This policy evolution was articulated by the Minister of Innovation, Science and Industry (ISI) in his
Below we provide a brief overview of three key developments:
Canada's new approach to reviewing investments in critical minerals (including the three recent divestiture orders noted above).- The most recent annual report describing the Government's approach to enforcing the Investment Canada Act (ICA),
Canada's federal legislation that regulates foreign direct investments intoCanada . - Where a foreign investor does not make such voluntary filing, the Government has up to five years from the closing of the investment to engage the national security regime.
- all other investments in
Canada's critical minerals sectors by SOEs (including private investors assessed as being closely tied to, subject to influence from, or who could be compelled to comply with extrajudicial direction from foreign governments) could constitute reasonable grounds for the Government to believe that the investment could be injurious toCanada's national security, regardless of the value of the transaction. Chengze Lithium International Limited (Chengze) is required to divest its investment inLithium Chile Inc. Chengze acquired a 19.35% interest inLithium Chile inMay 2022 in exchange for$27.9 million , an increase from 5.14%. It appears that all ofLithium Chile's properties are located outside ofCanada , inChile andArgentina . Both parties issued preliminary press releases in response to the divestiture order, withLithium Chile's press release indicating that "Chengze is reviewing the directions of the Order, and their legal options."Zangge Mining Investment (Chengdu) Co., Ltd. (Zangge) is required to divest its investment inUltra Lithium Inc. Zangge acquired a 14.17% interest inUltra Lithium for$4.14 million inMay 2022 . It also entered into an agreement inJune 2022 to payUS$10 million toUltra Lithium and investUS$40 million in its lithium exploration project inArgentina for a 65% stake in its subsidiary that owns the Argentinian property, Ultra Argentina S.R.L. Each of Zangge andUltra Lithium issued a preliminary press release in response to the divestiture order, withUltra Lithium advising that the parties "have also mutually agreed to terminate the definitive agreement" for the lithium exploration project inArgentina , and that it "is assessing its legal and other options to preserve value for its shareholders".- None of the Chinese investors appear to have acquired "control" of the Canadian businesses (as that term is defined in the ICA), and none of the Chinese investors are de facto "control persons" of the Canadian companies (as that term is used in securities law to apply to holders of 20% or more of a public company).
- Each of the three Canadian companies is a
TSX Venture Exchange listed junior mineral exploration company engaged in the exploration of lithium, with their projects in early exploration stages, and no commercial production. Thus the intervention is occurring at an early point in the development of any critical mineral deposit held by these entities. - Two of the Canadian businesses' lithium assets are not even located in
Canada :Lithium Chile has interests in exploratory stage lithium projects inChile , andUltra Lithium has interests in exploratory stage lithium projects inArgentina . This contrasts with the decision earlier in 2022 not to intervene in the acquisition byZijin Mining of Neo Lithium which was developing a lithium project inChile (see above). While the Government has taken action in relation to the shares of the Canadian parent company, a sale by a Canadian company of assets located wholly outside ofCanada would not otherwise trigger any review by the Government under the ICA. - Divestiture orders for the sale of shares of public companies are unprecedented in
Canada . These orders will require the Chinese investors to divest their shares within a confidential mandatory time period. While government policy typically is not focused on the negative impact on the value of the assets to be sold, a requirement that a shareholder sell a significant block of shares likely will have a negative impact on the trading price (i.e., a "fire sale"), which may not reflect the underlying value of the company or its project(s). The securities of junior TSX Venture issuers are often thinly traded and therefore are not able to absorb the rapid sale of a significant number of shares. Additionally, as junior exploration companies typically fund their operational expenses through equity financings, significant and unexpected downward changes in a share price can directly impact such companies' ability to obtain financing on advantageous or market terms, resulting in increased costs to obtain financing for projects and increased shareholder dilution. - These divestiture orders and the Critical Minerals Policy may deter the flow of capital to Canadian businesses engaged in exploration and mining projects for critical minerals from Chinese SOEs and investors that are closely tied to the PRC.
