Canada's new foreign investment scrutiny a risk for M&A in key sectors

© Reuters. FILE PHOTO: Canada’s Minister of Innovation, Science and Industry Francois-Philippe Champagne speaks during Question Period in the House of Commons on Parliament Hill in Ottawa, Ontario, Canada April 25, 2022. REUTERS/Blair Gable/File Photo

By Divya Rajagopal and Steve Scherer

TORONTO (Reuters) - Canadian financial dealmakers are raising the alarm about Ottawa's proposal to more closely scrutinize national security implications of foreign acquisitions of Canadian companies, warning that such interventions could deter foreign investments and slow impending deals in critical sectors.

Last week, Canada announced its biggest overhaul in more than a decade to Investment Canada Act, allowing the government to impose interim conditions to prevent buyers from accessing trade secrets, and to block investments that could compromise national security.

Lawyers and industry associations say such conditions could delay and add to the cost of dealmaking.

"There is a concern on how the proposed amendments affect timing of an acquisition," said Sandy Walker, co-Chair of Competition and Foreign Investment Review group at law firm Dentons. "In some instances, there may be commercial or financial imperatives that require a transaction to close quickly."

Canada added national security review to ICA in 2009 and since then only five out of the 87 deals were blocked outright, according to industry ministry annual reports. It is applied to 15 industries, ranging from mining, advanced materials and manufacturing to space technology, but the list is expected to be expanded next year, a government source told Reuters.

The increased scrutiny comes just as Canada's large deposits of critical minerals needed for green transition are in hot demand.

"The level of investment you're going to see is going to be unprecedented in the country," Industry Minister Francois-Philippe Champagne told reporters on Wednesday when asked whether the new rules would inhibit investment.

Referring specifically to critical minerals, Champagne said allies "understand we take national security, economic security very seriously, and we're going to protect our critical minerals because, as you know, these critical minerals will power the economy of the 21st century."

DELISTING RISKS

Still, some M&A lawyers say the national security reviews can be invoked for companies that are registered in Canada but do not have physical operations in the country.

An example is that Canada ordered three Chinese investors to divest their investments in Canadian lithium companies in November. Some of these Canadian companies listed on the Toronto Stock Exchange do not run lithium mines in Canada, but abroad. The move is seen as the precursor to what could come under the amended ICA, lawyers argue.

"The jurisdictional threshold for a national security review is fairly low in that it appears to require very little connection to Canada," said Huy Do, Co leader of the Competition, Marketing & Foreign Investment Group of law firm Fasken.

That could encourage some companies to seek delisting from Canada's main stock exchanges.

"We are hearing arguments that some companies might want to de-list from the Toronto Stock Exchange and re-domicile in other jurisdictions," said a lawyer from a Toronto based law firm who did not want to be quoted as the discussions are still private.

A TSX spokesperson declined to comment what individual issuers may do, but said it encourages the government to find ways to "supplement investment" in critical minerals and "make up for the potential shortfalls generated by these types of policy decisions."

Pierre Gratton, President and CEO of the Mining Association of Canada, said while the industry is concerned about missing out on needed investments to explore for new mines, "we're also not blind to the geopolitical environment in which we're living."

In the last year, the number of applications under review for foreign investments in mining, oil and gas, agriculture, forestry, fishing - dropped 11% to 37, according to industry ministry.

"So as long as what's being cut off is replaced, we'll be okay, Gratton added.