Optimistic M&A outlook for 2017

As we begin 2017, the 1,000 corporate and private equity executives surveyed for Deloitte’s M&A Trends Year-end report 2016 display optimism for the coming year. The survey was conducted in September 2016 and included participants from companies or private equity firms with annual revenues of $10 million or more, representing 18 industries.

Respondents expect a rebound year from 2016, with 86% of surveyed private equity and 71% of surveyed corporate dealmakers expecting to close more deals this year. Not only is deal volume expected to increase, but 64% of all respondents also expect deal size to increase. Divestitures appear poised to be a focus of 2017 transactions, with 74% of respondents reporting plans to sell units or assets, up from only 31% in last year’s survey. This positive outlook is consistent with the findings of Ernst & Young’s Global Capital Confidence Barometer survey, discussed previously.

Strategic drivers

Survey respondents indicate that the top strategic drivers of M&A activity this year are:

  1. expanding product offerings or diversifying services (22%);
  2. expanding customer base in existing geographic markets (19%); and
  3. acquiring technology assets (19%).

Compared to 2015, the acquisition of technology assets increased in importance dramatically, having been the top driver of M&A strategy for only 7% of respondents last year. Companies also report increased cash reserves, which 43% intend to use primarily to seek M&A opportunities.

On the other hand, survey respondents cite global economic uncertainty, volatility in capital markets, the interest rate environment, and anti-trust issues as having the potential to thwart deal flow.

Brexit: an M&A opportunity?

While it has been noted that domestic UK M&A and inbound UK M&A are both down by over 60% since the Brexit referendum, some see Brexit as an opportunity for M&A. According to the respondents of the Deloitte survey, the UK continues to rank highly among markets in which they plan on pursuing deals. Many even said that Brexit’s impact would generate more M&A deals in the UK (46%) and Europe in general (48%).

Prime Minister Theresa May has announced that she intends to begin the formal Brexit process before the end of March 2017. However, a legal challenge which would force Parliament to give its approval before the Brexit process can begin is still underway. Though the decision is unlikely to halt the British withdrawal, it will be of continuing interest to monitor how the Brexit process impacts M&A in 2017, along with the US presidential transition.

The author would like to thank Simone Nash, Articling Student, for her assistance in preparing this legal update.

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2016: the year of sandbagging

One of the highlights from the American Bar Association’s (ABA) 2016 Canadian Private Target M&A Deal Points Study in which our firm was a key participant (the 2016 Study), was the increased inclusion of sandbagging provisions in deals. The 2016 Study saw the inclusion of sandbagging provisions in 46% of deals (up from 29% in the ABA’s 2014 Canadian Private Target M&A Deal Points Study (the 2014 Study)).

As explained in a previous post, sandbagging provisions deal with a circumstance in which a buyer asserts a post-closing indemnification claim in relation to the seller’s breach of a representation or warranty of which the buyer had knowledge prior to closing. A “pro-sandbagging provision”[1] permits a buyer to pursue this course of action whereas an “anti-sandbagging provision”[2] restricts a buyer from pursuing this course of action. A buyer may insist on a pro-sandbagging provision in order to shift risk onto the seller, especially when it lacks confidence in the accuracy of a seller’s representation or warranty. Conversely, a seller may insist on an anti-sandbagging provision in order to shift risk onto the buyer.

It is of note that the uptick in the inclusion of sandbagging provisions was largely reflected in an increase in pro-sandbagging provisions, which jumped from 15% in the 2014 Study to 31% in the 2016 Study. This increase in pro-sandbagging provisions may reflect the uncertainty in Canadian jurisprudence on the enforceability of sandbagging provisions. Unlike their American counterparts, Canadian courts have yet to directly consider the enforceability of sandbagging provisions. Adding a clearly drafted “pro-sandbagging provision” demonstrates the explicit intention of the parties to account for a situation where a buyer “sandbags” the seller. Nevertheless, until Canadian courts directly consider the issue, there is no guarantee that the addition of a sandbagging provision will be enforceable. In light of this uncertainty, in some cases, it may be prudent for a buyer to obtain representation and warranty insurance that specifically covers “known” breaches.

