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New ICA Developments - Tougher Measures for SOE Investments


Lawyer Michael Koch
Area Corporate Finance and Securities, Mergers and Acquisitions, Competition, Antitrust and Foreign Investment


As part of its budget bill likely to come into force early this summer, the Government of Canada this week introduced legislation implementing its new policy for the review of investments by foreign state-owned enterprises (SOEs) and other amendments to the Investment Canada Act (ICA).

As discussed in our December 8, 2012 Update1 , these changes include:

  • new, more restrictive guidelines for the review of SOE investments under the “net benefit test”;
  • implementing a hike to the financial threshold for the review of non-cultural, non-SOE investments, from $344 million “book value” to $1 billion “enterprise value”; and
  • an extension to the time available to the Government to review transactions that raise national security concerns.

Regarding SOEs, the proposed legislation is more interventionist than suggested by the policy announced last December.  The amendments:

  • define SOEs broadly to include not only entities but also, unexpectedly, individuals acting under the direction, or the direct or indirect influence, of a foreign government;
  • provide the Minister with sweeping powers to determine  whether an entity is controlled in fact by a SOE and whether there has been an acquisition of control in fact of an entity by a SOE; and
  • provide the Minister with discretion to effectively characterize entities that qualify as Canadian-controlled as SOEs, which might have the effect of requiring a net benefit review.


Under the ICA, a non-Canadian investor seeking to acquire control of a Canadian business over certain financial thresholds must demonstrate that its transaction will result in a “net benefit to Canada”.  In December 2012, at the same time as it approved significant foreign SOE investments in Canada’s resource sector2, the Government announced expanded and tougher guidelines to address the risks identified as being inherent in control of Canadian businesses by foreign SOEs.

On April 29, the Government introduced a budget bill that includes amendments to the ICA to implement its December 2012 announcements.

Implementation of Higher Thresholds for Non-SOE Acquisitions

The amendments will implement changes to the financial threshold for a net benefit review first announced in 2009.  For proposed acquisitions of non-cultural businesses by investors from WTO countries, other than SOEs, the current threshold for review of $344 million will rise to $600 million, increasing to $1 billion over a further four-year period.  These new thresholds will be based on the enterprise value of the business rather than the book value of its assets.  Since the definition of “enterprise value” remains unresolved pending enactment of regulations, there is uncertainty as to the actual impact of this change on the reviewability of transactions.

The amendments confirm the new threshold will not apply to proposed acquisitions by SOEs, which will remain subject to the existing book value threshold of $344 million, adjusted on an annual basis.


The amendments implement specific aspects of the Government’s policy towards SOEs; however, uncertainty regarding application of this policy remains.

First, the amendments contain a very broad definition of SOE.  In addition to the government or agency of a foreign state, a SOE includes an entity that is “controlled or influenced, directly or indirectly” by such a government.  Significantly, the definition also includes an individual who is acting under the direction of, or “under the influence, directly or indirectly, of such a government or agency.”

The Government has not provided guidance on the interpretation of these terms.  Many instances can be envisioned where an individual may be considered to be “indirectly under the influence” of a foreign government by reason of commercial or other relationships and will therefore now require a higher level of scrutiny.  This may create uncertainty as to which financial threshold could apply to a contemplated transaction and therefore whether the transaction would be subject to a net benefit review.

Second, the amendments give the Minister significant discretion to determine that:

  • an entity that otherwise qualifies as a Canadian-controlled entity under long-established ICA rules (such as ownership of the majority of voting shares of a corporation) is not a Canadian-controlled entity, where the Minister is satisfied that the entity is controlled in fact by one or more SOEs; and
  • an entity will be considered controlled by another entity, or a transaction will be considered an acquisition of control of an entity where the Minister is satisfied there has been an acquisition of control “in fact” of the entity by a SOE.

These determinations may be made with retroactive effect to a specific date (no earlier than April 29, 2013), with the result that the Minister can scrutinize past transactions.

This ministerial discretion in respect of transactions involving SOEs is similar to that which the Minister of Heritage already possesses for transactions affecting Canada’s cultural industries.  This change may have the effect of increasing deal uncertainty where SOEs (and/or other parties) are involved.

Extensions to National Security Reviews

The amendments also implement last December’s announcement that the Federal Cabinet will be given greater flexibility to extend the process for a national security review, currently a review period of up to 135 days.  The full impact of these amendments on transaction timing will not be known until the necessary regulations are enacted.


The timing of the regulations, which are expected to clarify the meaning of “enterprise value” for the purpose of the threshold for review and the impact of the amendments on the timing of national security reviews, is unknown, but is likely to be early this summer.

We will continue to update developments in this important area of the law.

For further information, please contact any member of our M&A, Corporate Securities or Competition Law Groups.


1 www.goodmans.ca/Doc/Canada_Approves_2_Significant_SOE_Bids_but_Signals_Tougher_Measures_for_Reviewing_Future_Investments_by_Foreign_SOEs.

2  The takeover of Nexen Inc. by CNOOC Limited, and of Progress Energy Resources by Petronas International Corporation Ltd.