The Canadian government has proposed legislation to update and reinforce its national security review process under the Investment Canada Act (ICA). The proposed changes contained in Bill C-34, National Security Review of Investments Modernization Act (Bill) are the most significant since the ICA’s national security regime was introduced in 2009.

Proposed New Measures

New pre-closing filing regime for investments in prescribed sectors. Investments in certain sectors (as yet undefined) will be subject to a new pre-closing filing and suspensory obligation under the ICA. Currently, only foreign investors who acquire control of a Canadian business or establish a new Canadian business must notify the government. The vast majority of these notifications have no suspensory effect on implementation of the investment and may be filed after the fact. By contrast, the new pre-closing filing regime would require investors making sensitive sector investments, including certain investments to acquire less than control, to notify in advance. Under the new regime, such investments would be prevented from closing until review time frames lapse or are terminated. Investors who fail to comply with the pre-closing filing obligation would be subject to a penalty of up to C$500,000.

Although the regulations have yet to define the sensitive sectors to which the new filing obligation would apply, they are likely to include critical minerals, businesses handling personally identifiable information of Canadians and certain sensitive technologies like artificial intelligence, quantum computing and other technologies currently identified in the federal government’s Guidelines on the National Security Review of Investments. It is expected that consultations on the scope and definition of these sectors will take place before the new filing regime is implemented.

Enhanced ministerial powers. The Bill also contemplates the devolution of administrative powers from the federal cabinet to the Minister of Innovation, Science and Industry (Minister) ostensibly to streamline the national security process and provide for greater flexibility to address potential national security concerns during and after a national security review. A new power to unilaterally impose interim conditions on an investor while a review is underway would be a significant change. It could involve, for example, the issuance of “hold separate” orders – even after implementation of an investment – to limit an investor’s access to sensitive intellectual property and data of a Canadian business pending the outcome of a review. The Bill would also permit the Minister to accept undertakings from an investor during the review process, which could potentially lead to quicker reviews with fewer referrals to Cabinet; but this also may signal an expectation that undertakings be offered in a wider variety of circumstances to mitigate procedural delay and potentially negative outcomes.

Updated penalties for non-compliance with the ICA. Under the ICA, the government may seek a wide variety of court orders in the case of unremedied non-compliance with the statute. These court orders include divestiture orders and monetary penalties of up to C$10,000 per day of non-compliance. Under the Bill, maximum monetary penalties per day of non-compliance would be increased to C$25,000 while, as noted above, a new penalty of up to C$500,000 could be imposed for failure to comply with the new pre-closing filing obligation for sensitive sector investments. In each case, the Bill would provide for future increases to these maximums by way of regulation.

More permissive approach to sharing information about foreign investors with international counterparts. The ICA currently contains very strong provisions designed to protect the confidentiality of information pertaining to investors that is obtained in the foreign investment review process. The Bill would authorize the sharing of such information with foreign investment review authorities in other jurisdictions to facilitate national security reviews where, for example, a common national security interest exists. At the same time, however, the government says that Canada will not share such information “where there are confidentiality or other concerns,” which may signal an intent to share such information only with trusted jurisdictions that would, in turn, protect the confidentiality of such information.

New rules to shield detailed sensitive information in court proceedings. The Bill also contains provisions that would permit the Minister to identify sensitive information, like classified intelligence information, that would be protected from disclosure in legal proceedings arising from enforcement action under the ICA, such as judicial reviews of orders to block or attach conditions on investments for national security reasons. Designated information could be used and considered by a judge but would be available to an investor and its counsel only in summary form.

Recent Tougher Stance on National Security

The amendments proposed in the Bill were foreshadowed in the government’s recently announced Indo-Pacific Strategy. Furthermore, the Bill continues recent government moves to toughen enforcement of the ICA’s national security review process. These initiatives were commenced with policies issued as a result of the COVID-19 pandemic, and have recently been supplemented with tougher policies applying to Russian investments and to investments by state-owned enterprises (SOEs) in critical minerals while, overall, national security scrutiny of foreign investments has increased markedly. One might not have expected this government to be the engineer of more aggressive national security enforcement and indeed, as recently as the beginning of this year, questions were raised by the media and in Parliament concerning the government’s seriousness about dealing with national security issues. However, geopolitical developments and pressure from allies have led to a noticeable change in the Canadian government’s attitude, which is reflected in its evolving approach to the ICA. This evolution is also evident in the government’s backgrounder to the Bill, which refers to the ICA’s role in protecting Canada’s “economic security” and mitigating “economic security threats arising from foreign investment.” These references underscore how national security review processes here and abroad (especially in the United States and the United Kingdom) have evolved from a narrower focus on traditional concerns about espionage, national defence and critical infrastructure to a broader concept of economic security that includes strategic technologies and products that will drive the economy of the future.

