C$1 billion. For investments that fall below the threshold, the ICA requires only that the foreign investor provide post-closing notice of the investment.

In addition to the across-the-board threshold increase, investors from certain states will see the “net benefit” review threshold rise to C$1.5 billion, due to the recently-signed Comprehensive Economic and Trade Agreement between Canada and the European Union. The C$1.5 billion threshold, which is to be indexed annually to GDP growth, will apply not only to investments flowing into Canada from the European Union and its member states but also to investments from the following countries with which Canada has pre-existing free trade agreements: the U.S., Mexico, Chile, Peru, Columbia, Panama, Honduras and Korea. The precise timing for the introduction of this increase remains unclear. However, Bill C-31, the amending legislation to introduce the increase, received its first reading in Parliament on October 31, 2016.  

Not all foreign investors will benefit from the new higher thresholds. In particular, the higher thresholds will not apply to investments: (a) to acquire a Canadian “cultural business”; (b) by a state-owned enterprise (which includes an entity influenced by a foreign state); and (c) where neither the purchaser nor the seller is ultimately controlled by nationals of WTO member countries.

National Security Reviews

Under the ICA, any foreign investment, including those that do not meet the “net benefit” review threshold, can be subject to a national security review if the government believes that the investment could be injurious to Canadian national security. The government has promised to make the national security review process more transparent by publishing, by the end of 2016, guidelines according to which such reviews will be conducted.

Currently, the national security review process under the ICA is opaque. While the ICA allows for review of any foreign investment that “could be injurious to national security,” national security is not defined by the ICA and there are no published criteria according to which such a review is undertaken. The forthcoming guidelines have the potential to provide welcomed insight into the process and clarity to prospective foreign investors.  

Canada announces rules for 2500 MHz spectrum auction in 2015

David Elder -

Days before the hammer is raised for the 700 MHz auction, the Canadian government has already announced its next spectrum auction.

On January 10, Industry Minister James Moore announced that the government will commence an auction of 2500 MHz spectrum on April 15, 2015. The spectrum will be licensed in paired blocks of 10 + 10 MHz and unpaired blocks of 25 MHz. Licence availability varies across different blocks and regions of the country, but a total of 318 licences will be offered, each with a 20 year term. Applications will be due by November 27, 2014.

Coincident with the announcement, the government posted the Licensing Framework for Broadband Radio Service (BRS) – 2500 MHz Band, which sets out the rules and procedures for participation in the spectrum auction, including the auction format and rules, the application process and timelines and the conditions of licence that will apply to BRS license holders.

The auction framework includes a number of features that the government believes will help foster sustained competition in the wireless telecommunications market, as well as robust investment and innovation by wireless service providers and extension of services to rural residents. These features include the following:

Spectrum caps

The auction framework imposes a spectrum aggregation limit of 40 MHz in each service area of the 2500 MHz band, except in the far north, where there is no such limit. 

Unlike the 700 MHz auction, which applied more stringent caps to service providers with larger market shares, the caps for the 2500 MHz auction appear to apply equally to all bidders. The government stated that the use of caps will ensure that at least four carriers would be able to utilize the BRS frequency band.

Smaller licence areas

Spectrum will be auctioned in blocks assigned to smaller geographic licence areas than previous auctions, for the expressed purpose of providing more opportunity for rural Internet service providers to acquire spectrum. In addition to potential use to support mobile wireless data applications, the spectrum can also be used to provide fixed broadband Internet services in rural areas.

Transfer restrictions

The spectrum caps will remain in place for 5 years from the date that licences are issued, although any transfer of spectrum is subject to the prior approval of Industry Canada.

Use it or lose it

Licences for 2500 MHz spectrum will be subject to conditions of licence that will require licensees to demonstrate that within 10 years of licensing the spectrum has been materially deployed, meeting minimum population coverage targets of between 10 and 50%, depending on the specific licence area.

Federal Court confirms Minister of Industry's authority to impose spectrum caps

David Elder and Shannon Kack -

In the latest chapter in the ongoing battle between incumbent wireless service providers and the federal government over government policies intended to stimulate more competition in the wireless market, the Federal Court has dismissed an application by Telus Communications Company (Telus) for judicial review of the Minister of Industry’s authority to impose conditions on spectrum licences issued pursuant to the Radiocommunication Act.

The Court’s decision in the case of Telus Communications Company v Canada, came less than two weeks before the scheduled start of Industry Canada’s auction of the highly desirable 700 MHz spectrum.

Telus’s application was provoked by the imposition by the Minister of conditions of licence that capped the amount of spectrum that can be acquired by certain bidders in the pending 700 MHz spectrum auction, set to commence on 14 January 2014. 

More particularly, while Industry Canada’s Licensing Framework for Mobile Broadband Services (MBS) - 700 MHz Band (Licensing Framework) generally limits licensees to two paired spectrum blocks within each of the 5 blocks in which paired spectrum will be available, large wireless service providers will only be permitted to acquire one paired block of the most sought-after spectrum.

