The threshold for certain pre-closing net benefit reviews under the Investment Canada Act (ICA) and the threshold for a pre-closing merger notification under the Competition Act have now both been released for 2021. Thresholds under both statutes decreased slightly, meaning more transactions may be reviewable or notifiable, respectively, than in 2020.
Canada uses a two-part test for determining whether a pre-merger notification is necessary. The two-part test is based on the size of the parties and the size of the transaction. The transaction size component can be adjusted annually for inflation. Under the size of the parties test, the parties, together with their affiliates, must have aggregate assets in Canada or annual gross revenues from sales in, from or into Canada, in excess of C$400 million. Under the size of transaction test, the value of the assets in Canada or the annual gross revenue from sales (generated from those assets) in or from Canada of the target operating business and, if applicable, its subsidiaries, must be greater than C$93 million. This is down slightly from the 2019 transaction size threshold of C$96 million.
Investment Canada Act
In general, any acquisition by a “non-Canadian” of control of a “Canadian business” 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 an 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.
The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person or entity from a member of the World Trade Organization (WTO); (b) a state-owned enterprise (SOE); or (c) from a country considered a “Trade Agreement Investor” under the ICA. Trade Agreement Investors include investors from the European Union, the United States of America, Korea, Mexico, Chile, Peru, Colombia, Panama, Honduras, Australia, Japan, New Zealand, Singapore and Vietnam. A different threshold also applies if the Canadian business carries on a cultural business.
Generally speaking, for a non-SOE from a WTO country (other than a Trade Agreement Investor) directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1.043 billion (down from $1.075 billion in 2020).
For a non-SOE from a Trade Agreement Investor directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1.565 billion (down from $1.613 billion in 2020).
How enterprise value will be determined will depend on the nature of the transaction:
- Publicly traded entity (acquisition of shares): Market capitalization plus total liabilities (excluding operating liabilities), minus cash and cash equivalents.
- Not publicly traded entity (acquisition of shares): Total acquisition value, plus total liabilities (excluding operating liabilities), minus cash and cash equivalents.
- Acquisition of all or substantially all of the assets: Total acquisition value, plus assumed liabilities, minus cash and cash equivalents transferred to buyer.
The net benefit review threshold for investments by SOEs from WTO member states is based on the book value of the assets of the Canadian business. It is adjusted annually, and for 2021 the threshold is C$415 million, down from C$428 million in 2020.
Note that investors from the UK will be treated as WTO investors until the Canada-United Kingdom Trade Continuity Agreement takes effect, at which time they will be treated as Trade Agreement Investors once again.
The net benefit review threshold for investments by non-WTO investors, or for the direct acquisition of control of a cultural business (regardless of the nationality of the buyer) is C$5 million in book value. The threshold for an indirect acquisition of control is C$50 million in asset value.
It is important to remember that any acquisition, whether of control or even a minority interest, of a Canadian business by a non-Canadian can be reviewed to determine whether it could be harmful to Canada’s national security. Parties to transactions that could raise issues as identified in the Guidelines on the National Security Review of Investments, and that aren’t otherwise subject to a pre-closing net benefit review, should consider submitting their notice of acquisition in advance of closing.
It is also important to note that in April 2020, the Canadian government will subject the following foreign investments to “enhanced scrutiny” under the ICA “until the economy recovers” from the effects of the pandemic:
- “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”; and
- “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.”
Details of this enhanced scrutiny can be found in our previous update, Canadian Government Announces New Policy Applying “Enhanced Scrutiny” to Certain Foreign Investments During COVID-19.