On April 18, 2020, the Canadian government issued a Policy Statement on Foreign Investment Review and COVID-19. This policy change seeks to avoid opportunistic investment behaviour during the 2019 novel coronavirus disease (COVID-19) pandemic by subjecting certain foreign investments to increased scrutiny under the Investment Canada Act, R.S.C. 1985, c. 28 (1st Supp.). This Update highlights key aspects and implications of this new policy.

Foreign investment in Canada is generally subject to review and approval under the Investment Canada Act if the investment exceeds the applicable financial threshold or raises national security concerns. See Practice Notes, Investment Canada Act: Overview, Investment Canada Act Thresholds for Review and National Security Reviews. The relatively high thresholds for review mean that much foreign investment is not subject to approval, which reflects an acknowledgement of the important role that foreign investment often plays in ensuring that Canadian companies can innovate and compete.

However, during the COVID-19 pandemic, the Canadian government has also recognized that many Canadian businesses have seen their valuations decline, which could lead to opportunistic foreign investment and takeovers. Moreover, in the unique current circumstances, the government has highlighted the need to safeguard the supply of critical goods and services in Canada.

Therefore, the government's Policy Statement identifies two categories of foreign investment that will be subject to increased Investment Canada Act scrutiny until the Canadian economy recovers from the COVID-19 pandemic:

The government has stated that it will now “scrutinize with particular attention” under the Investment Canada Act “foreign direct investments of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government.” Three points are worth noting:

Investments by state-owned enterprises are already subject to greater scrutiny than other foreign investments in two respects:

The government now views the risks associated with investments by foreign state-owned enterprises as increased in the current environment. Consequently, the Policy Statement indicates that the government “will also subject all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny under the Act”. Thus, the scope for review of state-owned investments has been expanded in two respects:

For a foreign investment that exceeds the regular Investment Canada Act thresholds and, therefore, is already subject to a “net benefit” review, the statutory process of filing an application for review and the associated waiting periods will be the same. See Practice Note, Investment Canada Act Applications for Review. However, one can anticipate, depending on the investor and sector involved, that there may be closer examination of what will be needed, including undertakings, to establish that the investment is of net benefit to Canada and obtain approval. See Practice Note, Net Benefit Undertakings.

For a foreign investment that does not exceed the regular thresholds for review but may give rise to enhanced scrutiny because it involves critical goods or services or a state-owned (or related) investor, there is no statutory requirement to file an application for review. However, the government still has broad latitude to trigger a national security review. Such a review could be lengthy, taking up to several months, and result in rejecting the investment or requiring significant conditions. Thus, to obtain regulatory certainty that a national security review will not occur, foreign investors must file a notification at least 45 days before closing, since the government has up to 45 days from the notification to determine whether to initiate a national security review. Overall, given the new breadth of potential triggers for scrutiny (for example, minority, non-controlling investments, private investors with potentially minimal links to a foreign state, open-ended concepts of what is “critical”), it is strongly recommended that investors file notifications more than 45 days pre-closing in all cases where an application for review is not statutorily required. This is likely to constitute a significant change in practice, since historically many notifications were filed post-closing.

Where a review does occur under the Investment Canada Act (either a regular net benefit review or a national security review) in relation to a foreign investment involving critical goods or services or a state-owned investor, one should anticipate that enhanced scrutiny may involve more extensive information requests as well as extensions of timelines for review.