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[1] An example of a “pro-sandbagging provision” is as follows: “The right to indemnification, payment, reimbursement, or other remedy based upon any such representation, warranty, covenant, or obligation will not be affected by any investigation conducted or any Knowledge acquired at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of, or compliance with, such representation, warranty, covenant, or obligation.” (2016 Study, slide 68)

[2] An example of an “anti-sandbagging provision” is as follows: “No party shall be liable under this Article for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Losses had Knowledge of such Breach before Closing.” (2016 Study, slide 68)

Final quarter deals add to hopes of M&A activity in 2017

As was predicted in our discussion of Q4 2016 here, the last quarter of the year proved to be busy. Global M&A in the final quarter reached $1.2 trillion, which was not only the busiest period in 2016, but also raised the total for M&A to $3.6 trillion. Although the total value of deals decreased by 17 per cent from 2015, the final flurry of large takeovers allowed 2016 to reach the second-highest total since the financial crisis in 2007, according to the Financial Times.

Chinese companies in particular demonstrated their ability to be a major force in cross-border M&A in 2016 by almost doubling their 2015 transaction amount to $220 billion. In contrast, Thomson Reuters data indicates that North American companies were less diverse in their dealmaking, with $1.3 trillion worth of M&A being done domestically.

From the UK’s decision to leave the EU to Donald Trump’s election, 2016 faced a series of obstacles and uncertainty for M&A activity. In addition, regulatory clearance remains a critical obstacle, as was seen by the backlash against a wave of deals struck by Chinese buyers in the US and the EU. Withdrawn M&A reached an eight-year high in 2016, climbing to $804.7 billion.

Nevertheless, the Financial Times notes that advisers claim that in spite of these challenges, the M&A boom seen in Q4 2016 will carry on. Many companies face poor organic growth, which forces them to look elsewhere. With the continuation of historically low borrowing rates, buying rivals or expanding is an attractive choice. While 2017 may not see the record highs of 2015, given that M&A was able to stand strong in the face of uncertainty, there is reason to believe that the year to come can do the same.

The author would like to thank Simone Nash, Articling Student, for her assistance in preparing this legal update.

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Taking stock of SPACs: update for 2016

Earlier this year, we discussed the arrival and usage of Special Purpose Acquisition Corporations (SPACs) in Canada, focusing on the logistics and purpose of these capital holding shell companies.

To recap, a SPAC is a shell company that raises money through an initial public offering (IPO), then searches for a private company to acquire and bring to the market (Target Company). SPACs were thought to be particularly useful in Canada as (i) they fill a traditional gap in capital markets, making private acquisitions in the $100 to $500 million range, (ii) they provide Target Companies with an easier and additional means of access to public markets (as compared to a traditional IPO) and (iii) they provide investors who would not be able to buy into hedge or private equity funds, the ability to participate in the acquisition of private operating companies traditionally targeted by those funds.

Despite these attractions, the successful usage of SPACs and its impact on private M&A had been underwhelming for some time now, with some attributing this downfall to the long, tedious process involved in acquiring a Target Company which requires shareholder approval. However, much has changed as SPACs have recently demonstrated their place and importance in Canada’s capital markets.

In fact, one SPAC has recently demonstrated how these shell corporations can be as “nimble” as hedge or private equity funds in acquiring a Target Company – or, in this case Target Companies. Acasta Enterprises Inc. (Acasta), a SPAC that raised $402.5 million in its IPO in July 2015, had recently announced its proposed acquisition of not one, but three private companies, with an enterprise value of $1.2 billion. For all three acquisitions the vendors will receive Acasta stock, which is said to align the interests of all parties.

Tony Melman, chief executive of Acasta, stated that Acasta was “never going to be a one-trick pony” and that “the acquisitions demonstrate [Acasta’s] ability to access unique and proprietary deal flow at compelling valuations”. Indeed, Acasta’s investors are seemingly pleased as well: on December 20, 2016, Acasta announced that its shareholders displayed overwhelming support for these deals, with over 89% of the votes cast in favour of the acquisition, which is now scheduled to close on January 3, 2017.

Following the close of this acquisition, Acasta will become a private equity manager and will launch a private equity fund to pursue further market opportunities. According to Melman, future business sectors could include infrastructure, energy, and high-end manufacturing.

If this transaction is indicative of the future, it could very well be that the SPAC market will develop in Canada as originally contemplated, proving to be a useful and unique vehicle for certain investors and private companies alike.

