National security review of foreign investments will be a central aspect of Canada's economic security going forward

On October 28, 2022, the Minister of Innovation, Science and Economic Development Canada (Minister) released the 2021-2022 Investment Canada Act Annual Report (2022 ICA Annual Report), making it clear that, going forward, foreign investors should expect a higher level of scrutiny under the national security provisions of the Investment Canada Act (ICA). The report cautions that national security risks have been elevated, not just in Canada, but globally, due to climate change implications, the COVID-19 pandemic, disruptions to global supply chains for critical goods and services, and changing geopolitical realities, such as Russia's invasion in Ukraine. 

This elevated national security risk was addressed in two important policy statements issued by the Minister in 2022:

• On March 8, 2022, the Minister issued the Policy Statement on Foreign Investment Review and the Ukraine Crisis (Russia Policy Statement) which directly affected both the net benefit review and national security review provisions of the Investment Canada Act (ICA). More specifically, the  Russian Policy Statement specified that: (a) acquisitions of control of a Canadian business by entities or individuals associated with, controlled by, or subject to influence by the Russian state will only be approved on an exceptional basis; and (b) any investment or proposed investment by an entity or individual associated with, controlled by, or subject to influence by the Russian state, will support a finding by the Minister that there are reasonable grounds to believe the investment could be injurious to Canada's national security.
  
  
• On October 28, 2022, concurrent with the release of the 2022 ICA Annual Report, the Minister issued the Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act (ICA Critical Minerals Policy). In 2019 the Government of Canada identified a list of 31 minerals as critical for Canada's sustainable economic success in its transition to a low carbon economy, including minerals that are critical to the manufacture of batteries, such as cobalt, graphite, lithium, and manganese.  The National Security Guidelines under the ICA were amended in 2021 to provide enhanced scrutiny of investments involving businesses in the critical minerals sector. The new ICA Critical Minerals Policy reflect the elevated risk by expanding on the National Security Guidelines. More specifically:  (a) acquisitions of control of a Canadian business involving critical minerals by a foreign state-owned enterprise (SOE) will only be approved on an exceptional basis; and (b) any investment or proposed investment involving a Canadian business or entity operating in the critical minerals sector in Canada by a foreign SOE or a foreign SOE-influenced private investor, regardless of size or value, will support aa finding by the Minister that there are reasonable grounds to believe the investment could be injurious to Canada's national security.

These policy statements are similar to the Policy Statement on Investments in the Oil Sands issued by the Minister in 2012 providing that the acquisition of control of a Canadian oil sands business by a state-owned enterprise would be found to be of net benefit to Canada only on an exceptional basis.

There was a significant jump in the number of national security reviews that were undertaken in the 2020/2021 review year and this trend continued into the 2021/2022 review year.  Almost 70% of the national security reviews that have been undertaken in the past 5 years have been undertaken in the last 2 years, with 23 national security reviews undertaken in the 2020/2021 period and 24 national security reviews undertaken in the 2021/2022 period.  In 2021/2022, the initial 45 day review period was extended for an additional 45 days in 12 of the investments, with 9 investments proceeding and 3 investments being withdrawn at the end of the second review period.  The review period was further extended for the other 12 proposed investments, 4 of which were subsequently withdrawn, one of which is ongoing, and 7 which were allowed to proceed. The investments subject to national security review originated from several countries, but most investments originated from Russia and China.

Unlike a "net benefits review" under the ICA which only applies to investments that meet certain thresholds, any investment by a foreign investor, regardless of size or value, is subject to a national security review.  However, the ICA did not, until recently, have a formal notification process for investments that were not notifiable or subject to review.  In recognition of the need to balance investor certainty with an elevated national security risk environment, the ICA was amended effective August 2, 2022 to permit a non-Canadian with an investment proposal that does not require notification or an application for review, to file a voluntary notification. See our article on the national security regulation amendment here.

The 2021/2022 ICA Annual Report strongly encourages investors to file at least 45 days prior to any planned implementation of an investment, and at least 75 days prior to closing if an application of net benefit review is required, especially if it may involve a national security review. The average review days range between 72 and 85, and in the 2021/2022 review year, the average review period was 88 days. The average review days in the 2021/2022 review year for those investments subject to a national security review was 133 days. As such, investments that require a net benefits review and that may give rise to national security concerns, should be prepared for a review period that is much longer than 75 days.

The 2022 ICA Annual Report concludes with some very strong words for foreign investors – "We expect this trend of increased national security consideration of foreign investment to continue – ongoing geopolitical tensions arising from Russia's invasion of Ukraine, Canadian and global recovery from the COVID-19 pandemic, and increasing threats due to climate change will continue to elevate security risks, and the Investment Canada Act will continue to be a central aspect of Canada's economic security framework."

If you have any questions about national security reviews or foreign investment in Canada generally, please reach out to any member of our Competition and Foreign Investment Group.