New Pre-Closing Filing Regime at Centre of Amendments

Against this backdrop, the Bill is intended to signal to Canada’s allies that it is modernizing its national security review process to align more closely with corresponding regimes in like-minded countries such as the United States and the United Kingdom. Indeed, the mandatory pre-implementation filing regime that is the centrepiece of the Bill is conceptually similar to legislative requirements in those countries. Nevertheless, the new filing requirement may have a significant impact on transaction planning by Canadian businesses active in sensitive sectors (including high-tech startups seeking capital) and by foreign investors looking to invest in those businesses.

In 2021-22, the last fiscal year for which the government maintains statistics, only eight non-cultural investments were subject to a mandatory pre-closing notification and approval requirement, and these were all under the ICA’s “net benefit” to Canada review process, which does not focus on national security issues. None of the other investments notified during the period (more than 1,200) were subject to pre-closing notification and waiting period requirements, although parties in at least some of these cases likely voluntarily elected to file and pre-clear in order to exclude or manage national security risk prior to closing. Although it remains to be seen how many investments will get caught in the Bill’s pre-closing filing dragnet, the number is likely to be significant, especially since the new filing obligation would extend to certain non-control investments that are not currently subject to notification at all. Accordingly, important definitional questions will need to be resolved in order to determine the scope and application of the new pre-closing filing obligation, and thus limit the burden, cost and potential uncertainty of complying with such a regime. Key terms of the implementing regulations will include the following:

• Definitions of the sensitive sector activities subject to mandatory notice. It may be a challenge to define these with specificity.
• The scope of non-control investments caught by the obligation. Currently, the Bill suggests these investments will include ones that provide the investor with some level of access to sensitive information about the business as well as the power to appoint or nominate any person (e.g., director, senior manager) with the capacity to direct the affairs of the business. It is unclear whether the regulations will provide any kind of safe harbour for de minimis percentage shareholdings, for example.
• Administrative aspects of the filing and review process. These aspects include the level of communication with investors about their filings and the potential for obtaining early termination of pre-closing waiting periods.

Particularly given the serious consequences of failing to comply with the pre-closing filing regime proposed in the Bill, it is hoped that these and other practical considerations will be the subject of consultations, before the details are fleshed out and regulations are promulgated. Similarly, stakeholders would benefit from administrative guidelines to assist them in navigating the amended process. Quite apart from creating a category of investments that would become notifiable pre-closing, another potential effect of the Bill (including the prospect of interim orders) may be to also increase the frequency of discretionary pre-closing notifications. Voluntary pre-closing notifications have also been both encouraged by the recent introduction of a voluntary filing regime for non-control investments and incentivized by allowing the government to conduct a national security review of any non-notified investment for up to five years after closing.

What the Bill Does Not Include

In assessing the Bill, we should also note what is not included. For example, the Bill does not incorporate some recent suggestions made by the House of Commons Standing Committee on Industry and Technology (Committee) to strengthen the ICA. For example, the Committee had recommended that every acquisition of control by a foreign SOE should be subject to a pre-closing net benefit review and that all investments by foreign SOEs from “authoritarian regimes” be subject to a full national security review. The government has chosen not to go that far – at least for now. It also remains to be seen whether an increase in earlier notification filings will lead to a discernible increase in enforcement outcomes. In that connection, nothing in the Bill changes the government’s substantive approach to assessing investments for potential national security concerns.

In light of the changes provided by the Bill, and the government’s increasing national security scrutiny of investments generally, foreign investors in Canada must continue to be diligent in assessing the potential implications of the ICA, including through early consultation with legal counsel, as part of their transaction planning.