Chad Rogers is a founding partner at Crestview Strategy and frequently provides public affairs counsel to buyers and sellers in major transactions.
Is the door to foreign takeovers closing in Canada? With conflicting signals coming from the Trudeau government, it can be difficult for foreign investors to know which to listen to. One of the biggest obstacles they face is understanding what compels regulators to action in approving an acquisition.
Since mid-April, Canada’s federal government has quietly expanded the definition of what triggers a national security review in the evaluation of foreign investments and takeovers, providing it new powers to extend the notice and review periods.
Ottawa’s motivation lies in three areas. First, Prime Minister Justin Trudeau is apprehensive about “predatory foreign investors” taking advantage of a COVID-19 discount on Canadian assets and companies. Second, greater scrutiny is being applied to foreign investors that may not be state-owned enterprises, but do have close ties to states that pose a security threat to Canada. Third, Canadian acquisition targets that supply critical goods are likely to be subject to long reviews and a greater risk of unfavourable outcomes, particularly with an ever-expanding idea of what is critical in 2020.
We should all be concerned about increasing threats to the security of our economy, such as corporate espionage and IP theft. But how do we define a critical industry when automotive plants are making medical ventilators and breweries are producing sanitizer?
After years of focusing on attracting foreign investment to Canada, such as the mammoth $20-billion-plus Asian-European LNG Canada consortium, is the Trudeau government distancing itself from globalization with creeping protectionism? Canada is in good company during an era of pandemic-created, wartime-like economies. The United Kingdom and Australia are implementing enhanced foreign investment reviews; even the North Atlantic Treaty Organization, which doesn’t normally focus on the economies of its members, publicly warned about opportunistic foreign acquisitions.
The federal Liberals also have a new challenge facing them across the aisle in Parliament. Conservative Leader Erin O’Toole’s platform reads like a China hawk’s to-do list: banning Huawei from Canada’s 5G network, imposing sanctions and revoking visas, targeting Communist Party of China members, embracing Taiwan, and decoupling global supply chains. He promises to strengthen foreign investment reviews for acquisitions of Canadian companies and resources by state-owned entities from “non-free countries,” with the default position being to reject such acquisitions without a “compelling reason." Mr. O’Toole may be new to the job, but in this minority Parliament he leads the largest opposition caucus in Canadian history.
It would be easy if it’s just about China, but it is no longer rare for companies to be notified that they are being considered for national security reviews regardless of the home-country of the buyer. A Canadian gold miner with exclusively foreign operations and a TSX-listed acquirer almost got caught up in a lengthy delay this summer. With the recent passage of Bill C-20, more than five months of initial reviews can be undertaken before an official National Security Review is ordered. This can feel like a lifetime for a company that is trying to close a transaction during a global pandemic, moving this matter near the top of their risk register.
When implementing Bill C-20 the federal government acknowledged challenging operational restrictions because of COVID-19. Confidential document flow is difficult when ministers and their staff are working remotely, as are secret briefings in secure rooms. Delays could be driven as much by these logistics constraints as they are a tool for political risk management.
Regardless of their source, these delays are already affecting deal flow. Canadian capital alone will be insufficient to prevent COVID-related bankruptcies, job losses and even potentially expensive nationalizations by cash-strapped provincial and federal governments.
So, the pressure is on for government to create an environment where businesses can maintain and create well-paying jobs. To achieve this, foreign companies require assurance that Canada remains a predictable, rules-based environment in which to transact. This means sending a clear signal that the government wants high-quality foreign investment and will provide a consistent and transparent framework for getting deals reviewed and approved.
Delays and ambiguity kill deals. Deal participants know this, but our public-sector partners often forget it. While the government must ultimately provide clarity on the viability of a deal, it has no obligation to guarantee speed and without the right two-way conversation, this new risk will remain acute.
The Investment Canada Act presents not just a legal process, but also a political one. Without telling the story of how your deal will protect and create value for Canada, the importance of its expeditious and fair consideration will not be fully understood by its Ottawa gatekeepers.
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