Annual Report 2009–2010 (lk81130)

2. Overview of the Investment Canada Act and Its Administration

Background

As noted in the preceding section, the Investment Canada Act (ICA or the Act) provides for the review of significant foreign investments for their likely net benefit to Canada. It also provides authority to the government to review investments that could be injurious to Canada's national security. The Act applies to a broad range of investments; however, only significant acquisitions of control of Canadian businesses by foreign investors are reviewed for their likely net benefit.

Under the Act, when a non-Canadian acquires control of a Canadian business, the non-Canadian must file either an application for review or a notification. An investor must file a notification where there is an establishment of a new Canadian business or where there is an acquisition of control of a Canadian business with assets valued below the established threshold.

For an investment that is not subject to a net benefit review under the Act and where an investor has filed a notification containing the information required by the Regulations Respecting Investment in Canada, the investor has met its obligations under the Act. No further action is required on the part of the investor.^{Footnote 3}

Acquisitions of control by foreign investors are subject to review where the value of the assets of the Canadian business is equal to or above the established threshold. By filing an application for review, an investor initiates the review process. The information that must be submitted where an application is filed is also established by the Regulations Respecting Investment in Canada. The relevant threshold for review for direct acquisitions by investors from World Trade Organization (WTO) member countries for the 2009-10 fiscal year was $312 million from April 1 to December 31, 2009, and $299 million from January 1 to March 31, 2010.^{Footnote 4} This threshold also applies if the seller is from a WTO country other than Canada. The threshold is based on the book value of the assets of the Canadian business. Indirect acquisitions by investors from WTO member countries are not reviewable.^{Footnote 5} In all other cases, the review threshold is $5 million for direct acquisitions and $50 million for indirect acquisitions. This lower threshold also applies where the Canadian business is a cultural business listed in Schedule IV of the Regulations Respecting Investment in Canada.

Where a proposed investment is subject to a net benefit review under the Act, the investor cannot implement the transaction without the approval of the Minister responsible for the Act.

The Minister has the authority to issue guidelines and interpretation notes (under section 38) with respect to the application and administration of any provision of the Act or its regulations. Over the years, the Minister has issued the following guidelines:

• Dual Filing Requirements-Guidelines
• Related-Business Guidelines
• Guidelines-Investment by State-Owned Enterprises-Net Benefit Assessment
• Guidelines-Administrative Procedures
• Guidelines-Acquisitions of Oil and Gas Interests

The Minister has also issued the following interpretation notes:

• Interpretation Note No. 1-Defunct Business
• Interpretation Note No. 2-Part of a Business Capable of Being Carried on as a Separate Business
• Interpretation Note No. 3-All or Substantially All of the Assets
• Interpretation Note No. 4-Business

The guidelines and interpretation notes are complementary to the provisions of the Act and do not modify the provisions of the Act.

Case Review-Net Benefit Test

The Minister of Industry approves an application for review only where he or she is satisfied, based on the information, written undertakings and other representations of the investor, that the investment is likely to be of net benefit to Canada. In making this determination, the Minister must consider the following factors listed in section 20 of the Act and only those factors:

1. the effect of the investment on the level and nature of economic activity in Canada, including, without limiting the generality of the foregoing, the effect on employment; on resource processing; on the utilization of parts, components and services produced in Canada; and on exports from Canada;
2. the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada of which the Canadian business or new Canadian business forms or would form a part;
3. the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
4. the effect of the investment on competition within any industry or industries in Canada;
5. the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and
6. the contribution of the investment to Canada's ability to compete in world markets.

In determining whether a transaction is likely to be of net benefit to Canada, the Minister proceeds as follows.

The first key step is to establish a baseline against which to review a proposed transaction. To do so, the Minister looks at the Canadian business that an investor proposes to acquire, taking into account the business' likely prospects on a stand-alone basis (i.e., in the absence of an acquisition). For example, the Minister assesses whether the Canadian business is a healthy company with good prospects or whether it is in financial distress. The Minister also takes into account the Canadian business- key strengths, areas requiring improvement and the key business challenges it is facing.

In reviewing a proposed transaction, the Minister takes into account what the foreign investor brings to the investment, for instance, whether the investor is bringing capital or expertise that is not accessible to the Canadian business, the investor's plans for the Canadian business and any legally enforceable undertakings that the investor may offer to provide further assurance that the transaction is likely to be of net benefit to Canada. The Act requires that the Director of Investments provide the Minister with specific information to assist in the net benefit determination. This includes the investor's plans, written undertakings and other information, and representations from affected provinces and territories as well as the results of the consultations held with other federal government departments.

The types of undertakings that investors may offer relate directly to the factors listed in section 20 of the Act and vary based on the nature of the transaction. Not all transactions involve undertakings. Undertakings generally reflect the importance of a transaction to the Canadian economy as well as the health of the Canadian business being acquired. Undertakings related to employment are common, as are those related to capital spending. Undertakings on the participation of Canadians in the Canadian business, including those to maintain head offices or head office functions, are also common. Finally, research and development undertakings are frequently offered, particularly in research- and technology-driven industries.