For the purpose of the Licensing Framework, companies with 10 percent or more of the national wireless subscriber market share, or 20 percent or more of the wireless subscriber market share in the province of the relevant licence area, will be considered to be “large wireless service providers”, and will therefore be limited to purchasing only one block of “prime” spectrum. According to figures provided in the CRTC’s most recent Communications Monitoring Report, only Rogers, Telus, Sasktel, MTS and the “Bell Group” (wireless providers owned by BCE Inc.) are considered to be large wireless service providers.

The remainder of smaller incumbents and new entrant carriers will be allowed to purchase up to two prime blocks in all paired spectrum blocks; however, not all of these companies have applied and been qualified to bid.

The Court noted that the case was not a challenge to the wisdom or soundness of a government policy, but rather, raised the question of whether there is authority to enact decisions made under a policy.

In dismissing the application for judicial review, the Court found that the Minister had the authority to impose conditions on spectrum licences - including the spectrum caps applicable to larger wireless service providers - in light of the Minister’s broad power to fix spectrum licence terms and conditions, taking into account the policy objectives of the inter-related statutory scheme comprised of the Radiocommunication Act, the Radiocommunication Regulations, the Telecommunications Act and the Department of Industry Act.

The Court also found that, in imposing spectrum caps as a condition of licence, the Minister did not transgress into the regulatory powers reserved to the Governor-in-Council under the Radiocommunication Act, rejecting an argument that the spectrum caps amounted to a spectrum licence eligibility requirement, which only the Governor-in-Council has the authority to prescribe.

Bureau clears Telus to take over Public Mobile

Ashley Piotrowski and Shannon Kack -

On November 29, 2013, Canada’s Competition Bureau (the Bureau) issued a no-action letter in respect of the proposed acquisition by TELUS Communications Inc. (Telus) of Public Mobile Holdings Inc. and its operating subsidiary, Public Mobile Inc. (Public Mobile), giving Telus the green light to acquire Public Mobile’s four spectrum licenses. The Bureau’s review is noteworthy for several reasons: First, it resulted in a remedy. Second, the remedy is behavioural in nature. Third, there is no “consent agreement”, which is the usual way of formalizing a remedy. And, fourth, the precise form of the commitment made by Telus is not clear. A position statement accompanied the Bureau’s announcement.

In its position statement, the Bureau characterized the wireless telecommunications industry as having high barriers to entry and expansion, readily accessible information about competitor pricing, and the existence of industry organizations that could facilitate the dissemination of market and pricing information amongst competitors, all of which are factors the Bureau states could potentially raise concerns not only of unilateral, but coordinated conduct. The Bureau also characterized the industy as having a high concentration of market share, with the vast majority of wireless subscribers served by three national incumbents (Telus, Rogers and Bell). Following Industry Canada’s 2008 spectrum auction, the Bureau states that national incumbents responded to increased competition from new entrants (WIND Mobile, Public Mobile, Mobilicity and Videotron Mobile) by lowering prices, accelerating the introduction of new products, plans and services, and expanding the overall range and diversity of wireless products, plans and services available to customers.

While the parties will continue to face competition from the other national incumbents post-transaction, the Bureau focused its analysis on the degree to which the non-incumbents were likely to provide effective remaining competition in Southern Ontario and Greater Montreal, where Telus’ “value conscious” Koodo brand, and Public Mobile’s wireless networks overlap. Based on its market contacts, a review of the parties’ and third parties’ strategic documents and business plans (including information on customer switching data), the Bureau concluded that the remaining non-incumbents in Southern Ontario (Wind Mobile and Mobilicity) and Greater Montreal (Videotron) were likely to continue to provide effective competition post-transaction.

In deciding to issue the no-action letter, the Bureau also considered Telus’ commitment to offer a $19/month “Unlimited Talk” plan on substantially the same terms as Public Mobile’s current plan until at least December 31, 2014. Through its review, the Bureau had learned that Public Mobile intended to discontinue the plan due to financial sustainability issues, and was concerned the timing for the elimination of the plan would be accelerated as a result of the proposed transaction. Telus’ commitment to retain the plan until the end of 2014 addressed the Bureau’s concerns. The Bureau did not, however, require Telus to enter into a consent agreement to formalize what is, in effect, a behavioural remedy.

The transfer of Public Mobile’s four spectrum licenses to Telus was also subject to review by Industry Canada, which approved the licence transfer on October 23, 2013 on the grounds that the transaction would not materially change the spectrum concentration of incumbents in Canada, and therefore would not diminish competition in the wireless sector. As noted in Public Mobile’s Press Release, Public Mobile acquired its spectrum licences from the open part of the spectrum auction and not the AWS set-aside for new entrants; thereby allowing Public Mobile to transfer its spectrum licences to Telus without any restriction.