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Contributed by Michael Kilby and Stewart Sutcliffe, Stikeman Elliott LLP

2015 should prove to be yet another eventful year for foreign investment in Canada. We expect that the global energy slowdown, reflected in substantially reduced oil and commodity prices, may lead to distressed asset sales or possibly even opportunistic takeover attempts in the energy and resource sectors, which represent a disproportionately large proportion of Canadian industry. Businesses that were acquired during headier times may again be on the block, and divestitures, rather than acquisitions, may be an important trend to follow.

In 2015 and beyond, we expect that debates surrounding the advantages and disadvantages of foreign investment in Canada will continue, flaring up periodically whenever a high-profile transaction is announced. But while these debates sometimes create the outward impression that Canada has an ambiguous position on foreign investment, it is in fact the case that the vast majority of investments into Canada are not subject to any approval requirement at all. As for those that are subject to an approval requirement, the overwhelming majority of even this subset will continue to be approved with little fanfare.

Canada’s foreign investment review regime has been in the international spotlight in recent years, particularly in the aftermath of several high-profile transactions that generated intense policy and media debates. Most recently, in 2014, 'tax inversion' transactions involving Canadian companies first increased before then declining following a shift in U.S. tax policy. This tempered somewhat a nascent debate about the advantages and disadvantages of being a jurisdiction to which U.S. acquirers look for inversion partners. This trend culminated with the CAD12.5 billion 3G Capital / Burger King / Tim Hortons transaction, which was ultimately approved.

Previously, it was undoubtedly the large, high-profile resource transactions that captured all the attention. These transactions included, for example, CNOOC’s approved acquisition of Nexen, BHP’s rejected acquisition of Potash Corporation of Saskatchewan, Rio Tinto’s approved acquisition of Alcan, and a number of additional investments by Asian and Middle Eastern state-owned enterprises (SOEs) in the energy sector, with a focus on the oil sands. Investments by SOEs have become the source of considerable controversy, particularly as they accelerated in recent times, both in terms of number and size.

Notwithstanding these debates and controversies, it is beyond dispute that Canada remains open to foreign investment in broad terms. Indeed, only the very largest transactions – representing only a few percentage points of total deal activity – are subject to foreign investment review at all. And of the small subset of transactions that are subject to foreign investment review, only a small fraction are in any way contentious, and even a smaller fraction still have been blocked – a mere handful in total over the course of decades. Nevertheless, the perception has developed in recent years that Canada has adopted a more aggressive posture in reviewing foreign investments. While there is some merit to this view and there have been several recent developments that give credence to it (described below), our overall perspective is that Canada remains open to foreign investment, even as the source of those investments has and will continue to shift from traditional OECD countries to less traditional, emerging markets, with which Canadians are less familiar.

State-owned enterprises

In 2013, the government amended the Investment Canada Act, the primary piece of legislation governing foreign investment into Canada, to give itself broader discretion in deciding whether an SOE investment should be subject to a foreign investment review. Whereas traditional, non-SOE investors generally benefit from bright-line rules determining whether an approval is required, SOE investors are now subject to less structured tests. On its face, the definition of SOE captures companies in which foreign governments have only minority interests falling short of control, and SOEs acquiring less than control of Canadian companies may nevertheless be subject to review, which is in marked contrast to non-SOE investors. Concerns have been expressed that these less certain rules may chill foreign investment, including in the Canadian energy sector. That having been said, the fears associated with the new, toughened stance may not be justified. The fact remains that, to our knowledge, Canada has never explicitly blocked a proposed SOE investment – SOEs with substantial energy assets in Canada now include CNOOC, Sinopec, Petrochina, China Investment Corp, Petronas, Korea National Oil Company, Korea Gas Corporation, INPEX Corporation, Statoil, PTTEP, Qatar Petroleum and TAQA. They all have substantial Canadian operations. In addition, if anything, there is an argument that SOEs have over-invested in Canada in recent years and that any slowdown in SOE-related activity is attributable to the changing economic fundamentals of the energy industry and has little to do with Canadian laws.

National security – information technology and telecommunications

In 2009, the Investment Canada Act was amended to include an explicit national security test for foreign investment. In the first few years following the amendments, it was far from clear what sorts of investments the government might seek to review from a national security perspective. High-profile investments in natural resource industries were not reviewed, for example. The term 'national security' was left undefined and no written guidance was provided as to its scope, with the result that for several years the concept was poorly understood and, indeed, it is believed that the process has been triggered very rarely. In recent years, however, it has become apparent, through several proposed investments, that national security reviews are occurring with a higher degree of frequency and that a key, or perhaps the key, national security focus of the government is the telecommunications and information technology industries, defined broadly. Foreign investors into Canada in these industries should consider carefully whether their transactions may implicate national security issues, particularly if the Canadian government is an important customer or stakeholder in the industry.