Important Changes to the Investment Canada Act New Review Thresholds for Investments by WTO Investors that are not SOEs

Transcription

1 Important Changes to the Investment Canada Act New Review Thresholds for Investments by WTO Investors that are not SOEs By Alicia Quesnel, Jody Wivcharuk and Brittney LaBranche Overview On March 12, 2009, the Canadian government enacted, but did not proclaim in force, new, and much higher, thresholds for review (the "New Review Thresholds") of acquisitions of control of Canadian es by foreign investors under the Investment Canada Act ("ICA"). 1 Regulations Amending the Investment Canada Regulations for the purposes of implementing the New Review Thresholds were published for comment in the Canada Gazette Part 1 on June 2, The New Review Thresholds were re-introduced as amendments to the ICA in 2013 pursuant to the Economic 2 Action Plan 2013 Act, No. 1 ("EPA No. 1"), but again, were not proclaimed into force pending the implementation of regulations establishing a methodology for the calculating the New Review Thresholds. EPA No. 1 did, however, introduce a number of additional amendments to the ICA to address direct investments by state-owned enterprises ("SOEs") (the "ICA (SOE) Amendments"). The ICA (SOE) Amendments made it clear that the New Review Thresholds, once proclaimed into force, would not apply to acquisitions of control of Canadian es by foreign SOE investors. Foreign investors that are SOEs would continue to be subject to the current lower thresholds. On March 12, 2015, after taking into account the comments of stakeholders, the Canadian government published revised Regulations Amending the Investment Canada Regulations (the "ICA Amending Regulations") as well as Regulations Amending the National Security Review of Investment Regulations ("ICA National Security Amending Regulations") in the Canada Gazette Part II, Vol. 149, No. 6. The ICA Amending Regulations address a number of items arising out of EPA No. 1, including the establishment of a methodology for calculating the New Review Thresholds and formalizing the information requirements for national security and net benefit review purposes, particularly as they relate to the ICA (SOE) Amendments. The ICA National Security Amending Regulations extend the time lines for conducting a national security review. While the ICA (SOE) Amendments came into force on June 26, 2013, with retroactive effect to April 29, 2013, the New Review Thresholds and the ICA Amending Regulations will come into force on April 24, The ICA National Security Amending Regulations came into force on March 13, The New Review Thresholds The amendments under EPA No. 1 and the ICA Amending Regulations immediately increase the review threshold to $600 million (gradually rising to $1 billion within four years) and change the review threshold from being based on book value of the Canadian 's assets to one based on enterprise value of the Canadian for investments made by non-soe investors from World Trade Organization ("WTO") member countries ("Non-SOE 1 Bill C-10, An Act to implement certain provisions of the budget tabled in Parliament on January 27, 2009 and related fiscal measures, 2d Sess., 40th Parl., 2009 (assented to 12 March 2009). 2 Bill C-60, An Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures, First Sess., 41 st Parl., 2013 (assented to 26 June, 2013).

2 2 WTO Investors"). For SOE investors from WTO member countries ("SOE WTO Investors"), the review threshold will continue to be a "book value" based review threshold. The tables below set out a more detailed depiction of the review thresholds for Non-SOE WTO Investors and SOE WTO Investors. For Non-SOE WTO Investors Canadian Business - Entity Type Acquisition Type Value Threshold Publicly-traded entity Acquisition of voting shares of a corporation that Private entity Acquisition of voting shares of a corporation that Enterprise (Market Cap) Value Enterprise (Acquisition) Value $600,000,000 (2015 and 2016) $800,000,000 (2017 and 2018) $1,000,000,000 (2019 and 2020 ending Dec 31) $1,000,000,000 adjusted annually (thereafter) Acquisition of Assets Acquisition of all or substantially all of the assets used in carrying on the Canadian For SOE WTO Investor Canadian Business - Entity Type Acquisition Type Value Threshold (for 2015) 3 All Types Acquisition of voting shares of a corporation that Acquisition of all or substantially all of the assets used in carrying on the Canadian Book Value $369,000,000, adjusted annually (thereafter) 3 For non-canadians that are WTO Investors, including SOEs, indirect acquisitions are only notifiable and are not reviewable, regardless of their size or value. An "indirect acquisition" is an acquisition of a foreign entity that has Canadian subsidiaries. For non-wto Investors and for acquisitions of a cultural, the thresholds are $5 million for direct investments and $50 million for indirect investments.

