Omar Wakil and John Emanoilidis are partners at Torys LLP, who co-lead the firm's foreign investment review and M&A practices.
Prime Minister Justin Trudeau's recent cabinet shuffle, promoting former trade minister Chrystia Freeland to Foreign Affairs Minister, has highlighted the Liberal government's focus on trade as a driver of domestic economic growth and prosperity. However, there's another area of Liberal focus that until recently has gone largely unnoticed and is arguably just as important to driving Canada's economy: a more open approach to the review of inbound foreign investment.
Under the Investment Canada Act, the government carries out "net benefit" reviews for transactions that exceed certain financial thresholds. It can also commence "national security" reviews in connection with virtually any investment. Under the previous Conservative government, both types of review were common, and an unprecedented number of deals were blocked, restructured or subjected to substantial undertaking commitments.
Now, however, there is good reason to believe an about-face is under way, and it is not just related to the recent high-profile reassessment of the O-Net case. The Liberal government is also opting to provide much-welcomed guidance on its approach to national-security reviews, to raise net-benefit review thresholds significantly and to streamline the approach to reviews of investments in certain "cultural" businesses.
Stephen Harper's government showed a sensitivity to popular opinion and a particular concern about investors from China and certain other countries. High-risk investments typically involved national or provincial "champion" targets, such as BlackBerry, Potash Corp., Rona, TMX Group and Viterra, investors that were state-owned and investments in sensitive industries such as telecommunications, defence and financial services.
Mr. Trudeau says he is "open to global investment" as long as it "respects and defends Canadian interests." The Liberals have also made it clear they want to reset the relationship with China, including sending former immigration minister John McCallum to Beijing as the new Canadian ambassador and reconsidering the rejection of Hong Kong-based O-Net Communications' purchase of Montreal's ITF Technologies.
Even if the government ultimately confirms the rejection of the O-Net investment, new guidelines for national-security reviews released in December suggest that such reviews will become more open and transparent, a welcome development that has been called for since reviews were introduced in 2009. While the number of national-security reviews is unlikely to change – indeed they could become a focus of activity – heightened transparency should help foreign investors and Canadian businesses assess risk up front and enter into transactions with a clearer sense of the potential outcome. Government officials may also be more willing to discuss concerns openly with investors and to approve investments conditionally based on nuanced assessments of risk.
Meanwhile, "net benefit" reviews will become much less frequent under the Liberals. The government has announced that it will increase the review threshold more quickly than had been planned by the Conservatives, and it is now expected to jump from $600-million in enterprise value to $1-billion in 2017. Moreover, under the Canada-European Union free-trade agreement, the review threshold for European Union investors will increase to $1.5-billion. Because trade obligations require Canada to use the same threshold for investors from every country with which we have a free-trade agreement, investors from the United States, Mexico, South Korea and several other countries will also be subject to a $1.5-billion threshold. This higher threshold could cut the number of net-benefit-reviewable transactions in half, if not more.
When it comes to Canadian cultural businesses, early indications suggest the Liberals will adopt a pragmatic approach. In particular, the introduction of a long-overdue streamlined process for review where the cultural component of the target business is of negligible importance suggests the process will typically be quick and any conditions reasonable.
All of these changes are signs the Liberals may be willing to accept more political risk by erring on the side of allowing investments. Of course, the real test will likely come with the first controversial, politically-challenging transaction, such as the acquisition of a Canadian national champion by a Chinese state-owned enterprise.
For now, however, the Liberals appear poised to provide foreign inbound investment to Canada with a more open and transparent future, which could become the defining trait of Trudeau-era foreign investment review.