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Net Benefit Reviews Under the Investment Canada Act – Some Practical Thoughts

June 6, 2023 Competition and Antitrust Bulletin 5 minute read

The Investment Canada Act (“ICA”) has two key strings to its bow – National Security reviews and Net Benefit reviews.  Recently, the National Security issues have been attracting all the attention: required dispositions by Chinese investors of their interests in three lithium producers (lithium being only one of 31! “critical minerals”); an increased focus on personal data, sensitive technology, health issues and critical infrastructure; Bill C-34 amendments to significantly toughen the regime – amongst other developments.

By contrast, the more traditional work of the ICA – determining whether the acquisition of control over Canadian companies by non-Canadian investors will be of “net benefit” to Canada – has received less emphasis.  This is in part because the size thresholds, beneath which transactions are not subject to net benefit review, have increased significantly (up to C$1,931 million in many cases – see our thresholds chart for 2023).  As a result the number of net benefit reviews have fallen, such that over the last few years there have been between nine and a dozen net benefit reviews per year.

However, the announcement of Glencore plc’s recent approaches to the shareholders of Teck Resources, one of Canada’s leading mining companies has once again brought the ICA’s net benefit provisions into the spotlight. In this bulletin, we describe how the “net benefit” review process works, explore some implications for investors and target companies affected by ICA reviews, and provide some up-front planning suggestions.

Key Issues

  • While the ICA sets out a 75-day timeline for the Industry Minister to complete a “net benefit” review, in practice, these reviews sometimes take considerably longer, especially when the transaction is high profile.
  • Certain investments, such as the one involving BHP Billiton / Potash Corporation a decade ago, can become politically controversial.  The current government also has shown a willingness to involve itself in merger/takeover issues that affect key constituencies.
  • The onus is on the acquiring company to demonstrate that the transaction is of net benefit to Canada in order to secure approval from the Industry Minister. While nearly all acquirers have been able to offer sufficiently robust commitments, called “Undertakings” (which typically involve issues such as jobs, head office functions, research and development capital expenditures and investments in local communities) in order to secure that approval, in rare cases acquirers cannot make out a net benefit case and must withdraw their investment and terminate the transaction.  As well, the required Undertakings can be quite costly, such that they may undermine the attractiveness of the investment.
  • In addition, it is open to the government to assess an investment on national security grounds in addition to conducting a net benefit review.

Process Considerations

The ICA requires that non-Canadian controlled acquirers (or “investors”) file an application with the Investment Review Division (“IRD”) of the Department of Innovation, Science and Economic Development Canada when they propose to acquire control of a Canadian business whose value exceeds certain prescribed monetary thresholds.

In addition to the application, the investor will submit a business plan setting out how it intends to operate the target business, often against the benchmarks that the target has established during its usual business planning cycle.  It is important when developing these plans to be mindful that anything set out in the plans could be turned into a binding commitment to the government by way of Undertakings.

In assessing the transaction, the IRD and the Minister will consider the effect of the investment on six statutorily defined factors:

  1.  economic activity, including employment, resource processing, services and exports from Canada;
  2.  participation by Canadians in the business or industry;
  3.  innovation and product variety in Canada;
  4.  competition;
  5.   compatibility with Canadian industrial, economic and cultural policies; and
  6.   Canada’s ability to compete in world markets.

These are broad categories that IRD applies to the particular circumstances of the transaction in light of the economic and political realities from time to time.

As noted above, to strengthen its ability to argue that the transaction is of net benefit to Canada the investor will typically propose a set of binding Undertakings, which generally apply for a three to five year period.  Such Undertakings often guarantee that the Canadian business will maintain a certain level of employment in Canada, that Canadians will have a significant role in the management of the business, that the head office will remain in Canada and continue to perform certain functions, that the capex and R&D plans will be fulfilled and that the target business will continue to meet its charitable and community commitments.  As well, transaction and industry specific Undertakings are often required.

For investments that involve Canadian “champions”, which are likely to attract more public and political attention, investors also may have to give additional Undertakings related to, amongst others things, the environment and sustainability, stock exchange listings, security of supply for Canadians and the creation of global centres of excellence in Canada, for example.

There have also been some investments where Undertakings, however strong, have not been sufficient to secure approval. As noted, when BHP Billiton proposed to acquire Potash Corporation in 2010, BHP was unable to secure approval after strong opposition from the Saskatchewan provincial government, where Potash Corporation was headquartered, as well as from several of the Members of Parliament who represented Saskatchewan in the House of Commons.

What Does this Mean for Investments in Today’s Political Climate?

Given that so few deals are subject to net benefit reviews today because the monetary thresholds have increased so much, investments that do require net benefit approval risk attracting greater attention than in previous years.
Despite a stated public policy that Canada is open to investment from abroad, when specific transactions attract public/political attention, the Canadian public is often sceptical of the benefits of foreign direct investment and typically hold negative or at best neutral views when polled. Governments, particularly when they do not control a majority of the seats in the House of Commons, may be more attuned to the reactions by constituents when making a decision regarding a net benefit review under the ICA.  In today’s political climate, investors that are not attuned to these realities may find themselves tied up in lengthy reviews – or even face outright rejection, as did BHP Billiton.

Some Practical Planning Suggestions

  • The investor should develop its plans for the acquired firm, to share with the IRD as part of the application for ICA approval, in parallel with its due diligence related to the acquisition.  The development of the plans may help inform negotiation of the purchase agreement, and focus the investor on potential regulatory risks.
  • Consider as well what Undertakings the Investor will – and will not – agree to give “up front”, as the transaction is being negotiated, and define “walk away” terms which, if demanded by IRD, may make the investment less attractive.
  • Carefully consider the political/public perception landscape when planning the investment, and determine whether and when to retain government relations assistance early in the process.
  • Make sure the purchase agreement permits sufficient time for an extended IRD review of the transaction.
  • Consider what involvement in the IRD review of the transaction by the vendor may be desirable and provide for that involvement in the purchase agreement.

For more information on the Investment Canada Act, please contact us or your usual McMillan contact.

by Joshua Krane & James Musgrove

A Cautionary Note

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 2023

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