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Trends in Canadian cross-border M&A

In recent years, cross-border M&A activity involving Canadian companies has soared, and 2016 gave rise to a record high in cross-border deal value. In Q3 2016 alone, Canadian companies were involved in cross-border transactions worth over CDN$77.7 billion, easily eclipsing the CND$21.7 billion in deal value from the previous quarter and representing 41% of all Canadian announcements. In particular, outbound deal volume continued to outpace inbound deal volume by a ratio of 1.7:1, confirming to Ed Giacomelli, Managing Director at Crosbie & Company, “the strategic importance to Canadian corporations of growth by acquisition.”

In a recent report by Mergermarket in partnership with Citibank Canada (the Mergermarket Report), three experts – including Craig Hoskins, a partner in our Calgary office – weighed in on the main drivers of surging cross-border M&A activity, and identified several trends to watch for in the near future. Some highlights from their discussion are below:

Increased activity of Asian buyers

The experts in the Mergermarket Report agreed that Asian acquirers are becoming increasingly active in seeking out Canadian assets, especially in the energy sector. In particular, the relative political and economic stability of Canada and the reduction in domestic growth opportunities (particularly in China) were suggested as key driving factors underlying the desire of Asian buyers to diversify into Canadian markets. However, the Mergermarker Report also suggested a reason to be cautious about the prospects of future deals: a new regulatory framework that imposes certain capital outflow restrictions on Chinese companies may make larger deals more difficult. For a more detailed discussion on rising outbound investments from Chinese companies, see our previous blog post on the subject here.

Increased divestiture by Canadian companies

A February 2016 report from EY noted that 56% of Canadian companies were planning to divest within the next two years, well above the global average of 49%. Mergermarkets’ experts put a spotlight on the energy sector in this regard, observing that companies in this sector are facing pressure to “clean up balance sheets, deal with debt, and find new ways to increase profitability”, and identifying strategic asset and corporate sales as one mechanism to tackle these issues. However, the Mergermarket Report cautioned that large divergences between ask and bid prices can make it difficult for such deals to gain traction.

Geopolitical uncertainty

Geopolitical uncertainty has been a clear theme of 2016, with the Brexit vote and the US election (among other events) leading to widespread global apprehension. As Craig Hoskins noted, in general, uncertainty is the enemy of deal-making. However, Mergermarkets’ experts largely downplayed the negative effects of these trends, agreeing that the Brexit vote may in fact create investment opportunities for Canadian companies, and noting that historically, US elections have not been a “deciding factor” in levels of trade. You can read more about our take on the US presidential election and its effect on M&A here.

The author would like to thank Geoff Mens, Articling Student, for his assistance in preparing this legal update.

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North American M&A decline in 2016

As has been discussed previously, M&A activity in North America declined in 2016 as compared to 2015. A recent survey published by Toppan Vite and MergerMarket of 25 top US-based dealmakers regarding North American M&A in 2016 delves further into the reasons for this decline.

Roughly half of the respondents to the survey believed that the M&A market underperformed in 2016 and mainly attributed the decrease in North American M&A activity to the US presidential election, the United Kingdom’s decision to leave the European Union (Brexit), the political turmoil in Russia and Ukraine and depressed oil prices. Survey participants cited uncertainty surrounding potential amendments to tax codes and trade agreements that may result from the new US presidential administration and Brexit as cause for concern, with certain respondents indicating that they purposely steered investments away from the European Union and the United Kingdom in light of the results of the referendum. Weak commodity prices, a contraction in US monetary policy, the cooling Chinese economy, increased regulatory restrictions and tensions in the South China Sea were also identified as factors which may have discourage investors this year. Many respondents believed that although economic anxieties may be alleviated in 2017, concerns regarding global political uncertainties would remain and continue to impact M&A deals. As one survey respondent stated,

The economic conditions will improve but the political challenges will continue to remain the same. It is not only the US political environment that will worsen, but countries such as France, Germany, China and some South American countries will also face significant political uncertainties.

Firms seeking business growth, increased market shares and cost synergies were most likely to participate in deals in 2016. Domestic transactions were clearly favoured as 60% of survey respondents indicated that they focused their M&A investments in North American this year and seven of the top 10 bids, including the AT&T US $105.045 billion bid for Time Warner Inc., were domestic deals.

