Under recently passed COVID-19 relief legislation, the federal government also extended the timelines it can take to review foreign investments for national security concerns, a power Ottawa has increasingly flexed amid public sentiment favouring Canadian protectionism.
The government has publicly used an initial screening process under the national security review power of the Investment Canada Act for two recent high-profile transactions: the takeover of Canadian gold miner Semafo Inc. by Endeavour Mining Corp., whose biggest shareholder is Egyptian billionaire Naguib Sawiris, and a bid by Chinese state-owned Shandong Gold Mining Co. Ltd. to acquire Arctic miner TMAC Resources Inc. (The Endeavour transaction closed in early July after Ottawa said it would not pursue a full national security review.)
Lawyers who advise clients on foreign investments say deals can still get done, but buyers – particularly those from China – and sellers of a growing range of assets, including resources, technology, health care and businesses in the supply chains of grocers and pharmacies, need to prepare for longer timelines and more uncertainty.
“There’s a climate around the globe that we’re seeing – and Canada’s not alone here – where national security reviews are popping up more regularly and in a broader sense than we would have seen prior to COVID,” said Anita Banicevic, a partner at Davies.
In an April policy statement, Innovation, Science and Economic Development Canada said it would tighten scrutiny of foreign investments in Canadian companies related to public health or critical supply chains during the pandemic, as well as any investment by state-owned enterprises. In the legislation extending the federal wage subsidy for employers, passed in late July, the government also gave itself the power to temporarily extend certain timelines related to national security reviews.
In a ministerial order, Innovation Minister Navdeep Bains extended the timelines for screening transactions for national security issues. The initial screening, which used to be capped at 45 days, can now take from 60 days to six months. Extended screenings have also been lengthened to 90 days from 45. (These timelines are valid only until Dec. 31 of this year.)
“We’re seeing increasing use of that initial screening period by the government, particularly for some investments in the health care space, and some investments in areas where we wouldn’t historically have thought the government would take significant interest, such as mining,” said Michael Laskey, a partner at Stikeman Elliott.
Foreign investors previously encountered national security reviews as a rare occurrence with severe consequences, Mr. Laskey said, noting that as initial screenings have become more common, so has the possibility of not proceeding to a full review, which can lead to conditions on a deal or an outright block.
“The trade-off is you have this sword of Damocles hanging over your head for a lot longer. ... It’s potentially quite a long stay in purgatory,” he said, noting that this state of uncertainty can be particularly challenging for smaller deals.
In a recent blog post, Torys partners Omar Wakil and John Emanoilidis questioned whether a “Canada-first” mentality spurred by the pandemic will curb mergers and acquisition activity. They point to a public opinion survey conducted in May by Hill+Knowlton Strategies, which found 25 per cent of respondents did not want any foreign investment into Canada.
The survey also found very low support (less than 15 per cent in each case) for Chinese companies buying large stakes in Canadian companies in a range of sectors, including retail, food processing, telecom and manufacturing. Support was higher for U.S. investors buying into Canadian businesses, but still ranged from a low of 11 per cent support for investments in banking and a high of just 34 per cent support for U.S. investments in retail.
“It already is difficult for Chinese buyers to secure Investment Canada Act approval in many sectors. Growing public and political antipathy to Chinese investment will mean that marginal cases are now more likely to be rejected rather than approved,” Mr. Wakil said in an interview. “The current environment may deter Chinese buyers from Canadian M&A or lead to creative work-arounds, such as carving Canadian assets out of a global deal in order to avoid Investment Canada scrutiny.”
Still, Mr. Emanoilidis says Torys is still seeing strong interest in Canadian assets from U.S. and European investors. “Notwithstanding recent moves from the Canadian government, Canada continues to be a favourable source of target companies for foreign buyers.”
And while national security reviews tend to draw significant public attention, Navin Joneja, a partner at Blakes, notes that the vast majority of foreign investments are not subject to the process. For the 2018-19 fiscal year, there were 962 foreign investment filings completed under the Investment Canada Act; just nine of those were subject to the extended screening process and seven were subject to full national security reviews.
“We anticipate this trend will generally continue, although there may be more investments that undergo an extended screening process without ultimately requiring a full national security review,” Mr. Joneja said.
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