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Michael Kilby, a partner at Stikeman Elliott LLP, says three high-profile cases illustrate the Canadian government’s seeming ambivalence with respect to Chinese investment.

The Canadian Press

New numbers show the Canadian government has increased its focus on national security reviews in recent years, with the vast majority aimed at investments coming from China.

The federal government introduced the national security provisions of the Investment Canada Act in 2009, paving the way for security and intelligence agencies to review foreign acquisitions of Canadian companies or the establishment of new businesses by non-Canadian owners. The process is naturally shrouded in some secrecy, but in recent years, Ottawa has begun providing some public data on the number and type of reviews it has conducted.

The most recent report, covering the 2018 to 2019 fiscal year (ended March 31), reveals the government conducted seven full national security reviews, up from two in 2017-18, five in 2016-17, and zero the year before that. There were also zero reviews between 2009 and fiscal 2012 to 2013. (In some cases, the government asks investors questions or even issues a notice of a potential national security review but does not proceed to the full review process.) Ottawa has conducted a total of 22 full reviews since the provisions were introduced and 14 of those have been investments from China.

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“Statistically, the numbers show an overwhelming emphasis on China,” said Ian Macdonald, a partner who practises competition law at Gowling WLG LLP. The government has only reported the investors’ country of origin for the past two years. Mr. Macdonald said he believes it held back that information for some time owing in large part to diplomacy as Canada seeks investment from China while balancing concerns about security related to investments in critical infrastructure or technology assets.

Michael Kilby, a partner at Stikeman Elliott LLP, says three high-profile cases illustrate the Canadian government’s seeming ambivalence with respect to Chinese investment. In 2017, the Liberal government reversed a decision by the previous Conservative administration to block Chinese technology company O-Net from acquiring a Canadian laser technology maker, ITF Technologies. Later that same year, Ottawa approved the sale of satellite maker Norsat International Inc. to Chinese telecom Hytera Communications without conducting a formal national security review.

But the pendulum swung the other way with state-owned China Communications Construction Co. Ltd.'s $1.5-billion bid to acquire construction and engineering company Aecon Group Inc. Market watchers expected the deal would be cleared, though perhaps with certain conditions imposed. But the government blocked the deal in May, 2018.

“Each successive major Chinese investment presents a new challenge to the Canadian government, given the intense public scrutiny and criticism that it inevitably attracts, and 2018 has confirmed the long-held view that not every Chinese investment in Canada will be approved," Mr. Kilby said.

He says advising clients on the national security review process has changed significantly in recent years. From a procedural standpoint, the government now urges foreign investors to notify Ottawa of a proposed deal at least 45 days before closing the transaction (the length of time the government has to decide whether to refer an investment to the national security process). Most investments do not attract such scrutiny, but lawyers will weigh this risk when advising clients on how to approach closing dates. (Out of 962 investment filings in 2018-19, seven were subject to national security reviews, compared with two out of 751 filings in 2017-2018, five out of 737 filings in 2016-2017, and zero out of 641 in 2015-2016.)

“Another implication is that when a Canadian business has multiple potential buyers, the business and its advisers would do well to make a comparative assessment of the different bidders and the risks that they present, given that certain bidders may present substantial risk,” Mr. Kilby said.

Cassandra Brown, a partner at Blake, Cassels & Graydon LLP, notes that the industry of the proposed investment remains a crucial factor, pointing out that the majority of Chinese investments that have attracted national security reviews have related to critical infrastructure or the digital economy. There were four investments from China that were subject to a national security review in 2018-19, but 32 others were not. The government does not name the specific companies involved.

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“So while the government showed an increased willingness to use the national security review mechanism in 2018-19, there was also a higher chance of an investment that was subject to a full review being cleared with no conditions.”

Last year’s report revealed that three deals – including two from China – went through the review process and were cleared with no further action required. According to its public disclosures, those were the first cases in which Ottawa conducted a national security review and the deals emerged unscathed.

“I do think that’s notable,” Ms. Brown said. “It will be interesting to watch in future years if that develops into a trend or whether we see a return to the pattern before that, which was any time you saw a full national security review, the result was either the government ordering a divestiture, blocking the deal or imposing modifications or the investor withdrawing the investment.”

Six deals that faced scrutiny on national security concerns

The federal government publishes annual information on investments that have been subject to a national security review, including the buyer’s country of origin, the industry sector of the target investment and the outcome of the review. It does not disclose the names of the businesses involved, however, some have been identified publicly by the parties themselves or through media reports.

Here are some notable deals to fall under Ottawa’s national security lens over the past decade:

2013

VimpelCom Ltd., controlled by a Russian oligarch, withdrew its bid to gain full control over wireless startup Wind Mobile after a months-long review process. At the time, Wind’s network infrastructure included equipment made by China’s Huawei Technologies Co. Ltd., which heightened concern over the deal.

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2013

Just a few months later, Ottawa blocked Egyptian investment fund Accelero Capital Holdings’ proposal to buy the MTS Allstream fibre-optic business from Manitoba Telecom Services Inc. Accelero owner, Egyptian billionaire Naguib Sawiris, who was one of Wind Mobile’s original backers, vowed he would never again invest in Canada.

2015

Beijing-based Beida Jade Bird Group announced in 2014 it would spend $30-million to build a plant near Montreal, planning to manufacture fire alarm systems for the Chinese market. La Presse reported the following year that the government conducted a national security review and rejected the location of the factory because it was too close to the headquarters of the Canadian Space Agency.

2017

The Liberal cabinet reversed a 2015 decision by the former Conservative government to prevent Hong Kong-based O-Net Communications Ltd. from acquiring Montreal-based ITF Technologies, a leader in fibre-laser technology. The new government order contained certain conditions that remained confidential.

2017

Later in 2017, the government approved the sale of satellite technology company Norsat International Inc. to Chinese telecom Hytera Communications Inc. The Norsat case was notable because Ottawa scrutinized the transaction but did not conduct a formal national security review, suggesting to some that Canada would take a more welcoming approach to Chinese investment.

2018

But the following year, Ottawa blocked the $1.5-billion sale of Aecon Group Inc. to a Chinese state-owned enterprise, China Communications Construction Co. Ltd

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