As indicated in the Guidelines-Administrative Procedures, the Minister, in reaching a decision on likely net benefit, considers both the positive and negative effects of a proposed investment in relation to each factor listed above. The results for all factors are then aggregated. Where their net effect is positive, the Minister can be satisfied that the investment is likely to be of net benefit to Canada. A proposed investment that is subject to review cannot be implemented by an investor unless the Minister has notified the investor that he or she is satisfied that it is likely to be of net benefit to Canada.

It is important to note that the Act does not assign set weights to the factors nor does it indicate whether any factor is more important than another in the net benefit determination. Furthermore, not all factors may be relevant to a specific investment and some factors may be more relevant to one investment than to another. As each transaction presents its unique features, the Minister examines proposed investments on a case-by-case basis and makes his or her decision based on the facts and merits of each proposed investment.

It is possible for competing investors to file applications for the same Canadian business. The Minister's role is to determine whether each individual investment is likely to be of net benefit to Canada, and he or she may approve more than one application, making the decision on a case-by-case basis on the merits of the individual case. The Minister does not compare one proposed investment with another to determine whether one proposal is more beneficial to Canada. Ultimately, it is the shareholders who decide whether to sell their business and to whom (assuming that all the investment proposals are determined to be of likely net benefit to Canada).

Finally, at any time after an application or a notification has been filed, the investor may withdraw the application or notification. Investors do this for a variety of reasons, such as the following: the investor has decided not to implement the investment; there were competing bids for the same Canadian business and the investor was not selected (only one can be successful); or there was an error in the interpretation of the application of the Act and the Act did not apply to the investment. From June 30, 1985, to March 31, 2010, 172 applications and 637 notifications were withdrawn. Two applications for review were withdrawn after the Minister issued a notice to the investor that he was not satisfied that the proposed investment was likely to be of net benefit to Canada. Twelve notices of this kind were sent out over this period. Only one application for review was officially disallowed by the Minister of Industry: Alliant Techsystems Inc.'s proposed acquisition of the Canadian business, the Information Systems Business of MacDonald, Dettwiler and Associates Ltd.

Net Benefit-Timelines

The Act provides an initial 45 days for the Minister to conduct the net benefit review and make a determination. The Minister may unilaterally extend this period for a further 30 days if required. Beyond this 75-day period, the time frame for the review may be extended with the agreement of both the Minister and the investor.

If the Minister does not make a decision within the timelines provided in the Act, the investment is automatically deemed to be approved.

In the 2009-10 fiscal year, the Minister of Industry approved 23 applications for review. The mean time required to complete the review process and for the Minister to make a determination of net benefit for these reviews was 69 days. In performing a review, officials are provided with the commercial deadline for the implementation of the proposed investment. Much of the time required to complete a review is consumed by obtaining information from investors, completing the analysis of the information obtained through the review and discussing undertakings with investors.

Consultations

An exception to the strict confidentiality provisions of section 36 of the Act allows the Minister to share information with federal or provincial/territorial ministers or employees for the purpose of administering the Act. This allows the Minister to consult with the federal departments with policy responsibilities for the industry sector involved and the provinces and territories where the Canadian business has significant activity. All parties consulted are bound by the confidentiality provisions of the Act.

Figure 1. The Review Process

[Description of Figure 1]

Monitoring and Enforcement

Investors who have implemented investments subject to review under the Act are required to submit information requested by Investment Review Division officials to determine whether the investment is being carried out in accordance with the application. An evaluation of an investor's performance in implementing its plans and undertakings under the Act is ordinarily performed 18 months after the implementation of the investment, or earlier as required. Efforts are often made to align monitoring activities with the investor's annual reporting cycle to facilitate the reporting of timely and accurate information.

The Guidelines-Administrative Procedures outline the policies that apply to the monitoring of investments that have been reviewed and implemented. As per the guidelines, investment performance is judged in the context of the overall results. If the Minister is not satisfied that an investor is meeting its obligations under the Act, the Minister may seek more information from the investor prior to determining what action to take.

The Act specifies enforcement procedures when the Minister believes that an investor has not complied with its obligations under the Act, for instance, where an investor has failed to comply with its undertakings. Sections 39 and 39.1 stipulate that the Minister may accept replacement undertakings or may send a demand letter to the investor requiring it to cease the contravention, to remedy the default, to show cause why there is no contravention of the Act or, in the case of undertakings, to justify non-compliance. If an investor fails to comply with a demand letter under section 39, an application may be made on the Minister's behalf to a superior court under section 40 of the Act. The court may order any measure as the circumstances require, including directing divestiture, compliance with undertakings, payment of a penalty of $10,000 for each day of contravention, revocation of voting rights and disposition of voting interests.

