National Security Concerns in Foreign Investment Transactions: A Look at Bill C-59 

publication 

Fall 2005 - (Lang Michener Competition & Antitrust Brief)

Lang Michener Competition & Antitrust Brief
On Friday, June 17, 2005, Minister of Industry David L. Emerson announced that certain amendments would be forthcoming in order to update Canada's foreign investment regime, the Investment Canada Act. Bill C-59, titled An Act to amend the Investment Canada Act received first reading on June 20, 2005. The amendments contained within the Bill have been touted by the Minister as necessary to fill in some "gaps" in the Act and to achieve consistency between the Act and substantially similar foreign investment regimes in other G-8 countries, including the United States, Germany and Japan, which already permit screening of foreign investments for reasons of national security. 

The purpose of the Bill C-59 amendments is encapsulated in the proposed changes to section 2 of the Act, namely, to encourage investment in Canada by Canadians and non-Canadians that contributes to economic growth and employment and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security. 

Bill C-59 further provides, in new Part IV.1, an avenue through which the Minister of Industry may review and take steps to modify or even disallow large foreign investments in Canada that are found to be injurious to Canada's national security, independent of existing reviews and existing sectoral or asset value thresholds. This two stage process would allow the Minister, if he has reasonable grounds to believe an investment by a non-Canadian could be injurious to national security, to send the non-Canadian a notice that an order for the review of the investment may be made. After the non-Canadian receives the notice, the investment may not be implemented until such time as (a) a further notice indicating that no order for the review of the investment will be made; or (b) an order authorizing the investment be implemented after a review takes place. 

An order for review described in the preceding paragraph would be authorized by the Governor in Council (GIC) on recommendation of the Minister of Industry if the GIC considers that the investment could be potentially injurious to national security. The parties to a transaction subject to such an order are permitted to make representations to the Minister and may be required to provide any prescribed or other information the Minister considers necessary for purposes of the review.
 
During the review period, the parties may not implement the transaction. Upon completion of his review, the Minister will (a) refer the investment to the GIC, together with a report of the Minister's findings and recommendations on the review, if (i) the Minister is satisfied that the investment would be injurious to national security, or (ii) on the basis of the information available, the Minister is not able to determine whether the investment would be injurious to national security; or (b) if the Minister is satisfied the investment would not be injurious to national security, send to the non-Canadian a notice indicating that no further action will be taken in respect of the investment. 

Upon referral of an investment, the GIC may, by order, take any measures in respect of the investment that it considers advisable to protect national security including (a) directing the non-Canadian not to implement the investment; (b) authorizing the investment on condition that the non-Canadian (i) give any undertakings the GIC considers necessary in the circumstances or (ii) implement the investment on the terms and conditions contained in the order; or (c) requiring the non-Canadian to divest himself of control of the Canadian business or their investment in the entity. Furthermore, if an order authorizes a non-Canadian to implement an investment, the non-Canadian is required to submit any information in its possession relating to the investment that is required by the Director in order to assess whether the investment is being carried out in accordance with the order. 

Bill C-59 also provides that the Minister, in the case of an entity that qualifies as a Canadian-controlled entity under the Act, may determine that the entity is not a Canadian-controlled entity if the Minister is satisfied that the entity is controlled in fact by one or more non-Canadians. As a consequence of such a determination, the entity's investments in Canada will be subject to national security review. 

After only the first reading, Bill C-59 and the national security review regime it proffers have already been the subject of criticism. Applicable to any foreign investment transaction, regardless of size, the process invests a significant amount of discretion in the federal government and has very considerable breadth. The terms "national security" and "injurious" remain undefined, and no limits have been placed as to the size or type of investments which may be the subject of review. As Bill C-59 is currently drafted, the GIC need only establish that a proposed investment could be injurious to national security in order to attract the review process. Following the referral of a transaction, the GIC is free to take any measures it considers advisable to protect national security. In addition, Bill C-59's amendments are applicable, subject to satisfying certain minimal jurisdictional requirements, to investments by non-Canadians which involve the acquisition "…in whole or in part…[of] an entity carrying on all or any part of its operations in Canada". 

Despite statements of comfort by the Minister of Industry that he expects national security reviews will be "rare", that the existing regime is "generally adequate in addressing potential national security concerns", and that the amendments represent "an update of our security system, not a change in investment policy", the uncertainty created by Bill C-59's vagueness with respect to how the proposed national security review power will be applied in practice is discomforting. While only a limited number of transactions are likely to be the subject of a national security review, uncertainty as to which ones will attract review is likely to create a chill on investment, at least until some experience is gained with the system.

This article appeared in Competition & Antitrust Brief Fall 2005.