The Moving Landscape of Foreign Investments in the Time of COVID-19

Mathieu: Hi, I’m Mathieu Rompré.

Peggy: And I’m Peggy Moss. This is episode 7 of the Blakes Continuity podcast.

Mathieu: Today, we are going to focus on competition and foreign investment in Canada.

Peggy: We’ll talk about how the pandemic is impacting companies looking to invest in Canada and how regulators are responding.

Mathieu: We’ve got a lot of ground to cover. It’s pretty much make or break for businesses whether they are foreign or domestic. So, let’s dig right in.

Peggy: Let’s welcome Julie Soloway and Navin Joneja, partners in our Competition, Antitrust & Foreign Investment group.

Mathieu: Julie, the Canadian government recently issued a policy statement on the application of the Investment Canada Act during the pandemic. What can you tell us about the key elements of this policy?

Julie: Thanks, Mathieu. On April 18th, the Canadian government effectively put foreign companies on notice that it’s going to be taking a closer look at certain transactions. They announced that investments related to public health or the supply of critical goods and services will be subject to enhanced scrutiny under the Investment Canada Act. We expect that this will be interpreted quite broadly, and it will likely capture investments relating to energy and utilities, IT and telecoms, food, water, transportation, and potentially many other sectors.
The government also announced that it’s going to take a close look at state-owned enterprises and investors with close ties to foreign states. They’re concerned about opportunistic investment behaviour, and that basically means that during the pandemic, while all these companies in Canada have quite low valuations, they’re concerned that foreign companies might come in and try and take advantage of these declining valuations and gobble up these companies under the thresholds. So, in light of this, the government has recommended that foreign investors file notifications at least 45 days before closing to mitigate the risk of a post-closing review. Investors would be wise to canvass the possibility of potential national security issues early on in a transaction, and for transactions that do raise potential risks, investors should establish a proactive strategy for addressing these issues.

Peggy: Navin, could you give us a sense of how this will impact timelines for approval?

Navin: As Julie mentioned, the biggest implication of this new policy is that we will probably see more pre-closing filings and more pre-closing interactions with the government as opposed to post-closing notifications. Basically, under the Investment Canada Act, once a notification is made, the government has 45 days to tell the investor whether or not they’re going to initiate a national security review process. And a fairly standard practice had been to make these Investment Canada Act notifications after closing, mainly because the risk of a national security review was fairly rare, fairly identifiable, and it was only in the more extreme situation that you might have a filing made pre-closing. But because of this new announcement and national security reviews becoming more frequent, more prominent, there is a trend towards making those filings pre-closing. And what that does is it allows the investor to basically have a 45-day waiting period before closing after which they would have comfort that there would be no national security review, or if there is a national security review, be able to deal with that before having to close the transaction. Now, one of the interesting things that has happened is the government has also proposed legislation that could extend the time frames for national security reviews. And one of the key implications is that this draft legislation would also allow for extensions of this initial 45‑day waiting period that the parties would otherwise be using to gain comfort that they won’t be subject to a national security review. So, if this legislation is passed, it will introduce this additional amount of uncertainty, and that, to me, goes to what Julie was saying about making sure that there’s early planning by the parties to try to address some of these contingencies in the transaction agreement and in case there is a national security review that’s initiated.

Mathieu: Julie, going back to you, what is the rationale for these changes? One could argue that this is really meant to make feds look on top of it. Is it just window dressing?

Julie: Well, I think it’s more than just window dressing. There’s a concerted international and domestic opposition effort to bring these issues to the forefront. Just internationally, these statements and changes and everything we’ve been discussing is in line with what’s happening around the world. For example, Australia introduced temporary changes to its foreign investment review framework allowing it to review more transactions regardless of the size and extending their timeline for review from 30 days to up to six months. The EU has released updated guidance for investment into Europe urging member states to take action to protect companies and critical assets in health-related industries, in particular, PPE equipment, and they’re saying “please protect these companies from foreign buyouts,” and France, Germany, the Netherlands have all taken action as a result of this. The EU competition policy had specifically called out China as a potential source of foreign investment for coming in and taking over low-valuation businesses and that countries should encourage investors, domestic investors, to try and protect against this dynamic. Similarly in the U.S., we’re seeing more extended reviews although there has not been formal legal changes. And in Canada, on top of what Navin and I have already discussed, the Standing Committee on Industry, Science and Technology recently passed a motion to conduct a study on the ICA, and this will be done during the month of June. And the goal of the committee is to provide a recommendation to the government on whether the current thresholds are appropriate, given the devaluations in many companies across the country, or whether they should implement a temporary recommendation on investments by state-owned enterprise from authoritarian countries. So, they’re really targeting this towards bad actors who they think will be trying to take advantage of the crisis. This is driven in large part by the opposition in Parliament as well. There’s a lot that’s being said out there on this.

Peggy: What are the implications for foreign companies looking to acquire Canadian businesses?

Navin: All of these developments do have important implications for foreign investors and Canadian businesses that are considering a merger or an acquisition. From a practical perspective, I would really put them into two categories. First of all, parties to a transaction need to really expand the areas, or the consideration of the areas, that could be subject to enhanced scrutiny under the Investment Canada Act and the national security provisions, in particular. So, we’re no longer just talking about what one might consider as sort of a core national security industry, defence-related items or extremely sensitive technologies, and so on. But there is a need to now, sort of, expand that thinking into things like critical infrastructure, because of this new announcement that Julie was discussing, public-health-related industries, and certainly COVID-response-related businesses probably need to have that extra thought given as to whether or not there is going to be a process under the Investment Canada Act. That type of planning and thinking is certainly one practical implication of these new announcements.
The second one, and this is a key practice point that we try to emphasize, is that businesses need to think about these issues early on in their transaction planning. That way, they can make a proper assessment, properly address things like how to allocate the risk of a national security review and the transaction agreements or possible delays under the Investment Canada Act and how that might complicate transaction timing. But the key is early planning allows for those issues to be addressed so there’s no surprises down the road. So, those are what I would say are the two key practical implications of these new developments under the Investment Canada Act.

Peggy: Thank you, Julie and Navin, for taking the time to talk with us today. You’ve helped us make sense of complicated territory.

Mathieu: Listeners, if you’d like more information on this topic or any other legal issues related to the pandemic and how we successfully emerge from it, please check out our website.

Peggy: Until next time, stay safe and stay well.