A few survey participants were encouraged by the volume and value of deals that were announced in 2016 in spite of uncertain, volatile markets and the factors discussed above. October 2016 resulted in US$254.8 billion worth of deals representing the highest monthly US deal value since July 2015. Respondents also pointed to mega-deals such as the announcement of Microsoft’s US$28.1 billion acquisition of LinkedIn and Bayer AG’s US $63.4 billion bid for Monsanto Company as reasons to be optimistic. See our post on the outlook for 2017 M&A for additional discussion on the views of global executives for the upcoming year.

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The PE lifecycle is expanding

While private equity firms are enjoying more dry powder than ever, the overall fund lifecycle is expanding. Mergermarket interviewed private equity partners, directors and principals from across the United States and their responses point to increases in time in all three lifecycle segments of a fund: raising capital, searching for suitable targets, and exit.

Prolonged fundraising

For the majority of US GPs, the time period spent raising money from investors for their most recent fund was longer than the preceding one, 76% of the respondents needing between 9 to 18 months total. While fund lifecycles are extending, the amount of capital being raised has largely remained stable, increasing only slightly year over year. Mergermarket believes that the reason for the increased fundraising time horizon is caused by changing investor demand and regulatory pressure. Investors are streamlining their PE assets by selling into the secondary market, which continues to grow, and concentrating their capital with fewer managers for primary commitments. By writing larger checks for fewer GPs, they are able to leverage economies of scale and negotiate more favorable fund terms. Preqin data supports the trend citing that the US$550bn raised by US PE funds in 2015 was shared between 1,061 funds, an annual drop of 24% by fund count. While the blue chip funds easily meet their fund raising targets, the remaining PE managers take substantially longer to close their funds.

Searching for suitable target

More than half (56%) of surveyed PE shops report that the length of time spent tracking and investigating potential investment targets has increased over the past five years, with more than a quarter (28%) saying it has increased significantly. The US PE industry is very competitive and the global low interest rate environment coupled with a bull market in US equities propels target expectations. Purchase price multiples have reached an all-time high, as US buyout firms paid an average of 10.3x EBITDA for their deals in 2015, according to S&P Capital IQ’s LCD. Additionally, the caps on leverage imposed through Dodd-Frank limit the funds’ ability to create value through financial engineering. As the market not only forces GPs to pay top dollar for target companies but also creates pressure to bolster yield through operational improvements, extensive due diligence is imperative. The increased time spent assessing assets to justify high prices and creating appropriate operational growth strategies drags out the target search period.

Disposition of assets

Similarly, 56% of respondents say that the timeframe from investment to disposition has increased over the past five years, with 12% saying it has increased significantly. According to the survey, 76% of the funds own portfolio companies for 6 to 9 years on average before divestment. Arguably, the reinforced emphasis on operations as opposed to financial engineering can take longer to achieve target growth. Even though the US economy has been relatively strong, business profits were down in the recent years in light of the energy slump and sluggish global growth. As profits and growth are fundamental to company valuations, it has been more difficult to sell portfolio companies at an acceptable price.

Longer lifecycle & more capital

While the PE lifecycle is prolonged, dry powder in the industry is piling up. Estimates put the global reserves of uncalled capital under GPs’ management at US$1.31tn. According to Mergermarket, over the last five years, a clear majority of firms have relaxed their buying criteria in terms of valuation in order to utilize liquidity. The next few years will show whether PE managers are up for the challenge to handle the increased pressure through record entry multiples and depressed annualized returns through prolonged holding periods.

The author would like to thank Hugo Margoc, Articling Student, for his assistance in preparing this legal update.

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Bank of Canada maintains historically low overnight rates and reserved outlook for 2017 and 2018

On December 7, the Bank of Canada (the Bank) announced that it will be maintaining its overnight rate at 0.5%, closing out a year of historically low interest rates. The overnight rate is the interest rate at which large institutions, including banks, lend money amongst themselves and is one of the main levers that the Bank can pull in order to effect a particular monetary policy. It forms the basis for other interest rates throughout the economy and, in theory, low borrowing rates incentivize deal-making. We have blogged before about the effect of interest rates on M&A deals, including the interesting consequences of the negative interest rate policy that the Bank was contemplating about one year ago.

In its announcement, the Bank cited uncertainty undermining business confidence as one of the main drivers of it policy. Notably, this is the first such announcement since the United States Presidential election and some commentators have suggested that the election and its aftermath are the chief drivers of the uncertainty to which the Bank has been referring. We recently wrote about the effect that the election might have on M&A deals here. For its money, the Bank appears to be approaching the upcoming months with caution.

