Guidelines on the National Security Review of Investments
With the highly anticipated release of its Guidelines on the National Security Review of Investments, the Canadian government has finally shed some light on circumstances which may draw investors and parties involved in the investment into the realm of a national security review.
Canada’s national security regime—background
If the Canadian government believes that a transaction that involves a non–Canadian may be injurious to Canada’s national security, such a transaction can be blocked or, if already implemented, unwound. These national security powers apply not only to significant acquisitions of control (as is the case for a ‘net benefit’ review), but also to smaller acquisitions of control and minority investments.
Since the national security regime was created in 2009, publicly available information regarding the Canadian government’s approach to national security reviews has been scant. This lack of information, coupled with the fact that a number of important terms regarding the national security scheme are not defined in the legislation, has created uncertainty for foreign investors.
The Guidelines on the National Security Review of Investments
The Guidelines explain that a national security review will focus on the nature of the asset/business activities and the parties involved in the transaction (including the potential for third party influence). The most illuminating aspect of the Guidelines is the list of factors that the Canadian government considers when assessing whether an investment poses a national security risk. These factors focus on defence, technology and critical infrastructure/supply. The Canadian government may take into account:
- the potential effects of the investment on Canada’s defence capabilities and interests;
- Involvement in the research, manufacture or sale of goods/technology identified in Section 35 of the Defence Production Act;
- the potential of the investment to enable foreign surveillance or espionage;
- the potential of the investment to hinder current or future intelligence or law enforcement operations;
- the potential impact of the investment on Canada’s international interests, including foreign relationships;
- the potential of the investment to involve or facilitate the activities of terrorists, terrorist organizations or organized crime and other illicit actors;
- the potential effects of the investment on the transfer of sensitive technology or know–how outside of Canada;
- 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;
- the potential impact of the investment on the supply of critical goods and services to Canadians; and
- the potential impact of the investment on the supply of goods and services to the Government of Canada.
Other key highlights from the Guidelines:
- Sensitive Information Restrictions: An investment is evaluated on the basis of facts related to the investment, which may include “sensitive information” that is protected under the Canada Evidence Act. As such, national security restrictions may restrict the degree to which certain information will be shared with the investor and others. Such information restriction highlights the tension between an investor’s ability to make full representations to the government during the review process and the government’s priority to protect the security of Canadians.
- Timing: The Minister of Innovation, Science and Economic Development has 45 days (which can be extended by up to an additional 45 days) after an application or notification under the Investment Canada Act has been certified, or after the implementation of an investment that does not required a notification, to refer an investment to the Governor in Council for an order for national security review. As such, where a transaction gives rise to national security risks, investors are encouraged to contact the Investment Review Division at the earliest stage of the development of their investment projects to discuss their investment and, where applicable, to file a notification or an application for review at least 45 days prior to the planned closing date.
Other Investment Canada Act updates: Net benefit review threshold to increase to $1B in 2017
In 2017, the Canadian government will amend the Investment Canada Act to increase the threshold that triggers a review of investments under its net benefit provisions. The threshold will be raised to $1 billion in enterprise value from the existing amount of $600 million. This legislative amendment will take place two years earlier than scheduled.
It is important to note that review threshold considerations are different for investments where the target’s business is cultural or raises national security concerns, as well as where the investor is a state–owned enterprise (SOE) or where a non-WTO investment is involved.
By: Oliver J. Borgers and Michele F. Siu, McCarthy Tétrault LLP
 There is no definition of “national security” and, unlike the net benefit review process, there is no financial threshold for investments under the Investment Canada Act’s national security review regime. Review can occur before or after closing and may apply to corporate reorganizations where there is no change in ultimate control.
 “Sensitive information” means “information relating to international relations or national defence or national security that is in the possession of the Government of Canada, whether originating from inside or outside Canada, and is of a type that the Government of Canada is taking measures to safeguard”. (Section 38 of the Canada Evidence Act.)