Foreign investment review policy sees further changes

By Donald E Greenfield, QC, Bennett Jones LLP

Under the Investment Canada Act (ICA), the government of Canada reviews acquisitions of control of Canadian businesses. Announcements by the prime minister of Canada on 7 December 2012, regarding changes to the ICA and related policies that would primarily affect acquisitions by foreign state-owned enterprises (SOEs), were discussed in this column in the March 2013 issue of this journal. The ICA was subsequently amended (in June 2013) to include specific provisions relating to SOE investments that were not anticipated.

‘Brightline’ tests

The ICA mandates a scheme for the review of acquisitions of control of large Canadian businesses by non-Canadian investors. In broad terms, control of a Canadian business may be acquired through: (i) the acquisition of all or substantially all of the assets used in carrying on the business; (ii) the acquisition of a majority of the voting securities or interests of the joint venture or partnership that owns the business; or (iii) the acquisition of a majority of the voting securities of a corporation that owns the business.

Donald Greenfield
Donald Greenfield

The acquisition of one-third or more but less than a majority of the corporation’s voting securities will also constitute an acquisition of control, unless it can be established that the investor will not control the Canadian business through the ownership of those securities. An acquisition by an existing minority non-Canadian owner may be reviewable if by the incremental acquisition that owner acquires control.

These tests or thresholds are sometimes referred to as “brightline” tests.

Special ICA guidelines apply when foreign SOEs want to make reviewable acquisitions of control of Canadian businesses.

Among the changes announced by the prime minister: (a) the SOE definition will now include an investor that is influenced by a foreign government; (b) the financial threshold for review for investments by foreign SOEs will continue to be based on book value – the threshold for which is GDP-indexed and is C$354 million (US$324 million) for 2014 – rather than a higher enterprise value, which will apply to acquisitions by other non-Canadian investors when the necessary regulation becomes effective; (c) the examination of foreign SOE investments will now consider the degree of control or influence that the SOE and the foreign state would likely exert on the target Canadian business and the relevant industry; and (d) a foreign SOE investment to acquire control of an oil sands business will be approved only in “exceptional circumstances”.

Virtually no guidance has been given with regard to the matters of influence and exceptional circumstances referred to above.


The June 2013 amendments provide that if the buyer is a foreign SOE, a “control in fact” test will be applied even if the acquisition does not meet one of the brightline tests, to determine whether the SOE is acquiring control of the Canadian business.

Typically, in applying the “control in fact” test, a Canadian court would look at the ongoing power or ability, whether exercised or not, to make the strategic decisions of an enterprise and the ability to manage the day-to-day operations of that enterprise. Instead of one standard definition, individual factors are considered which, when taken together, might result in a minority shareholder exerting control. Determining where control lies may require weighing competing factors such as: the composition of the board of directors; authority over the appointment of officers; shareholder rights, for example, on liquidity; veto rights; commercial arrangements; and financing arrangements.

Potential results

It is therefore possible that the Investment Review Division (IRD), which administers the ICA, could take the position that an SOE would be acquiring control of the Canadian business even though the acquisition does not pass any of the brightline tests.

It is also possible that the IRD could conclude that the ownership of a majority interest does not constitute control (for example, where an SOE owns 66% of a joint venture and significant decisions require unanimity). If the SOE was considering buying the remaining 34% in this circumstance, it could be found to be acquiring control.

If a foreign SOE made an acquisition without obtaining ICA approval, the minister of industry could conclude after closing that a reviewable acquisition of control had occurred. If the minister believed that the SOE failed to obtain the required approval, the SOE could be required to remedy the default or show cause why there was no contravention. The minister could also apply for a court order and, if successful, the court could direct the SOE to divest itself of control of the business and/or impose fines on the SOE.

These new provisions thus in some circumstances add further uncertainty to the ICA analysis for foreign SOEs.

Donald E Greenfield, QC, is a partner and the head of oil and gas at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Dubai and Doha, and representative offices in Washington DC and Beijing.


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