Canada's national security screening net is cast very broadly

In December the Government of Canada blocked Chinese state-owned Shandong Gold Mining Co. Ltd. from purchasing TMAC Resources and its Hope Bay gold mine in Nunavut. The proposed $230 million dollar investment was blocked by the government on national security grounds following a review under the Investment Canada Act (ICA).

Laura Rowe

The government did not provide specific reasons for its decision (which is typical in reviews under the ICA, especially when national security is involved) and only noted that reviews are conducted on a case by case basis. Nevertheless, it is widely understood that the Government, acting on the recommendations of its security experts, was not comfortable with the Chinese state having indirect ownership over mining and infrastructure assets in the increasingly strategic Arctic region. The Shandong case continues a recent trend of heightened scrutiny over potentially sensitive investments, which has been amplified during the Covid-19 pandemic.

The goal of the ICA review process is to ensure that large foreign investments are beneficial to Canada, and in the case of national security reviews, to prevent investments that are "injurious to Canada's national security." At the start of the Covid-19 pandemic in April 2020, the government announced that scrutiny of inbound foreign investments would be increased. In particular, heightened scrutiny will be applied to foreign investments of any value, controlling or non-controlling, in Canadian businesses related to public health or involved in the supply of critical goods and services to Canadians or to the Canadian government.

The government also indicated that investments by state-owned enterprises (SOEs) or private investors assessed as being closely tied or subject to direction from foreign governments will be subject to enhanced scrutiny under the ICA. All foreign investments are subject to potential review under the ICA, although only investments that result in an acquisition of control by a non-Canadian of a Canadian business, even where the target business is already controlled by a non-Canadian, require that a filing be made.

Investments with values over statutory thresholds have to obtain "net benefit" approval from the Government of Canada prior to closing. The "net benefit" approval process can take months, although timing is typically case specific. The government adjusts these thresholds annually based on growth in nominal GDP. The impact of Covid led to a decline in Canadian GDP in 2020, which slightly reduced the applicable "net benefit" thresholds under the ICA for 2021. The threshold that applies to a particular transaction depends on various factors, including whether the acquisition of the Canadian business is direct or indirect, whether the investor is from a member country of the World Trade Organization, and whether the investor is a SOE. The threshold for SOE investors is significantly lower than for non-SOE investors.

Investments from SOE investors are subject to pre-closing review if the target's book value of assets exceeds $415 million (this threshold was $428 million in 2020) while investments from most non-SOE investors are only subject to pre-closing review if the enterprise value of the investment is over $1.043 billion (or $1.565 billion for investors from select countries which Canada has a trade agreement with). This reflects the government's concern about foreign influence and control in the Canadian economy. SOE investors are much more likely than non-SOE investors to be subject to mandatory pre-closing "net benefit" review.

All transactions subject to "net benefit" review are also screened for national security concerns. In addition, control transactions that fall under the "net benefit" thresholds set out above must nonetheless be notified to the Canadian government, which requirement captures a large number of transactions. In 2019, for example, nearly 1,000 transactions were so notified to the government. All of these transactions are also screened for possible national security concerns. Finally, transactions that do not trigger a notification or a "net benefit" review (including where they do not result in a change in control of a Canadian business, such as minority investments) can also be subject to a national security review if the transaction comes to the attention of the government. The national security screening net is therefore cast very broadly.

TMAC Resources' Hope Bay gold project in Nunavut. Credit: TMAC Resources.

The government has not issued any definitive rules on whether an investment will trigger a full national security review. The government has, however, issued Guidelines on the National Security Review of Investments, which include a non-exhaustive list of factors the government will consider. These factors include the potential effects on Canada's defence capabilities and interests, the potential impact on Canada's critical infrastructure, and the potential to enable foreign surveillance or espionage, among others.

In addition, the government identified ten critical infrastructure sectors in its National Strategy for Critical Infrastructure in 2009. These sectors include energy and utilities, finance, food, transportation, government, information and communication technology, health, water, safety, and manufacturing. The vast majority of national security reviews conducted by the government since 2012 have involved businesses in these ten critical sectors. The government has not released any updated information on reviews since the pandemic started but we would expect new statistics to be released in the coming months.

National security reviews can take up to 200 days to complete and can involve a large number of government bodies. The Investment Review Division coordinates national security reviews with the departments of Heritage, Public Safety and Emergency Preparedness, National Defence and Public Health, and authorities such as the Canadian Security Intelligence Service, RCMP and Canada Border Services Agency. The Ministers of Innovation, Science and Industry and Public Safety and Emergency Preparedness are the primary decision-makers for the assessment of whether an investment would be injurious to national security. If they determine that an investment would be injurious to national security, the matter is referred to the federal Cabinet for the ultimate decision. Cabinet has the discretion to order any measures it considers advisable, including a divestiture, an order not to implement a transaction, or authorising the investment on certain terms and conditions.

Shandong Gold's proposed acquisition of TMAC Resources triggered the requirement for pre-closing "net benefit" review. Shandong Gold, as a Chinese SOE, is subject to a lower statutory threshold for net benefit review than non-SOE investors. As noted, the threshold for pre-closing net benefit review of investments by SOEs from WTO member countries was $428 million in book value of assets of the target for 2020, so notwithstanding the fact that the purchase price was $230 million, the value of TMAC Resource's assets triggered pre-closing "net benefit" review.Shandong Gold would have had to convince the government that its acquisition of TMAC Resources would be of "net-benefit" to Canada in order to get the transaction approved. In addition, the government elected to trigger a national security review. The fact that Shandong is ultimately state-owned by China in particular likely raised concerns, especially given the Hope Bay mine's location near the strategically important Northwest Passage and significant tensions between the Canadian government and China in recent years.

TMAC Resources has now accepted an offer from Agnico Eagle Mines, the largest gold producer in Nunavut, to takeover TMAC and the Hope Bay mine. This transaction will not raise issues for the Investment Review Division as Agnico Eagle is a thoroughly Canadian company. This is an outcome which will be very much to the satisfaction of the Canadian government. It remains to be seen whether Canada will see further state-owned investment in the mining industry in 2021- any such transactions are bound to invite media and political scrutiny.

Laura Rowe is an associate in Stikeman Elliott's Ottawa office. Laura is a member of their Competition & Foreign Investment, Intellectual Property, and Privacy & Data Protection Groups.