In practical terms, these low targets suggest little optimism at the Bank, as it continues to try to spark borrowing and spending. Since the Bank looks forward approximately 6-8 quarters in setting the overnight rate, its prognosis for 2017 and perhaps even 2018 is decidedly reserved. On the other hand, the strong third quarter performance in the Canadian economy may be the Bank’s monetary policy over the past year and a half beginning to blossom. The target overnight rate has in fact been less than 1.0% for the past 7 quarters.

Meanwhile, the US Federal Reserve has just announced that it is increasing its benchmark rate to 0.75% (a +0.25% increase). In January, the Bank will release a full update for its outlook on the economy which will undoubtedly have to respond to the US rate hikes; however, it is not expected that the Bank will change its overnight rate any time soon. For the foreseeable future, a stronger US economy and weakening Canadian dollar will likely have positive run-off effects north of the border for some (especially for exporters), but by the same token it may make Canadian companies the potential target of cross-border acquisitions.

The author would like to thank Peter Georgas, Articling Student, for his assistance in preparing this legal update.

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Bank of Canada announces changes to its foreign exchange rate data

Recently, the Bank of Canada (the Bank) announced the final list of 26 foreign currency exchange rates that it will continue to publish after March 1, 2017. The list of currencies is based on the majority of foreign exchange transactions conducted against the Canadian dollar and combines the top 20 currencies by trading volume and Canada’s top 20 trading partners. This list will be reviewed and revised, as needed, every three years.

The release of this list follows a trail of changes being made in respect of the Bank’s published foreign exchange rate data. In February 2016, the Bank announced changes to the calculation methodology of its foreign exchange rates which, starting on May 1, 2017, will be published as a single indicative rate as against the Canadian dollar for a reduced number of currencies.

To facilitate the transition, the Bank will concurrently publish the existing and new foreign exchange rate data between March 1, 2017 and April 28, 2017.

Starting on May 1, 2017, exchange rate data will be posted only in respect of the final 26 currencies. All other exchange rates, including noon and closing, high and low, will cease to be published. However, monthly and annual averages as well as the Canadian-dollar effective exchange rate index will continue to be published. In terms of historical data, the Bank will maintain such information for a 10-year look back period.

In anticipation of these changes, the Bank conducted a survey in 2014, canvassing a range of stakeholders using the Bank’s exchange rates including for general business purposes, commercial contracts, benchmarks for commercial transactions, accounting purposes for corporations and entities subject to legal requirements that reference these rates (e.g., the Income Tax Act). The survey’s findings informed the Bank’s approach to crafting the new calculation methodology.

The Bank’s rationale is buttressed in part by the fact that the publication of the Bank’s exchange rates is based on providing a public good for statistical, analytical and information purposes only – not as benchmarks for transactional purposes. In the age of the internet, the Bank also notes that exchange rates are readily available from numerous alternate sources. The Bank highlights the fact that similar changes are being undertaken by other central banks and that many currencies currently published are infrequently accessed.

The Bank has acknowledged that these changes may impact business processes, IT systems, drafting of legal contracts and federal and provincial legislation. Businesses should review their commercial contracts, including credit agreements, to ensure exchange rate definitions and provisions continue to work from both a drafting and practical perspective. For example, reference to noon spot rates should be removed as noon rates will no longer be published.

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National security guidelines shed light on Investment Canada review process

On December 19, 2016, the Government of Canada issued long-sought guidelines to help foreign investors and their advisors understand the national security review process under the Investment Canada Act (ICA). Following amendments to the ICA in 2009 the government has had the explicit authority to review investments in Canadian businesses by non-Canadians to determine whether they “could be injurious to national security,” a term that was not defined in either the statute or the accompanying regulations.

Given the subject matter, both the previous and current governments have maintained that they are often constrained in what they can tell foreign investors about the nature of any possible concerns. This has resulted in criticisms that the review procedure lacks procedural safeguards and deprives investors of the ability to know the case against them.[i] The new guidelines outline some of the factors that the government may consider as they assess the impact of a transaction on national security, and indicate a willingness by review officials to consult with parties about these issues. Concurrent with the release of the guidelines, the government announced its intention to amend the ICA to require annual reporting on the national security provisions of the ICA and reiterated its plan to increase the net benefit review threshold earlier than planned.