- The Government has stated it "is determined to work with Canadian businesses to attract foreign direct investments from partners that share our interests and values . [and] will continue to encourage and work with Canadian businesses that require investment capital, by helping to identify and find partnerships that will serve in the best interest of Canadian businesses, workers, and the economy." The nature and extent of action by the Government to support early stage exploration companies (potentially including
Power Metals ,Ultra Lithium and Chile Lithium) remains to be seen. - New sources of foreign funding will be required to develop
Canada's critical minerals, including for both Canadian and international critical mineral assets held by Canadian companies. As a result, there may be new opportunities for foreign investors fromCanada's preferred trading partners to invest in these areas. - When entering into new equity financing, debt financing and other contractual arrangements such as joint ventures, Canadian companies in the critical minerals space will need to consider the origin of potential investors and whether there are any associated national security risks. In circumstances where an investor has close ties to an
SOE or may be subject toSOE or PRC influence, Canadian counterparties are likely to consider negotiating more comprehensive risk-shifting contractual protections.
4. ICA Annual Report
On
October 28, 2022 , ISI released the Annual Report: 2021-2022 (Annual Report), which provides a summary of the key policy developments, investment activities, and increasing focus on national security matters under the ICA during the fiscal year endedMarch 31, 2022 .a) Filings and Net Benefit Reviews
The 2021-22 year was characterized by a record number of filings under the ICA. The 1,255 filings represented an increase of 52% over 826 filings in 2020-2021, and 22% over the previous record of 1,032 filings in 2019-2021. This increase is consistent with the recovery of the Canadian and world economies, with
OECD data indicating that foreign investment inCanada increased fromUS$46.5B in 2019 toUS$98.3B in 2021.7Of the total number of investments for which filings were made in 2021-2022,
the United States continues to be the largest source of investments (731 investments representing 58% of total filings), followed by theEuropean Union (209 investments representing 17% of total filings), theUnited Kingdom (88 investments representing 7% of total filings), andChina (includingHong Kong ) (50 investments representing 7% of total filings).Each of the eight investments subject to a net benefit review (i.e., (1% of the total investments) obtained the required approval by the Minister. These eight investments had an average enterprise value of
$3.9B . The average net benefit review took 88 days, which was slightly higher than the range in the previous five years of 72-85 days.b) National Security Reviews
In the 2021-2022 year, 24 investment proposals were reviewed for national security concerns, which is the same number as 2020-2021. This represents a significant increase over each of 2019-2020 (10), 2018-2019 (9), and 2017-2018 (4). Of the 24 national security reviews in 2021-2022, 12 were subjected to the longer extended national security review process, which can lead to a final order blocking the investment or imposing conditions.
Of the 24 investment proposals, 16 (i.e., 67%) were permitted to proceed, seven were withdrawn, and one review was ongoing at year-end. These outcomes were broadly similar to 2020-2021, where 16 of 24 investments were permitted to proceed, five were withdrawn and three were subject to divestiture or blocking orders by the Government. These data reflect that more transactions are receiving in-depth scrutiny, but that a solid majority of transactions subject to national security reviews are cleared.
Of the 12 investment proposals subject to extended national security reviews in 2021-2022, six originated in
China , four originated inRussia and one originated in each ofJordan andFinland . Of the four proposed investments withdrawn, two originated inChina , and one originated in each ofRussia andJordan . The review that remains ongoing originated inChina . This contrasts with 2020-2021, where of the 11 investment proposals subject to an extended national security review that that year, seven originated inChina , one originated in each ofRussia ,Taiwan ,United Arab Emirates and theUnited Kingdom . Of these 11, four proposed investments were withdrawn (three originating inChina and one originating in theUnited Kingdom ), two were subject to divestiture (one each originating inChina and theUnited Arab Emirates ) and one was blocked (originating fromChina ).The industries in which the extended reviews were conducted in 2021-22 are diverse: metal ore mining, grocery stores, taxi & limousine service, support activities and water transportation, data processing, activities related to creditor intermediation, securities & commodities, computer systems, management scientific and tech consulting, scientific research, and other.
Of the 50 Chinese investments into
Canada in 2021-22, only six investments (i.e., 12%) were subject to an extended review, and, of these six reviews, only two were withdrawn and one remains ongoing. These data show that there is a significant ongoing flow of investments intoCanada from PRC/Hong Kong , and only a few have been abandoned, blocked, divested or otherwise mitigated.5. Conclusion
The Government's messaging has shifted, from an "open for business" policy to a more nuanced statement that
Canada "continue[s] to welcome foreign direct investment" but that "Canada will act decisively when investments threaten our national security and our critical minerals supply chains".The ICA review process will raise increasingly frequent and complex issues, with a strong focus on (i) investments by SOEs and private investors closely tied or subject to the influence of foreign governments, and (ii) a broader range of potentially sensitive sectors, including critical minerals, as well as health, artificial intelligence and other sensitive technologies, personal data, and critical infrastructure. The review of an investment may be affected by a variety of factors, including the ownership and control of the investor, the size of the Canadian business, the nature of the Canadian business's activities, and the proposed structure of the investment. Foreign investors should contact legal counsel early in the process to obtain strategic advice to identify and mitigate any risks that may arise in connection with such investment.