3 3 For these purposes: (a) (b) (c) "Book Value" is the value of the Canadian which is the value of the assets acquired or of all assets of the entity acquired, as shown in the consolidated audited financial statements of the entity (and any other entities it controls) carrying on the for its fiscal year immediately preceding the implementation of the investment. "Enterprise (Market Cap) Value" means market capitalization of the entity, plus its total liabilities, minus its cash and cash equivalents. "Enterprise (Acquisition) Value" means the total Acquisition Value, plus its total liabilities, minus its cash and cash equivalents. For the purposes of the definitions of "Enterprise (Market Cap) Value" and "Enterprise (Acquisition) Value: (a) "market capitalization" is calculated by adding: (i) (ii) for each class of equity securities listed on a published market, the average daily number of each class of equity securities that are outstanding during the most recent 20 days of trading before the first day of the month that immediately precedes the month in which the notice or application for review is filed or, if no such filing is made, the most recent 20 days of trading before the first day of the month that immediately precedes the month in which the investment was implemented (a "trading period") multiplied by the average daily closing price of that class in the trading period; and, for each class of equity securities that is not listed on a published market, the amount that the board of directors or other authorized body of the non-canadian entity ("authorized body") determines, in good faith, and represents, to be the fair market value of the outstanding securities of that class. If the non-canadian investor does not know the number of equity securities in a class that are outstanding during the trading period, the most recently published information concerning the number of outstanding equity securities shall be used. (b) "Acquisition Value" means: (i) (ii) if 100% of the voting interests in the entity or assets are being acquired, the total amount of the consideration payable for the acquisition of the voting interests or assets, as set out in the if less than 100% of the voting interests in the entity or assets are being acquired, then the aggregate of: (A) the total amount of the consideration payable by the non-canadian investor, as set out in the (B) with regard to the voting interests in the entity being acquired, the total amount of the consideration payable by any investors other than the non-canadian investor, as set out in the (C) with regard to the voting interests in the entity being acquired, the total amount that the authorized body of the non-canadian determines, in good faith, and represents to be the fair market value of the portion of the voting interests in entity that is not included in (B) and (C) above.

4 4 With regard to the voting interests in the entity being acquired, if any portion of the total consideration payable is not quantified at the time the investment is implemented, that portion shall be equal to the amount that the governing body of the non-canadian determines in good faith and represents to be the fair market value of the portion. (c) (d) "liabilities" are equal to the total liabilities, other than operating liabilities, that are listed in the most recent quarterly financial statements released before the filing of the notice of investment or application for review or, if no such filing is made, before the implementation of the investment. "cash and cash equivalents" are equal to the total cash and cash equivalents that are listed in the most recent quarterly financial statements released before the filing of the notice of investment or application for review or, if no such filing is made, before the implementation of the investment. The New Review Thresholds should significantly reduce the number of transactions subject to a net benefit review by Industry Canada on a going forward basis. This new legislative regime accomplishes the objectives of the Competition Policy Review Panel (the "Panel"), which was mandated to review Canada's competition and investment laws with a view to boosting Canada's competitiveness. The Panel recommended retaining the ICA's net benefit review process but focusing it on the most significant transactions involving foreign investments in Canada. Changes to the Prescribed Information Required For Notices and Reviews The ICA Amending Regulations replace Schedules I and II to the Investment Canada Regulations. Schedule I prescribes the information to be provided in connection with a notice filed under the ICA (for acquisitions of control of Canadian es that are under the applicable thresholds). Schedule II prescribes the information to be provided in connection with a review application filed under the ICA (for acquisitions of control of Canadian es that are over the applicable thresholds). The newly prescribed information is designed to collect information for the purpose of assessing whether an investor is owned, controlled or influenced directly or indirectly by a foreign government or whether the products manufactured, sold or exported or the services provided by the Canadian give rise to national security concerns or are of a cultural nature. Some of the new information to be provided in both a notification and a review application under the ICA in connection with an assessment of the degree of foreign state control or influence, includes: an indication of whether a foreign state has a direct or indirect ownership interest in the investor; an indication of whether a foreign state owns one-third or more of the investor's voting interests and no other party has a controlling interest; an indication of whether a foreign state owns a minority of the investor's voting interests; if a foreign state has an ownership interest or voting interests in the investor, an indication of whether a special veto or other decision-making right is attached to that interest; an indication of whether a foreign state has the power to appoint members to the investor's board of directors or the power to appoint the investor's Chief Executive Officer or other senior management officers; and an indication of whether a foreign state has the authority under law to direct the strategic or operational decision-making of the investor.

