Watch this space: sweeping reforms proposed to Canada’s foreign investment regime

In the latest episode of our Global Foreign Investment Podcast Series, Neil Hoolihan, Linklaters Antitrust and Foreign Investment Partner based in Brussels, discussed upcoming amendments to Canada’s foreign investment screening regime with Katherine Burke, Director General of Canada’s Investment Review Branch, and Julie Soloway, Co-chair of the Competition, Antitrust and Foreign Investment practice at Canadian law firm Blake, Cassels & Graydon. Below are the main reflections from this discussion. 

Canada is an open economy, with a long-established foreign investment regime. In recent years, the regime has begun to focus strongly on aspects affecting national security, and now the Canadian Government has proposed sweeping revisions to the Investment Canada Act (ICA) – these are currently being debated in Canada’s Parliament.

What changes can we expect?

While the final text and timings for the reforms to the ICA are yet to be finalised, the key proposals are:

  • Mandatory pre-closing filings for investments in certain sectors and technologies. This represents a significant change, as the current regime allows for parties to file after closing a transaction.
  • It is anticipated that regulations following the amendments to the ICA will enable the Government to develop a specific list of technologies, as well as sectors, where pre-closing filings are required. These are likely to be similar to sectors caught in other jurisdictions like the US and the UK.
  • The ability to impose higher penalties for failing to receive approval prior to pre-closing. The proposed increase aims to ensure that penalties act as a serious and meaningful deterrent for non-compliance.
  • Authority for the Minister to impose interim conditions during the review of a transaction. The aim of this measure is to prevent harm during the review process by limiting the conduct of the parties.
  • A process that will allow the Minister to accept legally binding undertakings from the parties to mitigate national security risks. By identifying and limiting any national security harms in this way, a block on the transaction, or a divestiture, may be avoided.
  • Improvements to information-sharing between the Investment Review Division (IRD) and other regulators. This is set to include the Five-Eyes intelligence alliance, and other close allies who have developed their own foreign investment review regimes.
  • New rules regarding the protection of information during a judicial review of an ICA decision, to enable the IRD to share classified information in a manner that will not risk harming Canada’s national security interests.

Motivating factors for the reforms include:

  • addressing the increase in strategic and geopolitical interference by hostile foreign actors seeking to undermine Canada’s rule-based system,
  • improving investor certainty and transparency (including the speed of reviews) to promote positive investment in Canada, and
  • protecting Canada’s innovation economy by ensuring that Canadian innovation remains under Canadian control.
What are the IRD’s enforcement priorities?

Critical minerals, the use of sensitive data, and the role of state-owned enterprises were all mentioned as key enforcement priorities within the IRD. 15 sectors of concern are currently listed on the IRD’s website, including artificial intelligence, aerospace, medical technology, and quantum science including semi-conductors.

The role of transparency in the review process

Both the IRD and Canadian counsel emphasised the importance of early and transparent conversations between the transacting parties and the IRD, whilst recognising that the nature of national security reviews necessitates a greater level of confidentiality. If the ICA is amended to include a process for accepting legally binding undertakings, this will allow parties to structure their transaction to remedy any potential national security concerns before the review process begins.

Key considerations for investors

While the final text and timings for the revised ICA are currently unknown, international investors interested in Canada will need to calibrate their strategy in response to the upcoming regulatory changes. In particular, investors will need to focus on their approach to risk allocation during a transaction.

The shift from a post-closing to a pre-closing filing will require parties to consider a cascade of new questions when negotiating an agreement. These range from the efforts that the acquirer should expend to secure approval, to the extent of acceptable remedies required to settle any national security concerns, and the allocation of risk regarding potential penalties and whether indemnities are required. Early engagement with counsel will be key to navigating these new considerations. 

To listen to the full discussion, tune in to the episode here.