The Canadian government announced yesterday the coming into force of new review thresholds and other changes to the Investment Canada Act (ICA) that will affect foreign investors seeking to do business in Canada. While the changes should achieve the government’s objective of decreasing the number of investments subject to review, the determination of whether or not an investment will be reviewable will become more complex. In addition, the timeframes for national security reviews will become longer and investors will also have to provide significantly more detailed information about themselves in their filings.
What You Need To Know
Net benefit reviews will now be based on the Canadian business’ enterprise value
Effective April 24, 2015, the threshold for net benefit reviews under the ICA will be based on the enterprise value (EV) of the Canadian business rather than its asset value (AV).
For publicly-traded Canadian businesses, EV will be determined based on market capitalization, plus liabilities, minus cash and cash equivalents. For private companies, EV will be total acquisition value, plus liabilities, minus cash and cash equivalents. For an asset acquisition, EV will be the purchase price, plus assumed liabilities, minus any cash and cash equivalents that are transferred to the investor.
The initial threshold will be $600 million. It will be raised to $800 million in two years, to $1 billion two years later and thereafter indexed annually to changes in Canada’s nominal GDP. A similarly-indexed AV threshold will continue to apply to investors from non-World Trade Organization (WTO) member states, investors that are state-owned enterprises (SOEs), and in connection with the acquisition of cultural businesses. Although the new EV threshold is higher than the current $369 million AV threshold, retaining the AV threshold for certain transactions may lead to counter-intuitive results in some cases. For example, a Canadian business could have a low AV but high EV, with the result that its acquisition by an SOE would not be reviewable but its acquisition by a private sector investor would be.
National security timeframes will become longer
In addition to net benefit reviews, the ICA authorises the government to review investments that could be injurious to Canada’s national security. The changes announced yesterday extend the timelines for various stages of a national security review. Cumulatively, the changes increase the maximum national security review timeframe from 130 days to 200 days (or longer with the consent of an investor). The government tends to use all the time available to it to conduct its reviews, so the new maximum timeframe is likely to become the default review timeframe.
Revised forms will require the disclosure of confidential information
Effective April 24, 2015, new notification and application for review forms will require foreign investors to disclose a significant amount of additional information, even where there is no net benefit review. For example, investors will have to disclose whether they are owned, controlled or influenced by a foreign government; sources of funding; and information relating to board members, the five highest paid officers, and shareholders. These new informational requirements will be used by the government to help carry out net benefit assessments but also to determine whether to commence national security reviews, which have no triggering thresholds and are being initiated by the government with increasing frequency.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2019 by Torys LLP.
All rights reserved.