More power, penalties proposed for Ottawa’s national security control of direct foreign investments

By Cristin Schmitz

Law360 Canada (December 8, 2022, 3:28 PM EST) -- The Liberal government has introduced reforms to the Investment of Canada Act (ICA) that would boost Ottawa’s powers to review, restrict and control foreign direct investments in Canada as the federal government deems necessary to preserve national security.

On Dec. 7, Innovation, Science and Industry Minister François-Philippe Champagne introduced in the House of Commons an overhaul of the Investment Canada Act (Bill C-34), titled the National Security Review of Investments Modernization Act.

The 27-page bill, touted by Ottawa “as the most significant update” of the ICA since a national security review process became part of the Act in 2009, would expand the oversight, order-making and information-sharing powers of the industry minister, and the government, backed by higher and new penalties.

Industry Minister François-Philippe Champagne

Industry Minister François-Philippe Champagne

According to the government, the proposed National Security Review of Investments Modernization Act would, among other things:
  • require a new “pre-implementation” notice of investments to be given prior to the implementation of certain investments in prescribed business sectors, where there is a risk that the foreign investor would gain access to sensitive assets, information, intellectual property or trade secrets, for example, immediately on closing of the deal (investors in such sectors will be required to file notifications in time periods set out in future regulations — with non-compliance addressed by a new penalty);
  • authorize the minister of industry, after consultation with the minister of public safety and emergency preparedness, to impose interim conditions (currently a governor-in-council order is required) in respect of investments in order to prevent injury to national security that could arise during the government’s national security review — e.g. through access to, or transfer of, assets, intellectual property or trade secrets before a review is complete — an interim condition may be converted to a permanent undertaking or condition, or be removed, if appropriate, if the investment is allowed to proceed at the end of the review period.
  • authorize the industry minister to extend the review of investments under Part IV.1 of the Act, i.e. under the s. 25.3 stage of review (whereas previously a cabinet order was required) — thus giving the government more flexibility and providing “more time for security and intelligence partners to complete the increasingly complex intelligence analysis”;
  • allow binding written undertakings from investors to be submitted to the industry minister (rather than full cabinet) to reduce the potential national security injury that would result from the investment, and allow the industry minister, with the concurrence of the public safety minister, to accept that undertakings sufficiently address the national security injury that would result from the investment — with investors to be monitored for compliance with their undertakings. Undertakings — e.g. requiring avoidance of proximity to Canadian assets, granting access to facilities for compliance inspection by government, or creating approved corporate security protocols to safeguard information and access to a site (such as details on cybersecurity and visitor logs) — could be amended, or ended, in “the right circumstances” or if economic or security circumstances change;
  • introduce rules for “closed material proceedings” in judicial reviews enabling non-disclosure to a non-government party (and the public) of sensitive information relied on by the government in making decisions and orders, while also giving the reviewing judge access to information whose disclosure would potentially be injurious to international relations, national defence, national security or would endanger the safety of any person, in the course of judicial review proceedings of decisions and orders under Part IV.1 of the ICA;
  • authorize the industry minister, for the first time, to disclose information about a specific investor that is otherwise privileged under the Act to foreign states, for the purposes of their foreign investment reviews and national security assessments, on terms and conditions the minister deems appropriate, for example where the foreign investor may be active in several jurisdictions seeking the same technology, and where there is a common national security interest with the foreign state(s);
  • establish a new penalty not exceeding the greater of $500,000 and any prescribed amount, for failure to give notice of, or file applications with respect to, certain investments before they are implemented, and provide authority to update the ICA’s penalties for future non-compliance, via regulation; and
  • increase the penalty for other contraventions of the Act or the regulations to the greater of $25,000 and any prescribed amount for each day of the contravention — ICA fines will continue to be effected through court orders.

Speaking to Parliament Hill reporters Dec. 7, Champagne said the proposed modernization of the ICA to enhance national security reviews of foreign direct investments and protect Canada’s economic and security interests would give Ottawa “more tools, more flexibility, more authorities” enabling “us to be nimble.”

“You have investors looking at all sorts of investments in Canada,” remarked Champagne, citing as prime examples, the critical mineral, microchip and battery sectors.

Foreign investment that will require prenotification filings with the federal government will include sectors involving “sensitive technologies,” critical minerals” and “around anything about personal information,” the industry minister advised.

He pointed out that Canada is also a leader in quantum and artificial intelligence (AI). “We need to protect these technologies,” he said.

Asked what sectors he sees as most sensitive with respect to foreign direct investment, Champagne answered “key things you'll need ... over the next 20, 30 years to fuel the economy of the future.”

“Obviously vaccines came first because we've seen it,” he responded, alluding to the economic disruption caused by the COVID-19 pandemic.

“The second thing I would say is critical minerals. And the third one would be semiconductors, so I think in that sector, when it comes to these critical elements to fuel the economy of the 21st century, we need to pay close attention.”

Champagne also observed that “the underlying foundation for success in the 21st century is around quantum, it’s around AI and it’s around cybersecurity. So anything that will touch these critical sensitive technologies is something that we’ll pay additional attention. And certainly when it comes to prenotification, you can rest assured that it’s going to include critical minerals, sensitive technologies and anything about personal data because we’ve seen, more and more in the digital economy, people who want to access data of Canadians.”

Champagne vowed “I’ll be a hawk in that to make sure that we protect the information of Canadians, and that any transaction is in the interest of Canadians and our national security.”

He said the proposal to allow undertakings would provide a helpful tool. “Now the law only allows you to either say ‘yea’ or ‘nay’,” to a transaction, he explained. “But sometimes, you want to say ‘maybe ... with conditions,” he remarked. “So the [proposed] Act would allow us to say ‘you can do the transaction, but you need these undertakings’ — for example, ‘you won't be able to share the personal information [you obtain] with any other affiliates that you have. The information will have to stay within Canada, the board of directors will have to be composed, for example, of Canadians.’”

Asked what guardrails exist to prevent a private company with no ties on paper to a foreign government, such as China’s, from investing, under foreign-government control, in such national-security sensitive sectors as lithium or cobalt mining, Champagne replied that the ICA stipulates “no threshold” for national security.

“The current law, as well as the future law, allows us to review any transaction with respect to national security. We just put more rules around state-owned [foreign enterprises],” he said. “That being said, when private companies want to take equity interest, for example, or investment, in a Canadian company, they’re still subject to the Act. ... If it’s a private company, we’ll have to look on a case-by-case basis, ‘would that be injurious to national security in Canada?’”

Champagne emphasized that the government wishes to encourage direct foreign investment in Canada, while also protecting Canadian interests, securing Canadian resources and keeping Canadians safe.

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