FDI update: new policies for foreign investments in Canadian critical minerals businesses and ICA amendments

Last week the Canadian government announced a more restrictive approach to the review of critical minerals investments under the Investment Canada Act (ICA), as well as the coming into force of important amendments to the ICA. The government also approved the acquisition by Glencore of Teck Resources’ metallurgical coal business with unusually stringent conditions.

Under the new policy, certain foreign investments in companies with critical mineral businesses—regardless of the country of origin of the investor—will only be allowed “in the most exceptional of circumstances”.

There seem to be at least two limits on the new policy:

First, it only applies to investments subject to a “net benefit” review. Net benefit reviews are typically only required where there is a direct acquisition of a Canadian entity with an enterprise value of at least C$1.326 billion. Where investors are owned or influenced by foreign states, the threshold is a lower C$528 million in book value of assets test. Recent changes to the ICA also allow the government to order a net benefit review for certain state-owned enterprise investors or if a review would be in the public interest, regardless of their value.

Second, the government statement focused on “large Canadian-headquartered firms engaged in critical minerals operations” and “important Canadian mining companies engaged in significant critical minerals operations.” This could mean that transactions with a small Canadian nexus or limited critical minerals activities may be out of scope, even if the thresholds operate to trigger a technical net benefit review.

Considerable uncertainty remains. Historically, “exceptional circumstances” policies in other sectors (such as oil and gas in the wake of Nexen’s acquisition by CNOOC) over time proved not to be a practical obstacle to approvals for non-Russian or non-Chinese investments. However, those policies did chill the investment climate at the time. It is also well established that ministerial enforcement of policies cannot override legal requirements and Ministers must assess investments on their merits on a case-by-case basis. That said, the current Minister is known for his aggressive enforcement posture and willingness to test the limits of the law.

The Minister’s full statement can be found here.

The approval of the Glencore/Teck transaction also re-enforces the current government’s muscular approach to foreign direct investment screening.

A comprehensive summary of the conditions was released by Glencore and they show a tougher government stance on certain key metrics. Consistent with other recent precedents, they confirm that the new effective standard duration of undertakings has increased from three years to five years. There are also unusual and strong ESG commitments, including an obligation to ensure environmental obligations are financed over the course of Glencore’s ownership and potentially after a sale up until 2050. A full summary of Glencore’s undertakings can be found here.

The review period itself was also exceptionally long from an ICA perspective: over 8 months compared to the typical 75-90 day timeframe. But it seems consistent with the government’s recent handling of other transactions subject to political and media scrutiny, such as the almost 13-month review of RBC’s acquisition of HSBC’s Canadian banking operations.

Finally, the government announced that the first of two rounds of recently announced changes to the ICA would take effect as of September. These changes will permit the government to start net benefit reviews for acquisitions by state-owned enterprises or where they are otherwise in the public interest, as noted above. They will also allow the Minister to: (i) extend the statutory timeframe for national security reviews; (ii) impose interim conditions; (iii) resolve investigations on consent with undertakings; and (iv) share more information with foreign counterparts. Other impending changes, including a new national security mandatory reporting regime, are not expected to enter into force until 2025 at the earliest.

Overall, it is clear that critical minerals investments will be subject to greater scrutiny and the government will have more tools for its review of these transactions.