Please reach out to us or your usual McMillan contact if you have any questions about these developments or in connection with a new investment in
Canada . We would be very pleased to explore with you any national security risk implications of transactions that you may be contemplating.Footnotes
1 See also, Global Affairs Canada's Key Facts on
Canada's Competitiveness forForeign Direct Investment .2 For additional detail on when filing is required, see our 2022 Competition Act and Investment Canada Act Thresholds chart.
3 There are certain rare cases where the application for review can be submitted post-closing, but in most cases, filing is required pre-closing and closing must wait until Ministerial approval is received.
4 The definition of "state-owned enterprise" in the ICA is broad, and means: (a) the government of a foreign state, whether federal, state or local, or an agency of such a government; (b) an entity that is controlled or influenced, directly or indirectly, by a government or agency referred to in paragraph (a); or (c) an individual who is acting under the direction of a government or agency referred to in paragraph (a) or who is acting under the influence, directly or indirectly, of such a government or agency.
5 Neo Lithium's reserves will produce lithium carbonate rather than lithium hydroxide, and the end use limitations were taken into account in assessing national security risks (as reported on here).
6 Also see the Prime Minister's statement in 2012 regarding foreign investment in
Canada's oil sands.7 Of the 1,255 filings submitted in 2021-2011, 1,247 filings were certified notifications (including 278 notifications in connection with establishing new businesses in
Canada ) and only eight filings were applications for review subject to net benefit review. This small number of acquisitions subject to net review is a consequence of the very high "enterprise value" thresholds that trigger a net benefit review for acquisitions by foreign investors controlled in countries that are strong trading partners ofCanada , such as, among others:the United States ;Mexico ; members of theEuropean Union ; theUnited Kingdom ; CPTPP countries such asAustralia ,Brunei ,Chile ,Japan ,Malaysia ,Mexico ,New Zealand ,Peru ,Singapore andVietnam ; and alsoKorea . These thresholds were initially established in 2009 and have been expanded in recent years. See our earlier bulletin on these review thresholds and an our bulletin setting out the 2022 review thresholds.The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
©
McMillan LLP 2021 - The Government has stated it "is determined to work with Canadian businesses to attract foreign direct investments from partners that share our interests and values . [and] will continue to encourage and work with Canadian businesses that require investment capital, by helping to identify and find partnerships that will serve in the best interest of Canadian businesses, workers, and the economy." The nature and extent of action by the Government to support early stage exploration companies (potentially including
1. The Investment Canada Act Framework
The ICA requires foreign investors that acquire control of Canadian businesses or that establish new Canadian businesses to file an administrative notification or, if certain financial thresholds are satisfied, an application for review.2 A foreign investor may not close a reviewable acquisition until the Minister under the ICA determines that the investment is of "net benefit" to
The ICA also provides that all investments by foreign investors in
2.
Since the start of the pandemic,
a) Heightened Scrutiny in the Pandemic
On
b) Updated National Security Guidelines
On
c) Policy Statement on Foreign Investment Review
On
d) Review of Acquisition of
In
This decision received significant criticism, including from the
e) ICA National Security Review Amendments
On
-
Where a foreign investor makes a voluntary filing, the Government has 45 days to decide whether to engage the national security review regime.
3. New Approach to
a) New Critical Minerals Policy
On
The Critical Minerals Policy begins with a statement recognizing that
-
investments in critical minerals sectors by SOEs (including private investors assessed as being closely tied to, subject to influence from, or who could be compelled to comply with extrajudicial direction from foreign governments) that are subject to net benefit review will only be approved as a net benefit to
This policy is similar to the Government's approach in 2012 in connection with the then increased
b) Government Orders Chinese Entities to Divest Interests in Exploration Companies
On
-
Sinomine (
The Minister's statement does not indicate the specific reasons for the orders, other than reaffirming that
There are several notable features arising from these parallel orders:
-
While each of the three investors is a Chinese public company with its securities listed on the
Ms
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