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Minister of Innovation, Science and Industry Francois-Philippe Champagne leaves after a media availability on legislation to modernize the Investment Canada Act, in Ottawa, on Dec. 7.Justin Tang/The Canadian Press

Canadian technology companies support the federal government’s plan to ramp up scrutiny of foreign takeovers, while pushing Ottawa to ensure that its new rules don’t slow the approval process.

One tech executive said the government’s new strategy fits the needs of domestic companies in sectors such as critical minerals, artificial intelligence, semi-conductors and quantum computing, where foreign capital is often essential to growth and intellectual property is the most valuable asset.

“Succeeding in the knowledge economy is about more than education and innovation. Increasingly, it’s about nations securing and utilizing their intellectual property,” said Garth Gibson, chief executive of the Vector Institute, a Toronto-based hub for artificial-intelligence research and commercialization, in a recent report. He said strong IP laws encourage innovation and offer protection for inventions that are easily copied.

Last week, the government announced a sweeping update of the Investment Canada Act (ICA), including new measures to block the transfer of intellectual property to foreign countries, such as China. After Ottawa’s announcement, a Vector Institute spokesperson said in an e-mail:It makes sense for the government to be reviewing the act at this juncture to ensure it is in line with today’s modern world while protecting the economic interests of Canadians, including intellectual property.”

One proposed change to the act will require companies planning takeovers to give regulators notice of their intentions before a takeover closes and corporate secrets are shared with a foreign buyer. Current rules allow companies to wait until 30 days after an acquisition is complete before seeking approval from Ottawa.

Federal Innovation Minister François-Philippe Champagne said in a recent news release that the change in rules gives “the government earlier visibility on investments where there is risk that the foreign investor would gain access to sensitive assets, information, intellectual property or trade secrets, for example, immediately upon closing.”

Shifting the timelines on takeover reviews in sensitive sectors would align the act with the approach taken by some of Canada’s allies and has significant implications on how deals actually get done, said Charles Tingley, a partner in law firm Davies Ward Phillips & Vineberg LLP who specializes in foreign investment.

“What the government announced is in keeping with its recent policy statements on critical minerals, supply chains and technology that is critical to a modern economy,” said Mr. Tingley. “The major practical impact is the move to require companies to preclear certain transactions, prior to closing.”

The most recent data on takeover reviews, from the government’s fiscal 2022 year, which ended on March 31, showed that a record 1,255 transactions were filed with regulators, with 24 investments subjected to enhanced national-security reviews.

None of those deals were blocked, although some were voluntarily withdrawn. Government records show that transactions with enhanced reviews took an average of 133 days to complete, although full formal reviews can take considerably longer, said Mr. Tingley.

If companies are forced to file foreign takeovers with regulators prior to closing, and face increased scrutiny, Mr. Tingley said Ottawa must ensure that preclosing reviews are conducted as quickly as possible, with the government devoting more resources to the approval process. He said if the timeline on closing transactions stretches out, companies will need to allow for this uncertainty when they strike the terms of deals and set deadlines for financing and closing.

The government signalled that it is aware takeover rules need to be applied in a timely fashion. Last week, Mr. Champagne said: “These new amendments will help bring the act in line with today’s reality, while ensuring we can work at the speed of business.”

In the past three years, the government has intervened in six investments from foreign companies over national-securities issues, with a focus on Chinese corporations investing in Canadian miners. Earlier this year, Ottawa ordered Chinese state-owned businesses to divest three stakes in Canadian companies that focus on battery metals exploration. In 2020, the government blocked China-based Shandong Gold Mining Co.’s proposed $230-million acquisition of a property in Nunavut on national-security grounds.

The recent uptick in enforcement activity under the act’s national-security review provisions suggests that regulators are more sensitive to investments from China than from other countries. Mr. Tingley said: “This confirms the Canadian government’s increased willingness to leverage its statutory tools under the ICA to assess the national-security implications of foreign investments.”

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