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Politics Liberals reverse Harper cabinet order to unwind Chinese takeover deal

Prime Minister Justin Trudeau has made deepening trade relations with China and striking a free-trade deal with Beijing key foreign-policy objectives for his government.

CHRIS WATTIE/REUTERS

The Trudeau government has cancelled a cabinet order by the previous Harper government that would have forced a Chinese electronics company to abandon its takeover of a Montreal-based high-tech firm because of concerns the deal could harm national security.

Instead, in a decision that suggests a different approach to Chinese investment, the Liberal government has said federal officials will undertake a "fresh review" of this transaction.

Prime Minister Justin Trudeau has made deepening trade relations with China and striking a free-trade deal with Beijing key foreign-policy objectives for his government.

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His government declined to explain Ottawa's reversal of the divestment order when asked about it Monday, citing national security and commercial confidentiality.

ITF Technologies, formerly Avensys, of Montreal is a leader in "fibre-laser" technology that is used in telecommunications, data communications and industrial applications. Its website mentions military applications for some of its products but does not elaborate.

In July, 2015, the former Conservative government ordered an unwinding of the firm's acquisition by Hong Kong-based O-Net Communications. It came five months after Ottawa initially announced approval for the transaction.

The reason cited by the government was that it had decided the investment "would be injurious to national security," O-Net Communications said in its appeal of the decision to Canada's Federal Court.

In early November, 2016, the Liberal government quietly answered this appeal. In a court filing, Ottawa agreed to set aside the Harper cabinet order and ask Industry Minister Navdeep Bains to conduct a new review of the transaction.

The Conservative government did not elaborate on its concerns about O-Net's takeover before it lost power in the fall of 2015 and former Tory ministers told The Globe they are bound by confidentiality commitments and cannot discuss it.

Ownership may have been a factor. A corporation presentation prepared by O-Net in 2015 suggests that more than 25 per cent of its shares are owned by a company that is a subsidiary of Chinese state-owned China Electronics Corporation.

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The Tories, now in opposition, are calling the reversal of the O-Net divestment order a bad idea.

"It's certainly in line with [the Liberals'] rush to please the Chinese at every level and to encourage Chinese investment," Conservative foreign-affairs critic Peter Kent said Monday. He accused the Liberals of undoing "a pretty important divestment order by our government" without adequate due diligence.

Mr. Kent said O-Net's connection to a state-owned company is cause for worry, especially in light of "the Chinese drive to militarize the South China Sea" and the high-tech products that ITF makes.

Sandy Walker, a Dentons LLP lawyer who is a specialist in the Investment Canada Act, said Ottawa's decision to set aside the cabinet order and undertake a new review was surprising.

"[With] national security, we've always regarded the government as having very broad discretion here. So it was an interesting development."

Ms. Walker cautioned that the public is not privy to all the information that underlies the government's decision.

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O-Net had argued in its application that the government in 2015 did not provide the company with "any consequential details or insight" to back up its national-security concerns and did not offer the firm an opportunity to respond.

It also said the deal does not represent a risk for Canada. "ITF … does not own any technologies that could be transferred to O-Net Communications that are not readily available in the marketplace," the company said in a court filing.

It said it acquired the ITF assets through an auction after the bankruptcy of its previous owner. "There were no Canadian investors or investors from anywhere in North America that were willing to invest in ITF."

A federal lawyer wrote in a November court filing that Ottawa accepted at least parts of the Chinese company's argument, singling out the lack of explanation given to O-Net and the fact it was denied "meaningful opportunity to respond."

The Liberal government declined to explain Ottawa's about-face on the divestment order. Pauline Tam, a spokeswoman for Mr. Bains, referred questions to the department of Innovation, Science and Economic Development. The department declined to comment on the case.

"The law limits the amount of detail that can be disclosed about specific cases. These limits are important to prevent commercial harm and to protect national security," Hans Parmar, an Innovation spokesman said.

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