Canada: The New National Security Guidelines – Investments That Pose A National Security Risk

Last Updated: December 30 2016
Article by Alicia Quesnel

On December 19, 2016 the Government of Canada released its much anticipated guidelines on the national security review of investments under the Investment Canada Act (the "National Security Guidelines").

The national security provisions of the Investment Canada Act came into effect on March 12, 2009. These provisions allow the Minister of Innovation, Science and Economic Development (the "Minister") and the Governor in Council (e.g. federal cabinet) to reject a foreign investment on the basis that it is "injurious to national security". Regulations setting out the process for national security reviews were enacted; however, no further guidance on what constitutes an investment "injurious to national security" has been provided - until now.

Background

While the previous government eschewed transparency in the national security review process - for national security reasons, the new government has made it a priority to be much more transparent. In its 2015-2016 Annual Report, the Minister reported that between March 12, 2009 (when the national security provisions came into effect) and March 31, 2016, the Governor in Council ordered a total of eight (8) national security reviews. This is a very small percentage of the number of notifiable and reviewable transactions that took place in that period (less than 0.2%); however, action was taken by the Governor in Council in all seven (7) of the eight (8) cases reviewed. One (1) application was withdrawn. In three (3) cases, the foreign investor was directed not to implement the proposed investment. In two (2) cases, the foreign investor was required to divest control of the Canadian business it had acquired. And in a further two (2) cases, the investments were approved subject to conditions that addressed the national security risks identified.

Of the cases subject to national security review, only one (1) was publicly addressed by the Minister. In 2013, the Governor in Counsel rejected Accelero Capital Holdings S.a.r.l's bid to acquire MTS Allstream, a division of Manitoba Telecom Services Inc. on national security grounds. While the specifics of the rejection were not made public, then Minister of Industry, the Honourable James Moore, noted that "MTS Allstream operates a national fibre-optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada."

In 2015, the Governor in Counsel ordered O-Net Communications Group Ltd., a Hong Kong-based developer of optical networking components, to divest itself of its $5 million investment in Montreal-based ITF Technologies Inc. The order was made quietly, without reasons, and only became public when O-Net Communications Group Ltd. applied to the Federal Court for judicial review of the decision. The Attorney General initially opposed the decision, but on November 9, 2016 ultimately consented to an order of the Federal Court to set aside the decision and conduct a new national security review.

National Security Guidelines

The new National Security Guidelines comprise 10 paragraphs. Of these 10 paragraphs, only one (1) paragraph addresses the type of transactions that may be subject to a national security review. Paragraph 6 of the National Security Guidelines sets out of a high level list of non-exclusive "factors" that the Minister of Innovation, Science and Economic Development (the "Minister") or the Governor in Council can consider as they relate to national security:

  1. the potential effect 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 identified in Section 35 of the Defence Production Act;
  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, terrorists organizations or organized crime.

While none of these factors are particularly surprising, it is nonetheless helpful to have them set out in writing. Not unexpectedly, they focus on acquisitions that could be injurious to our national defence, that could result in the transfer to a foreign entity of technology or other expertise that could be deployed in Canada in a harmful way, or that promotes or facilitates surveillance, espionage and sabotage. The meaning and scope of "critical infrastructure" (for example, transportation, including pipelines and electricity distribution systems, as well as telecommunications infrastructure) and "critical goods and services" (broadcasting and telecommunications) are best viewed in this light. But as with most high level guidelines, they offer little guidance on how broadly or narrowly they will be applied in any given case or by any given government. Moreover, parties to transactions involving foreign investors also need to understand that the list is non-exhaustive.

Going Forward – Engage Early

For foreign investors, the uncertainty surrounding a potential requirement to divest of all or a part of the Canadian business after closing remains. As a result, even though the vast majority of foreign investments are not reviewable or subject to pre-closing approval, many foreign investors in certain industries have been counselled to file their post-closing notifications more than 45 days in advance of closing to allow the national review period to expire prior to closing.

The National Security Guidelines formally recognize that this approach is a prudent one, and further suggest that early contact with the Investment Review Division will provide foreign investors with even greater protection. In paragraph 8, the National Security Guidelines "encourage" foreign investments to "contact the Investment Review Division at the earliest stages of the development of their investment projects" if any of the factors in paragraph 6 "may be present" and, recommend, if their investment is not reviewable, to "file a notification ... at least 45 days prior to planned implementation." Paragraph 10 of the National Security Guidelines make it clear that officials at the Investment Review Division will meet with investors to discuss their investments and to "clarify information requirements that might be useful" in the course of assessments.

Greater transparency surrounding the national security provisions of the Investment Canada Act is much appreciated and the National Security Guidelines are a great first step in that direction. Hopefully, as we gain experience in the national security realm, the government's ongoing commitment to increased transparency and accountability will help us to more fully understand the full scope and reach of these provisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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