The House of Commons’ Industry, Science and Technology committee has been examining recent changes to the administration of the Investment Canada Act, the federal regime for reviewing foreign acquisitions of Canadian businesses. The changes are intended to respond to likely merger and acquisition activity as the economy recovers from the pandemic. We believe that although the changes are well intended, some elements need further consideration. Our main concern is that economic factors will be given short shrift in the more opaque national security review process — this at a time when efficiency and timeliness will be crucially important.
Under the act, the federal government can conduct a “net benefit” review when foreign interests acquire control of Canadian businesses with an enterprise value over $1 billion. Net benefit reviews are broad-based and largely economic in nature.
The government can also conduct “national security” reviews. Although the two types of review are linked, national security reviews are slightly different. They typically take longer and the size threshold for a review is essentially zero.
Most G7 countries and Australia subject foreign direct investment to economic review. The United States is the only major country that relies primarily on national security reviews, although they are led by the economy-focused Treasury Department.
The industry committee’s review followed an April statement by Navdeep Bains, minister of innovation, science and industry, that Canada would use the act to conduct “enhanced scrutiny” of foreign takeovers of Canadian firms that are “distressed.” The government is concerned the pandemic will cause many Canadian firms to either go out of business or be acquired. The associated news release warned that foreign firms could attempt “opportunistic takeovers.” It also said the government would be especially diligent regarding takeovers in the “health sector and other critical sectors” and that all transactions by state-owned enterprises — of whatever value — would receive special attention.
It goes without saying that our economy — and businesses — will continue to need infusions of foreign capital, as well as a lot of Canadian investment, too. The challenge for the government in conducting more stringent reviews will be in finding the right balance. Stopping foreign investment or imposing a moratorium would make little sense when so many firms may be distressed. Sometimes it will be best to keep firms Canadian. But to save jobs and companies we will, as in the past, need foreign investment. Subject to reasonable conditions to protect and favour Canada, many foreign takeovers should be approved.
That includes takeovers from China. Some commentators would ban deals with Chinese entities but it is magical thinking to believe we can ignore what by some measures is already the world’s largest economy.
Canada is not the only country increasing its scrutiny of foreign investment because of the pandemic. Australia, Germany, France and Italy have all made similar announcements. Most other countries have significantly lowered the review threshold and specified which sectors are of most concern. Germany has also created a fund to help its firms fight opportunistic takeovers.
We believe enhanced reviews will work better for Canada if three goals are met:
First, speedy decisions on acquisitions of distressed assets. Most enhanced scrutiny reviews will use a national security test that is opaque and can take 200 days or longer. But if these really are distressed assets, and if there are lots of them, we will need more timely decisions to save firms and the jobs associated with them.
Second, transparency around the definition of “critical sector” and about issues raised in the review process. Australia openly declared all sectors critical, while France listed such areas as food safety, defence, energy, AI, quantum computing and cyber security, among others. In Canada, we have left “critical sectors” undefined beyond health.
Third, keeping economic security at the forefront. The legal basis for enhanced reviews will fall almost exclusively under the national security provisions of the act, not the economic-based “net benefit” rules. Are takeovers of distressed firms national security or economic issues? We think economic security is mainly at play, even when Chinese firms target technology businesses or specific elements of the energy sector. National security reviews are led by the deputy minister of public security. But in the case of distressed firms, a better approach would be to have the deputy minister of finance or innovation chair, or at least co-chair, the review. In most other countries, including the U.S. and Germany, economic agencies lead the foreign investment review process with input from other relevant government departments.
It is very important we get this right. We want the economy and our firms to thrive. Enhanced reviews of foreign takeovers will need speed and agility. The reviews will also need transparency so foreign investors can have a clearer sense of areas of concern to the government and then better understand where they can invest. The reviews will also need to be driven more by economics and less by national security. This is especially true if we are to get the balance right in the recovery from the pandemic.
Published in the Financial Post
John Knubley is a former federal deputy minister. Lawson Hunter, a former Competition Commissioner, is senior counsel at Stikeman Elliott LLP. They are both senior fellows at the C.D. Howe Institute.