Canada’s Use of its National Security Power
Canada’s Use of its National Security Power
The Government of Canada’s decision to reject the proposed acquisition of Aecon, a major Canadian construction services firm, by China Communications Construction Company International Holding Limited. (“CCCI”), while significant, does not reflect a broader protectionist orientation or a retreat from Canada’s general openness to foreign investment and trade. In our view, there are three main conclusions to be drawn from the Government’s decisions in recent years under the Investment Canada Act (“ICA”). First, intervention in foreign investment transactions is exceedingly rare – each case stands on its own with the Government doing a careful case-by-case review of transactions which raise national security issues. Second, there is no indication that the Canadian process is being applied in a protectionist or political manner. Finally, parties seeking to undertake foreign investment transactions need to develop comprehensive legal and government relations assessments and strategies to deal with the possibility of reviews under the ICA, but there is no reason to regard Canada as riskier than other jurisdictions which have the power to conduct national security reviews.
The National Security Framework
Canada was a relative late-comer to national security review of foreign investments; the Government was not given such powers until 2009. The ICA allows the Government to initiate national security reviews within 45 days of becoming aware of any type of full or partial acquisition of a Canadian business or an investment in Canada by a foreign company, individual or government. A multi-step process allows information to be gathered from Canada’s security agencies and other government departments, as well as from the parties. At the conclusion of the review, the federal cabinet may approve a transaction unconditionally, condition approval upon “mitigation measures”, prohibit a proposed transaction or order a divestiture in respect of a completed transaction.
The Aecon Decision
The Aecon transaction was announced in October 2017 and was followed by considerable media coverage regarding potential national security issues in relation to Aecon’s work involving nuclear power facilities, hydroelectric facilities, oil and gas facilities and pipelines, transportation projects, telecom infrastructure, military housing and training facilities, and mining projects. In guidelines that were released in late 2016 (described in more detail below), the impact of a foreign investment on “critical infrastructure” is identified as a factor that the Government may consider when analyzing national security issues. Ten critical infrastructure segments have been identified, including the energy and utilities, transportation, and information and communication technology sectors in which Aecon is active.
As is usual in national security reviews, detailed reasons for decisions are not published, primarily due to confidentiality restrictions and national security sensitivities. However, the Minister of Innovation, Science and Economic Development, Navdeep Bains, stated that:
As is always the case, we listened to the advice of our national security agencies throughout the multi-step national security review process under the Investment Canada Act. Based on their findings, in order to protect national security, we ordered CCCI not to implement the proposed investment. Our government is open to international investment that creates jobs and increases prosperity, but not at the expense of national security.
I‘m confident that we’ll continue to work together. We want to pursue strong economic ties with China and we’ll continue to engage them on a range of files…. We’re also very clear that we’re open for trade, we’re open for investment, but not at the expense of national security. 
The Government’s Track Record
Since taking office in the fall of 2015, the Trudeau Government has continued to pursue bilateral and multilateral trade and investment agreements to diversify Canada’s economic base. Most notably, the Comprehensive Economic and Trade Agreement with the European Union (“CETA”) and the proposed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”), which has been tweaked after the United States’ decision not to participate, contain extensive provisions which protect and promote foreign investment. Canada’s CETA concessions included a massive increase of the review thresholds under the ICA to an acquiree enterprise value of C$1.5 billion. The Trudeau Government also unilaterally accelerated the phase-in of a higher C$1 billion review threshold for investors from other WTO countries almost two years ahead of schedule. These changes have significantly reduced the number of transactions that are subject to “net benefit” reviews under the ICA. In the year ended March 2018, there were only nine net benefit reviews, compared with an average of 16 per year in the prior five years. 
CCCI is a state-owned enterprise (“SOE”) for purposes of the ICA. The Trudeau Government, like the predecessor Harper Government, has not raised SOE thresholds other than through an annual inflation-related adjustment. The current threshold for WTO SOE investors is an acquiree book value of assets in Canada of C$398 million. The Trudeau Government continues to follow the guidelines for investments by SOEs that were released in 2012. Of note, one of Minister Bains’ first decisions under the ICA was approving the acquisition of control of the former Canadian Wheat Board (now G3 Canada Limited) by a Saudi Arabian SOE (the Saudi Agricultural and Livestock Investment Company).
Canada is not alone in considering the possible national security implications of investments by SOEs. In the U.S., new legislation is being considered that, among other amendments, proposes to require CFIUS notifications to be filed in respect of any transaction in which a foreign government has a 25% interest in the investor making the acquisition. Similarly, the European Parliament is close to finalizing a proposal that would broaden the powers of the European Commission to scrutinize foreign investments amid concerns about Chinese acquisitions, including by SOEs.
With respect to China, Canada has had a bilateral investment treaty in place since 2014. Canada and China have also been exploring the possibility of entering into free trade negotiations, although both have obviously been focusing much more extensively on the uncertainty in their trading relationships with the US over the past year and a half. Canada has continued to be very open to inbound investment from China, including in sensitive sectors that potentially may raise national security issues.
Since the Trudeau Government came to power in late 2015 until March 2018 (the most recent month with available statistics), there have been 82 investments from China and Hong Kong subject to review or notification under the ICA:
|Net Benefit Review and Approval||4||5||9|
|Notification – Acquisition||31||16||47|
|Notification – New Business||12||14||26|
Insights (5 Posts)
Full evaluation of a target's privacy, technology and cybersecurity compliance in due diligence is critical for transactions involving technology companies.
TSX Considering Adoption of Pricing Guidelines for Prospectus Offerings
Ottawa LRT and the Future of P3s: Public (interest), Private (collaboration) & (meaningful) Partnerships
A summary of the Commission’s key recommendations arising from the Ottawa Light Rail Transit Public Inquiry regarding the public-private-partnership (P3) model.
Arbitration Clauses Should be Respected, Most of the Time: Supreme Court of Canada Shifts Focus Away From Single Proceeding Model for Insolvencies in Rendering Arbitration Clause Inoperative
The SCC has provided a framework on when arbitration clauses should be rendered inoperative in order to promote efficiency in an insolvency proceeding.
Corporate Counsel Webinar | Beyond the Basics: Tools and Strategies to Create a More Inclusive Legal Work Environment
Join our guest speaker, Jodie Glean-Mitchell, Executive Director of Equity, Diversity and Inclusion, from the University of Toronto as we invite participants to dive deeper into the intricacies of intersectional identities and experiences with (micro)aggressions and their implications for the legal work environment.
Get updates delivered right to your inbox. You can unsubscribe at any time.