Over the 2009-10 fiscal year, 65 investments under the ICA were monitored. In one case, the Minister believed that the investor had failed to meet its obligations under the Act and a section 39 demand letter was sent. This case is now in the Federal Court. For more information, see "Enforcement Proceedings in the U.S. Steel Case up to March 31, 2010".

National Security Reviews

In February 2009, the Act was amended to include a new part, Part IV.1 Investments Injurious to National Security. This amendment provides the Government of Canada with the authority to review a foreign investment that could be injurious to national security. Under this new part, an investment is reviewable if the Governor in Council (GiC) orders a review. For the GiC to order a review, the Minister of Industry must have reasonable grounds to believe, after consulting with the Minister of Public Safety, that a foreign investment could be injurious to national security. The Minister of Industry must make a recommendation to the GiC for a review. In addition to ordering a review, the GiC has the authority to take any measure with respect to an investment that it considers advisable to protect national security, including the following:

• directing the investor not to implement the investment;
• authorizing the investment on condition that the investor (i) give written undertakings that the GiC considers necessary in the circumstances, or (ii) implement the investment on the terms and conditions ordered by the GiC; or
• requiring the investor to divest control of the Canadian business or of its investment in an entity.

The national security provisions apply to a broader set of investments by non-Canadians, including the establishment of a new Canadian business and the acquisition of an interest in a Canadian business that represents less than a controlling interest.

National Security-Timeline

Where the Minister has reasonable grounds to believe that an investment could be injurious to national security, he or she may proceed in one of two ways. The Minister may send a notice to the investor that an order for the review of the investment may be made. If he or she proceeds in this way, the Minister must still subsequently make a recommendation to the GiC for a review to be ordered. Alternatively, the Minister may refer an investment to the GiC, recommending that an order for review be made without first notifying the investor.

In both cases, the time period within which the Minister must give the investor the first notification of a review, or possible review, ends 45 days after a relevant starting point. For investments subject to review or notification under the Act, the 45-day period begins on the certified date of the application or notification. For all other investments, the 45-day period begins on the date of implementation of the investment. Where a notice is sent to an investor by the Minister that an order for the review of an investment may be made, the GiC has 25 days to order a review of the transaction.

Where a review has been ordered by the GiC, if the Minister is satisfied that the investment would be injurious to national security or is unable to determine whether it would be, the Minister must submit a report, with recommendations, to the GiC within 45 days from the date on which the order was issued, or any such further period agreed upon by both the investor and the Minister. Once the Minister has submitted a report and recommendations, the GiC may then order any measure it considers advisable to protect national security. The time period within which the GiC must make an order is 15 days from the date on which the Minister referred the investment to the GiC for consideration (i.e., submitted a report and recommendations). The Minister is then required to notify the investor, without delay, of the GiC order.

Confidentiality

Since coming into effect in 1985, the Act has contained very strict confidentiality provisions. The substance of these provisions was in fact carried over from its predecessor legislation, the Foreign Investment Review Act.

Industry Canada and its officials often receive advance notice of takeovers, are given highly confidential information by an investor during the review process and receive information from third parties. All information obtained with respect to a Canadian, an investor or a business in the course of administering the Act is privileged. The disclosure of information outside of the narrow exceptions defined in the Act is a criminal offence.

Recent amendments to the Act have enhanced the transparency in its administration. The Minister may disclose the fact that an application has been filed under the Act and where the investment is in the review process, provided that doing so does not prejudice the investor or the Canadian business. In addition, where the Minister does not allow an application, he or she must give reasons to the investor and may make these reasons public, provided this does not prejudice the investor or the Canadian business. Where the Minister approves an application, he or she may give reasons to the investor and may make these reasons public, provided this does not prejudice the investor or the Canadian business. Finally, the Director of Investments must submit an annual report on the administration of this Act to the Minister, and the Minister must make the report available to the public.

Organization

In June 1999, authority for the administration of the Act as it relates to cultural businesses listed in Schedule IV of the Regulations Respecting Investment in Canada was transferred to the Minister of Canadian Heritage. The Minister of Industry remains responsible for all other aspects of the Act.

Under the Act, the Minister may appoint a Director of Investments to advise and assist in exercising the Minister's powers and performing the Minister's duties.

At Industry Canada, the Director of Investments is supported by a Deputy Director and the personnel of the Investment Review Division of the Small Business, Tourism and Marketplace Services Sector. The Division has a total of 10 employees. Its staffing and operations budget for 2009-10 was $1.08 million.

The Investment Review Division relies on the exemption to the confidentiality provisions contained in subsection 36(3) of the Act-allowing the communication of confidential information to government officials at the federal and provincial/territorial level-to regularly draw on the extensive expertise, experience and support from within Industry Canada, including Industry Canada Legal Services; from other federal departments with policy responsibility for investments under review; and from provincial/territorial governments where Canadian businesses being acquired have significant activities.

Investment Review Personnel

The list of personnel in the Investment Review Division is available, as well as further information on the Act and its administration.