The Canadian government, concerned about the impact of
COVID-19 on corporate valuations, has issued guidance that it will
pay particular attention to foreign direct investments of any value
(meaning, even investments that are not subject to review under the
Investment Canada Act (the “ICA”)). The
government’s announcement does not amend the ICA, nor any
thresholds for review. But it does issue a warning that the
government intends to use the tools it has to review investments,
including the national security review provisions under the
ICA.
While the enhanced scrutiny is to apply to any acquisition
of an interest in a Canadian business involved in public health or
the supply of critical goods and services to Canadians or to the
Government of Canada, all foreign investments by state-owned
investors, regardless of value, or private investors assessed as
being closed tied to or subject to direction from foreign
governments, are also considered targets for such
review.
One can expect that Canadian companies involved in
manufacturing needed supplies to address COVID-19 healthcare
requirements (for example manufacturers of personal protective
equipment), or companies involved in vaccine research or other
health technology would be of particular concern. As to
critical goods and services, we can look to the Government’s
own Guidance on Essential Services and Functions in Canada during
the COVID-19 pandemic for assistance. In that guidance, the
Government cites energy and utilities, information and
communication technologies, finance, health, food, water,
transportation, safety and manufacturing.
The first real test, however, of the Government’s
application of its enhanced review will be a gold miner, TMAC
Resources Inc., which operates the Doris gold mine in Nunavut’s
Hope Bay. In a deal announced two weeks ago, China’s
Shangdong Gold Mining Co. Ltd. will pay just over C$207 million for
TMAC, which has been struggling financially. TMAC is listed
on the Toronto Stock Exchange and has lost significant value since
its IPO. Control and the majority equity interest in Shandong
is owned by the Chinese Government. Whether Shandong can
establish that the acquisition is of net benefit to Canada, and
particularly so with such declared enhanced scrutiny, remains to be
seen. There has been certain concern expressed by the
security community in Canada about Beijing’s control over
critical metals and minerals. Gold is, in volatile financial
circumstances, a safe haven investment.
As a general caution, foreign buyers should consider the
guidance from the Canadian government on the ICA. Foreign
investment is still recognized as beneficial with a compelling case
for the transaction. But at the least, potential acquirors
should be alive to the potential for a greater degree of review,
and should consider the time-frame for review and when to submit an
application for review, including a pre-closing notification under
the ICA.
Originally published May 25, 2020
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