5 5 As we note above, the New Review Thresholds do not apply to acquisitions of control of Canadian es by foreign SOE investors. Foreign investors that are SOEs will be subject to a much lower threshold. It is, therefore, important to know if an investor is an SOE before determining whether a transaction is notifiable or reviewable. There is a great deal of uncertainty as to what type or level of foreign government influence is necessary to cause a foreign investor to be an SOE. This means that from a practical perspective, if a transaction by a foreign investor exceeds the thresholds applicable to SOEs, the foreign investor would be well advised to engage with the Investment Review Division well in advance of simply filing a notification based on the New Review Thresholds for WTO Investors that are not SOEs. It would be politically embarrassing for a foreign investor to acquire control of a Canadian only to be advised subsequently by the Minister that, based on the information provided in its notice, it is an SOE and its investment was subject to review. If that occurs, the investor will be required to satisfy the net benefits test by making significant capital and other undertakings and/or risk having to divest all or a part of the Canadian. For purposes of assessing the national security review provisions, both the notice and review applications will require investors to provide a brief description of the products and/or services provided by the Canadian and the codes that are assigned to them by the North American Industry Classification System (NAICS) Canada, No doubt, the Minister will have internally identified NAICS codes that could potentially give rise to national security concerns (i.e. uranium, satellites). Finally, the prescribed information also requires the investor to provide information on the various components used to calculate the asset value, market capitalization or enterprise value (whichever is applicable) of the Canadian as well as the liabilities and cash and cash equivalents of the Canadian being acquired. National Security Review Timelines In 2009, the ICA was amended to include special review requirements for transactions that could be injurious to national security. National security is not defined in the ICA or the Investment Canada Regulations and there are no policies or other guidelines that indicate which industries are likely to be considered a national security concern. If the Minister of Industry ("Minister") and Governor in Counsel ("GIC") determine that there is a threat to national security, the GIC has the authority to take any measures it considers advisable to protect national security. The ICA National Security Amending Regulations have extended the prescribed timelines in which the Minister and the GIC are required to complete their review. These extensions increase the allocated national security review timeline from up to 130 days to 200 days, or longer with the consent of the investor, as follows: The GIC now has 45 days (amended from 25) to order a review of the investment after notice is given to the non-canadian that the investment may be reviewed. If the Minister is unable to complete his review within the prescribed 45 days, the Minister may now take an additional 45 days to complete the review (or longer with the consent of the non-canadian). If the Minister has referred the investment to the GIC with the recommendation that the investment would be injurious to national security, the GIC now has 20 days (amended from 15) to make a decision. This Bulletin is intended as general information only and is not to be considered legal advice. For further information related to your specific situation please contact any of the authors Alicia Quesnel, Jody Wivcharuk or Brittney LaBranche whose contact information is available on our website at