Heightened national security reviews could limit pool of potential future acquirors
Businesses currently retooling their operations to manufacture healthcare supplies may be subject to greater scrutiny in future foreign investment and face limitations in potential buyers in future acquisitions – especially if those buyers are from China, say lawyers.
“The government might say, we're not comfortable with the business being acquired by non-Canadians,” says Shawn Neylan, partner in Stikeman Elliott LLP’s competition and foreign investment group. “Or it might say, more specifically, we're not comfortable with the business being acquired by a particular non-Canadian, from a particular jurisdiction. And in that way, the company may have less access to foreign capital than would otherwise be the case.”
As the COVID-19 pandemic leads to a fall in valuations for Canadian business, the government is concerned about opportunistic investment and the impact it could have on its ability to respond to future crises. Innovation, Science and Economic Development Canada has announced “certain foreign investments” will be given “enhanced scrutiny” under the Investment Canada Act. Though the government maintains it will continue to examine each investment on its own merits, those foreign direct investments in businesses related to public health or the supply of critical goods and services to Canadians or government will be given special attention.
“It's important that everybody understand that they're entering into this new area of potential reviewability of what they might do in the future, if they respond to the government's call to help out,” says Marc Barbeau, M&A lawyer and chair of Stikeman Elliott.
The government will also be looking hard at investments from state-owned enterprises and private investors closely tied to foreign governments. Those investments could be for non-economic purposes and intended to harm Canada’s economic or national security interests and the enhanced scrutiny will apply “until the economy recovers from the effects of the COVID-19 pandemic,” said the government.
There are two types of foreign investment reviews in the Investment Canada Act: an economic review – when the transaction exceeds certain financial thresholds – and a national security review. National security reviews are required from any foreign investment of any size and the government can block an investment, allow it with conditions and order the divestiture of an already implemented investment.
According to an essay penned by Neylan and Barbeau on April 14 – prior to the announcement from Innovation, Science and Economic Development Canada – as the government is grappling with its unpreparedness in the face of the pandemic, it will direct a renewed focus on “critical infrastructure sectors.” The ten critical infrastructure sectors are energy and utilities, finance, food, transportation, government, information and communication technology, health, water, safety, and manufacturing. They write that there will be greater emphasis on preparedness in healthcare and more interest in the importance of facilitating oil exports because of the decimation of the energy sector. Post-COVID, government policy will be directed toward food self-sufficiency, transportation infrastructure and a resurgence of domestic manufacturing, write Neylan and Barbeau.
“There will be a keen focus on supply of personal protective equipment. The government's just not going to get caught out on that again,” says Neylan.