So hot right now: booming foreign investment in data centres faces regulatory heat (Part 3)

Introduction

More than ever before, cloud computing underpins almost every aspect of our daily lives. It comes as no surprise that data centres are a ‘hot’ asset for investors. This mini-series of blog posts continues our deep dive into the distinctive positions taken in jurisdictions across the globe for this ‘hot’ asset class and offers some practical tips for investors facing foreign investment reviews. 

In our first post, we considered the approaches taken in the U.S., EU and UK, while our second post examined the distinctive approaches taken by authorities in Australia and Asia. 

In the third instalment of this series, we explore two jurisdictions – Canada and New Zealand – where recent developments in national security laws could bring foreign investment in data centres under even closer scrutiny.  

Canada

There has been an influx of investment by foreign investors….

Data centres continue to be a growing market in Canada, with an estimated investment of USD$3 billion in 2020 and expected growth of over 10% between 2021 and 2026. As of 2022, Canada has around 324 data centres and is ranked 5th globally for the number of data centres. 

… but government intervention in relation to foreign investment remains possible, even for greenfield investments

Under the Investment Canada Act, establishment of a new business attracts scrutiny under national security rules in the same way as M&A activity. Recent Guidelines list “next generation computing and digital infrastructure” as sensitive technology, making it clear that data centres fall within the scope of the government’s national security focus, particularly where the investor has other risk factors.

The recent China Mobile International (CMI) case illustrates just how these rules can play out in practice. After operating for five years in Canada, CMI was ordered to divest or shut down its Canadian operations because of national security concerns. CMI has challenged the order, but the judicial review hearing was not able to be scheduled prior to the compliance deadline, so CMI ceased operations in Canada in January this year.

The reason divestment was ordered so long after CMI established its business is that CMI failed to file the required notification when it made the greenfield investment in 2016. It only filed after it was contacted by the government in 2020. Once CMI filed, the government was able to carry out its national security review and ultimately order CMI to unwind or divest its business – despite CMI having operated in Canada for the past four years.   

Practical tips

Investors considering data centre investments in Canada should ensure all required filings are made, and bear in mind that national security rules (and notification requirements) apply to greenfield investments as well as to acquisitions of pre-existing infrastructure.

New Zealand

Small, but growing

While the number of data centres in New Zealand is relatively small (around 45), it has been an area of significant growth and investment in recent years. In 2020, Microsoft was granted approval to invest over NZ$100 million to develop and operate a cloud-based data centre in New Zealand. In late 2021, Datagrid New Zealand (a French / Austrian partnership) was granted approval to invest over NZ$1 billion to establish Datagrid, New Zealand’s first hyperscale data centre. Amazon has also announced plans to invest NZ$7.5 billion to open data centres in New Zealand by 2024.  

It is also likely that the completion of the Hawaiki Cable (which will speed up data transfers between New Zealand, Australia and the U.S.) will increase New Zealand’s desirability as a location for data centres. 

A new national interest assessment….

Most data centre investments in New Zealand to date have been greenfield investments, which have fallen under the scope of New Zealand’s Overseas Investment Act (OIA), due to the foreign enterprises seeking to acquire land (many types of land are considered a “sensitive asset” under the OIA).

However, in June 2020, a new national interest assessment came into force (see our earlier post), which allows review of the acquisition of “strategically important” businesses or assets, regardless of the level of foreign ownership. Established data centres are likely to fall within the scope of “strategically important” businesses on the assumption that they will be likely to store “sensitive data” in the traditional sense of the term (e.g. genetic data, biometric data etc.).

… but it’s only likely to apply to the acquisition of existing data centres, not greenfield investments

Unlike the national security regime in Canada, the New Zealand national interest test is likely to only apply to the acquisitions of existing businesses or infrastructure, not to greenfield investments. The Microsoft and Datagrid investments (both of which were greenfield investments) were not examined under the national interest assessment. Instead, they both fell within the scope of the OIA when investors sought to acquire sensitive land, and/or due to the size of the investment (being more than NZ$100 million).  

Practical tips

Investors considering data centre investments in New Zealand should consider filing requirements for both greenfield investments and new acquisitions, and be aware that different types of investment may attract a different level of scrutiny.