• Proposed Changes to Canada’s Foreign Investment Rules Create More Uncertainty For State-Owned Investors
  • May 24, 2013 | Authors: Imran Ahmad; Chris Hersh
  • Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
  • The Canadian Government recently tabled Bill C-60 which proposes important changes to the Investment Canada Act (the “ICA”) that will increase uncertainty for state-owned investors and companies with significant relationships with state-owned investors.

    These proposed amendments flow from the government’s December 2012 policy statement and investment review guidelines on state-owned enterprises (“SOEs”), which were issued following the approval of the CNOOC/Nexen and PETRONAS/Progress transactions, two significant SOE investments in the Canadian energy sector.

    The proposed amendments were introduced in Bill C-60 on April 29, 2013, with the key changes to the ICA being:

    1. Expanding the definition of an SOE beyond foreign governments and their agencies to include (i) an entity that is controlled or influenced, directly or indirectly, by a foreign government, and (ii) individuals that are “acting under the direction” of a foreign state or agency;

    2. Empowering the Minister of Industry (“the Minister”) to determine whether (i) an otherwise Canadian-controlled entity is controlled “in fact” by one or more SOEs, (ii) an entity is controlled in fact by an SOE, or (iii) there has been an acquisition of control “in fact” of an entity by a SOE;

    3. Increasing the financial review threshold for investments by non-SOE foreign investors to $600 million (based on “enterprise value”) which will be gradually increased to $1 billion over four years;

    4. Establishing a separate and lower financial review threshold for investments by SOEs (essentially maintaining the current book value-based threshold that is indexed annually to GDP); and

    5. Extending certain timelines in connection with the national security review process.

    Expanded SOE Definition

    Under the proposed amendments, the definition as to what constitutes a SOE will be broadened to include not only foreign governments and their agencies, but also (i) an entity that is “controlled or influenced, directly or indirectly” by a foreign state or agency; and (ii) individuals that are “acting under the direction” of a foreign state or agency.

    As the ICA does not define the concepts of “influence” and “direction”, this proposed change may create uncertainty for investors in whom a foreign government has a minority investment, who have significant commercial relationships with foreign governments or significant relationships with officials within foreign governments, as these types of arrangements may be caught by the broader SOE definition.

    Determination of SOE Status and Control by SOE

    The proposed amendments give the Minister the power to determine that: (i) an otherwise Canadian-controlled entity is controlled “in fact” by one or more SOEs; (ii) an entity is controlled in fact by an SOE; or (iii) there has been an acquisition of control “in fact” of an entity by a SOE. The legislation provides that this power will be retroactive to April 29, 2013 - which means that foreign investors contemplating Canadian investments must consider how this change may impact the review of their investment.

    Adding to the uncertainty is the fact that the Minister can deem an entity to be controlled by an SOE despite the current statutory “safe harbour” that provides that an acquisition of less than one third of the voting shares of a corporation or less than a majority of the voting interests in a partnership or joint venture does not result in an acquisition of control under the ICA.

    New Thresholds

    Under the proposed changes, the financial review threshold under the ICA for foreign investors other than SOEs will be increased from the current $344 million book value-based threshold to $600 million enterprise value-based. The enterprise value-based threshold will be gradually increased to $1 billion over four years.

    While the methodology for calculating “enterprise value” has not yet been finalized, the most recent draft proposal indicates that it will likely be based on a calculation of market capitalization for publicly listed companies and on the purchase price for private companies and asset acquisitions. It is unclear what practical implications would be captured under enterprise value. We anticipate that Bill C-60, which is currently in second reading, will be adopted by Parliament this June and that the methodology for calculating “enterprise value” will be released shortly thereafter.

    Longer National Security Review Timelines

    Currently, the ICA provides several timelines with respect to national security reviews. Bill C-60 proposes to extend a number of five day review periods in connection with national security review to thirty days. It also provides for several other timelines to be extended on agreement between the foreign investor and the Minister. This is a change that will clearly lead to a lengthier national security review process.


    Broadly speaking, the proposed amendments provide the Minister more powers and discretion to scrutinize investments by foreign SOEs. However, in doing so, they also introduce a significant level of additional uncertainty within the ICA process for SOE investors.

    The key implication of the proposed amendments is that Canadian businesses and foreign investors that have significant relationships with foreign governments (for example, significant minority investment, material commercial relationships or close ties to government officials) must carefully consider the nature of these relationships and whether they could be deemed to be a SOE under the more expansive definition. In short, companies having significant relationships with foreign governments/SOEs can no longer assume they will not be treated as a SOE under the ICA simply because the level of foreign government ownership is below one third. Similarly, companies need to take additional care in structuring minority investments by, or strategic relationships with, foreign governments or SOEs to ensure they take steps to avoid being deemed to be a SOE.