2020 has redefined the Canadian legal and business landscape.
Many of the Canadian governmental public health measures created to
limit the spread of COVID-19 have disrupted several areas of
business and investment. Companies investing in Canada will need to
consider the potential implications of the following trends:
- A tightening of Canada’s foreign investment approval
processes;
- An updated approach to dispute resolution; and
- An increased focus on companies’ environmental and social
governance responsibilities
Securing foreign investment
Canada has traditionally prided itself on being an open trading
economy; foreign investment and international trade have always
been determining factors in the health of the Canadian business
economy. Having said that, Canada was one of the first
jurisdictions to establish a formal foreign investment review
process, now contained in the Investment Canada Act (ICA)
and so has had considerable experience in the regulation of FDI
compared to other jurisdictions such as the EU and UK, which have
more recently instituted screening of certain types of foreign
investments. Foreign investors must now grapple with new barriers
to entry due to increasingly stringent governmental approval
mechanisms, consequently pushing them to become progressively more
agile in deal planning and execution.
The global shift towards protectionism in major parts of the
global economy in recent years has been exacerbated by the current
health crisis resulting in uncertain foreign investment
opportunities. As in many countries, the extraordinary
circumstances around COVID-19 led to fears (substantiated or not)
that Canada’s financial markets and economy were exposed to
opportunistic acquisitions of sensitive Canadian targets.
Accordingly, on April 18, 2020, the Ministry of Innovation,
Science and Industry issued a policy statement indicating that
certain foreign investments (primarily but not exclusively those
involving state influenced or owned investors) that fall under ICA
would be subject to enhanced scrutiny in the aims of supporting
Canada’s economy during and after the pandemic: “the
Government will also subject all foreign investments by state-owned
investors, regardless of their value, or private investors assessed
as being closely tied to or subject to direction from foreign
governments, to enhanced scrutiny under the Act”.1
For instance, there are more significant concerns around Chinese
foreign direct investment, which have taken on broader geopolitical
dimensions. In addition, the federal government also enhanced
its scrutiny of foreign acquisitions of Canadian businesses engaged
in the supply of critical goods and services to Canadians or in
activities related to public health. This was in addition to
its already broad powers under the national security review
provisions of the ICA.
Onshoring and supply chain diversification have accelerated in
2020, and are expected to be longer term trends over the next few
years. The intensification of trade protectionism worldwide has
increased, seen in the number of trade remedy disputes (i.e.
anti-dumping, anti-subsidizing disputes). Canada falls in line with
this trend, having increased its use of trade remedy measures and
making legislative and policy changes to favour their effectiveness
and enforcement. As a party to the newly enacted USMCA, Canada now
has a functioning state-to-state dispute settlement mechanism, a
key change from the former NAFTA.
The issue for each jurisdiction is to determine the value and
effect of each new economic endeavour on protected business
sectors. Canada remains open to investments that benefit Canadians
while taking the necessary measures to help protect its national
security and its economic integrity.
Foreign investment, industries and regions on the rise in
2021
Investment from the United States, Canada’s strongest
trading partner, will continue to grow in 2021. There will also be
opportunities in the European market through Canadian trade
agreements, now largely in place across the continent. In the
aftermath of Brexit, The U.K. will be looking to secure
international trade agreements as well, making Canada a natural
trade and investment partner moving forward.
Canada has been gaining recognition as a growing foreign
investment destination for technology by successfully creating
industry city hubs in areas such as R&D, AI and biotech.
However, these same industries pose potential national security
concerns. Foreign investors will have to look at these
considerations if they are looking to engage within the Canadian
market.
COVID-19 has accelerated changes in consumer behaviour by
encouraging virtual shopping. Companies that have aligned
themselves with these trends in the digital economy will do well in
2021. For example, Shopify’s online merchant platform offering
overtook the Royal Bank of Canada to become
Canada’s most valuable public company, signalling
substantial growth in this area.
Canada’s largest financial institutions are rapidly
expanding their online digital capabilities and their use of
artificial intelligence including buying or partnering with smaller
successful Canadian or foreign technology developers. New fintech
companies have had tremendous success and growth in 2020 with
strong user-friendly online financial services offerings anchored
in a robust digital marketing strategy. This trend will surely
continue in 2021.
Finally, the cannabis industry is an interesting area to watch
as a potential comeback story in 2021. It has been a tough time for
the industry over the past year, but legalizing cannabis in Canada
allowed the country to emerge as a global player by building a
strong base of expertise in this sector. The opportunity for
cross-border activity with the U.S. has also presented itself
through favorable voting related to de-criminalization of cannabis,
in the recent U.S. elections.
ESG practices as a prerequisite to doing business in
Canada
Investors interested in Canadian business right now must be
cognizant of environmental social governance (ESG), and ESG-related
issues, as they are becoming important focal points to access
Canadian capital. Large institutional investors that have
established ESG criteria as an important prerequisite to investment
are driving this trend. ESG will be a critical issue to consider
for any business looking to raise capital in Canada. To demonstrate
how important this has become in the Canadian economy, Brookfield,
one of Canada’s largest real estate infrastructure asset
managers, recently appointed Mark Carney, former governor of the
Bank of England and the Bank Canada, as its Vice Chair and Head of
Impact Fund Investing. We have also recently seen an important
increase in large green bond offerings by some of the large major
banks. Both examples are clear signs of the importance of ESG for
business in Canada moving forward.
Improved disputes environment and future implications
Canadian courts have been relatively resilient in their response
to the pandemic following an initial period of uncertainty in early
March. Most courts pivoted operations to virtual hearings within a
matter of weeks to ensure a seamless continuation of services. If
faced with litigation in Canada, companies can be assured that
Canadian courts are open for business, albeit with some limitations
on efficiency and operations. Some courts, such as the Commercial
Court in Toronto, and all arbitration venues, were able to course
correct rapidly. They determined early on that commercial courts
and arbitration venues could not simply close, as parties with
important business disputes would continue to require adjudication
and resolution to ensure business continuity and limit business
disruption during this uncertain time. Recognizing that business
will continue to require dispute resolution services, the courts
adopted new virtual procedures for court hearings. Virtual hearings
are now available for chambers appointments, motions, applications,
trials and appeals, in most provinces. Parties are able to file
court materials electronically and counsel can appear before the
courts through virtual platforms such as Zoom.
The pandemic has, in some ways, reduced the time that counsel
spend waiting for court hearings, and also enabled parties across
the country to participate in proceedings without incurring the
costs of travel. These changes have improved the efficiency of the
court process and improved access to justice. Recognizing the
improvements made, a number of Canadian chief justices have stated
that many of these changes will remain in place moving forward.
Key considerations for businesses to adapt and prepare for the
evolving Canadian landscape
The impact of the pandemic on business has not been entirely
negative; some sectors have experienced unprecedented growth.
Although there is a degree of commercial activity that continues to
take place, namely big ticket M&A, the reality is that the
pandemic along with regulatory requirements have made the
investment climate particularly tricky. Although transactions will
continue to happen virtually, they will be unpredictable in the
near future. Nonetheless, the ability to engage in virtual dispute
resolution will be indispensable in dealing with the quickly
changing foreign investment landscape in Canada. It is critical for
foreign investors to get a handle on the regulatory and business
landscape in their initial planning and to be prudent with business
advice when considering how to approach potential investments into
Canada.
Source: – Government, Public Sector – Canada – Mondaq News Alerts
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