On March 12, 2009, the Canadian federal government passed significant amendments to the Investment Canada Act ( ICA ), Canada ’s foreign investment law of general application. Though the amendments generally liberalize important aspects of the Canadian foreign investment review regime, they also include a broadly worded national security test that now allows the responsible Minister to review proposed investments in Canada on national security grounds. On July 11, 2009, the government published draft regulations that provide the details of the new national security review process. A detailed summary of the amendments and regulations is included in an extended note available at www.vcc.columbia.edu.

At a time when many jurisdictions, including the U.S. and certain E.U. member states, have or are contemplating national security reviews, it is unsurprising that the Canadian government has put a similar process in place. Indeed, the Canadian national security review raises issues akin to those raised in other jurisdictions with similar tests, including uncertainty about the meaning of “national security”, concern that the new test may be used to target sovereign investment (particularly in the natural resources and energy sectors), and the likelihood of politicization of national security reviews.

As is the case in new processes which lack precise statutory or regulatory definition, it is unclear how the new test will be applied, and there are reasons to believe that it could be applied in a wide range of situations. There are at least three possible dimensions of national security: 1) economic welfare; 2) national security; and 3) super-national security. [5] The application of any of these dimensions to a merger review raises the possibility that a potential transaction that will increase economic efficiencies is rejected for political reasons. First, an interest in economic welfare may raise concerns that domestic industries should be protected from being bought out by foreign investors. In the past, producers of “clothespin[s], peanut[s], pottery, shoe[s], pen[s], paper and pencil[s]” in jurisdictions around the world have invoked the economic welfare dimension of national security to protect their industry. [6] Second, an interest in national security may refer to a concern that sectors of a country’s economy that are strategically sensitive for defence reasons should not be owned by foreign companies. Finally, an interest in super-national security may refer to the overarching imperative to “protect the homeland” from investment by countries that are viewed as a security risk.

Recently, it could be argued that the federal government and Canadian public view all three of these dimensions as relevant to national security reviews in Canada. Successive federal governments have expressed concern over investments by state-owned enterprises (SOEs) in Canadian businesses, exemplified by public debate over inbound investments by UAE SOEs and the issuance of review guidelines under the ICA specific to SOEs. [7] The current government’s decision (seemingly supported by all parties) to block the Alliant/MDA Transaction on the basis of arguably unusual concerns relating to U.S. access to surveillance technology further suggests that there is political will to consider similar restrictions on defence related acquisitions, even emanating from countries like the U.S.

Finally, public concern over the alleged “hollowing out” of corporate Canada, whether through elimination of Canadian head offices, stock exchange listings or reduced R&D has been apparent in the context of high profile acquisitions of Canadian businesses. Indeed, the consultation undertaken by the federal government, which preceded passage of the amendments to the ICA, explicitly considered the issue in its deliberations, and did not rule out the possibility, for example, that the loss of Canadian head offices due to foreign acquisitions of Canadian businesses could have negative consequences for the Canadian economy, though it did not recommend further direct restrictions on foreign investment. [8]

When these tendencies are considered in light of the breadth of the national security test, the federal government should be cautious in adopting an over-expansive approach to the application of the new test. The above tendencies demonstrate the country’s preoccupations with national champions, Canadian control over natural resources and domestic head offices. Allowing these preoccupations to dominate a national security review would counter the intended purpose of the test, and instead of functioning as a transparent tool to be used by the federal government in the limited circumstances in which foreign investment may threaten Canada’s national security, the national security test would become a meaningless catchphrase to be touted against unpopular, but legitimate foreign investments. Having said this, and as of the writing of this Perspective , the seemingly smooth progress (to date) of the recently announced acquisition by China Investment Corporation (CIC) of a minority voting interest in Teck Resources Ltd. (a major Canadian mining concern) under the new national security test is a welcome sign. [9] This transaction, involving a leading Chinese sovereign wealth fund acquiring a stake in a Canadian natural resource company, was precisely the type of acquisition that was to be scrutinized under the new test.

Foreign investors considering investments that could be subject to the new process will also have to adjust to a review process that is no longer primarily administrative, but essentially political. The national security review process is highly consultative in nature, and invites input from the cabinet of the federal government, departments of the federal government, as well as provinces affected by the transaction. All of these constituencies are heavily influenced by public concern about high profile transactions, especially those that are the subject of extensive media comment. Prudent foreign investors are well advised to recognize this at an early stage of their planning and to consider government relations and public relations strategies that are consistent with the approach taken to review under the ICA. Investors who appreciate the multifaceted nature of the Canadian foreign investment review process will have the most success in securing Ministerial approval in a timely and acceptable manner. - by Subrata Bhattacharjee

* Subrata Bhattacharjee is a Partner at Heenan Blaikie LLP. He can be contacted at sbhattach@heenan.ca. The views expressed by the individual author in this article do not necessarily reflect the opinions of Columbia University or its partners and supporters.