Investment Canada Act overview

In general, any acquisition of control of a ‟Canadian business” by a ‟non-Canadian” is either notifiable or reviewable under the ICA. Whether an acquisition is notifiable or reviewable depends on the structure of the transaction and the value and nature of the Canadian business being acquired, namely whether the transaction is a direct or indirect acquisition of control of a Canadian business.

With limited exceptions, the federal government must be satisfied that a reviewable transaction ‟is likely to be of net benefit to Canada” before closing can proceed; notifiable transactions only require that the investor submit a report after closing. Separate and apart from the net benefit review, the ICA also provides that any investment in a Canadian business by a non-Canadian can be subject to a national security review, regardless of its structure or value. The establishment of a new Canadian business by a non-Canadian is also notifiable and subject to national security review.

The threshold for the net benefit review is, with limited exceptions, based on the enterprise value of the Canadian business. At the time of its implementation (2015), the threshold was intended to be C$600 million for two years, followed by two years at C$800 million, and then C$1 billion for a year, after which it would be adjusted annually for inflation. However, in the 2016 Fall Economic Statement, the government announced that the threshold will be raised to C$1 billion in 2017, two years earlier than planned.

National security reviews

The Minister of Innovation, Science and Economic Development (Minister) has the authority to review almost any investment by a non-Canadian, regardless of the size of the interest acquired or the value of the assets, where the Minister has reasonable grounds to believe that such an investment could be injurious to national security. Until now, there have been no guidelines for investors on the issue of what kinds of investments may be reviewed. At the time the National Security Review of Investments Regulations under the ICA were released, the government explicitly rejected calls for such guidance.

To date, there have been eight national security reviews ordered since the regime was adopted in 2009. Due to confidentiality restrictions, the government has not identified those matters. However, the government has revealed that of the eight, three transactions were blocked, divestitures were ordered in two, conditions were imposed in two to mitigate concerns, and one investor withdrew its application before a final order was made.

National security reviews can, if all stages of the review take their maximum allotted time, take 200 days from the date of filing an application or notification. This can be extended unilaterally at various stages by the Minister. The initial review period is 45 days from the date that an application or notification is submitted. For a minority investment that is not subject to review or notification, the Minister has 45 days after closing to raise any initial concerns. Where the Minister gives notice that a transaction may be injurious to national security, cabinet, on the Minister’s recommendation, has a further 45 days to determine whether to order a review of the transaction.

Further information regarding the review process and the types of transactions where orders were made can be found in our Doing Business in Canada guide.

National security guidelines

The new guidelines outline a number of factors that the government may consider when assessing the impact of a transaction on national security:

  • The potential effects of the investment on Canada’s defence capabilities and interests;
  • The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
  • Involvement in the research, manufacture or sale of goods/technology identified in Section 35 of the Defence Production Act;
  • The potential impact of the investment on the security of Canada’s critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government;
  • The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
  • The potential of the investment to enable foreign surveillance or espionage;
  • The potential of the investment to hinder current or future intelligence or law enforcement operations;
  • The potential impact of the investment on Canada’s international interests, including foreign relationships; and,
  • The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

The guidelines encourage parties to transactions that include one or more of these factors to contact officials at the Investment Review Division early in their planning process to discuss the matter. Although review officials have always been willing to meet with potential investors, including these factors in the guidelines is a welcome commitment to increased transparency.


Non-Canadians considering investing in Canada must be mindful of their obligations under the ICA. If they plan a direct acquisition of control of a Canadian business, the transaction may require pre-closing approval under the net-benefit test as well as pass muster under a national security review. For indirect acquisitions of control, no pre-closing review will be necessary but where national security may be an issue, it is often advisable – though not legally required – to submit a notification at least 45 days prior to closing to allow for the initial national security review deadline to pass.

Similarly, although not legally required to submit a notification in respect of a minority investment, it is prudent to consider whether to proactively engage with investment review officials where national security concerns could be raised. Given the potential for cabinet to block a transaction or order that it be unwound if completed, national security considerations under the ICA should be top of mind for foreign investors. The new guidelines should provide additional insight into the types of transactions that may attract scrutiny under the ICA.

Norton Rose Fulbright has significant experience in national security reviews under the Investment Canada Act.  Among other matters, the firm was counsel to Nortel Networks in its various asset dispositions in 2009, including the first transaction to undergo review following the enactment of the national security amendments. 

[1]                 O-Net Communications Holdings Limited v. Canada (Attorney General), Docket: T-1319-15.

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