How Canada’s global partners can help supercharge the energy sector

 
Setting up Canada’s energy and natural resources sectors for success starts with ensuring that we find the right balance between our economic and national security priorities, in line with the times, as reflected in the Prime Minister’s words. Our current government has taken big strides to strengthen and renew key global trade relationships and further open Canada to the world. Canada must now turn intention into action to secure the necessary investment and additional expertise to develop our energy resources. How we apply our foreign investment rules will play an important role in our long-term success in this area.

In this article, we review the state of play of the relevant investment rules and reviews that apply to foreign investors and global partners, considering their impact on Canada’s ambitions to become an energy leader.

Foreign investment rules

The Investment Canada Act (the ICA) is Canada’s primary tool for regulating foreign investment, and it provides clear regimes to review large investments by any non-Canadian to determine if it will be of “net benefit” to Canada and/or whether an investment would be “injurious to our national security”.

Innovation, Science and Economic Development Canada (ISED) is responsible for the administration of the ICA, while the Minister of Industry, in consultation with the Minister of Public Safety, is responsible for conducting national security reviews (in coordination with several other Canadian government investigative bodies). The Minister of Industry can require conditions to approve an investment. While foreign investment reviews have become more rigorous in some instances, many such transactions continue to be approved and even expedited when projects align with national interests, as was the case in Anglo Teck.

Net benefit reviews

For significant transactions, the ICA generally requires that a non-Canadian investor proposing to acquire direct control of a Canadian business receive pre-closing approval that the investment is a “net benefit” to Canada, where the enterprise value of the Canadian business is equal to or greater than $2.179 billion in the case of private trade agreement investors or $1.452 billion in the case of private World Trade Organization investors. A lower threshold of $578 million applies to acquisitions by State-Owned Enterprises, calculated on the basis of the book value of the assets of the Canadian business.

The net benefit assessment is based on the impact that the acquisition will have on the Canadian business. Investments are generally approved, provided investors enter binding undertakings related to the maintenance and/or growth of the Canadian business. Typical undertakings relate to Canadian senior management, employment, production, R&D activity, and capital expenditures. Most undertakings are usually three to five years in duration.

National security reviews

Canada’s national security reviews continue to evolve amid a changing geopolitical environment, creating additional considerations for transactions involving Canadian businesses and foreign investors. As highlighted in the government’s recent Defence Industrial Strategy, Canada has a robust suite of legislative and policy tools to safeguard its most sensitive technologies, research, and know-how from malign actors. Foremost among these is the ICA. More specifically, any investment (either in part or in whole) in, or in the establishment of, a Canadian business by a non-Canadian investor may be reviewed if there are reasonable grounds to believe that the investment could be injurious to national security, regardless of whether the above relevant financial thresholds are met.

In addition, Canada has recently adopted several guidelines to bolster national scrutiny and help inform investors of the government’s ICA enforcement posture. Notably, these guidelines consider an investment’s potential impact on the security of Canada's critical infrastructure, which explicitly includes energy and utilities, as outlined in the National Strategy for Critical Infrastructure. This is in addition to the general focus on any investment’s potential impact on the “supply of critical goods and services to Canadians”. Other recent key government enforcement highlights include:

• Economic security: The Guidelines on the National Security Review of Investments (the Guidelines) now expressly include “economic security” as a national security consideration. In this regard, the government will consider factors such as the size of the Canadian business, its role in the innovation ecosystem, and its impact on Canadian supply chains when determining the potential economic security risks of an investment.
• Exceptional circumstances: The update to the Guidelines also came on the heels of the government announcing that acquisitions of control over Canadian critical minerals businesses would only be approved “in the most exceptional of circumstances”. 
• Mandatory notification: The government has also introduced new rules to require pre-closing notifications for acquisitions of any size in “sensitive sectors”, even where they fall below the net benefit thresholds. This will require foreign investors that are making sensitive sector investments (including non-controlling investments) to now notify the government in advance. These new rules have not yet come into force but are anticipated to in the near future. Currently, acquisitions of control falling below the net benefit review thresholds are only subject to a 30-day, post-closing notification while non-controlling acquisitions are not required to notify.

Putting Canada’s energy potential in motion

Global investors are increasingly aware of the opportunities to invest in and partner with Canada to be part of a generational opportunity, and recently Canada has begun to signal that the doors are further opening to foreign investors. Canada’s new Defence Industrial Strategy reflects this attitude with its “Build, Partner, Buy”-approach, which acknowledges that Canada will not always be able to do big projects alone and states, “where Canada lacks the capability to build domestically or there is an advantage to working jointly with partners, it will pursue partnerships with trusted allies and multinational firms”². This mindset will likely inform the government’s approach to foreign investment in the development of many key sectors. To square the economic and security interests at stake, it will be important for investment and project partners to work closely with regulatory counsel to bring proposals with creative win-win approaches to the market and government to secure approvals.

As Canada opens this new chapter to expand, build, and develop its energy resources for domestic and global markets, it is poised to realize its potential to become an energy superpower. With the right domestic and international partners, alongside renewed openness to foreign investment, that potential could become a reality, meeting the urgency of our times in the short term and securing Canada’s role on the global stage in the long term.