Updated guidelines on Canada’s national security review bring clarity

Revisions name areas of scrutiny, will inform investors about transactions that may raise concerns

Updated guidelines on Canada’s national security review bring clarity
Canada’s infrastructure matters to Canadians in a way they may not have realized, says Andrew House.

On Mar. 24 the federal government issued a significant update to guidelines for national security-based government reviews of investments — the first update since the guidelines were issued in 2016.

The Guidelines on the National Security Review of Investments, issued under section 38 of the Investment Canada Act, broadens the government’s role in vetting investments in sensitive sectors such as aerospace, biotech, intellectual property, and critical minerals. The guidelines also now include greater protection of Canadians’ sensitive personal data, including health, biometric, financial, communications, and geolocation data.

The updated guidelines respond to widely expressed concerns about security of personal information and the vulnerability of Canadian intellectual property, says Andrew House, co-leader of the National Security Group at Fasken Martineau DuMoulin LLP. They also underpin the growing importance of critical minerals to Canada’s geopolitical positioning, and to supply-chain concerns in a pandemic era.

As well, sensitive areas of technology that are understood to be of concern to Canada have been expressly listed in the update.

The revised guidelines “don’t in practice change the degree of scrutiny that an investor will face,” says Joshua Krane, a competition law partner at McMillan LLP in Toronto. But since the revisions reflect the government’s recent experience in reviewing transactions on national security grounds, the updated guidelines are “quite helpful” in informing the business community about the types of transactions that could raise security concerns.

Several transactions in the past few years have been blocked on national security grounds, “and those transactions would have raised issues reflected in these guidelines,” he notes.

“I think the government has been reluctant in the past to have detailed discussions on matters that touch on national security, for very obvious and legitimate reasons,” House told Canadian Lawyer; “many of the implications of that discussion are secret of necessity.”

At the same time, there is a desire for certainty in investment.

“Foreign direct investment will necessarily be part of the [post-pandemic] recovery strategy for Canada,” he adds. “What's needed in return is more certainty for investors, and I think the government has taken a step in the right direction in this edition of the guidelines.”

The updated guidelines expand the list of factors the government would consider during the national security review process for foreign investment in Canada. They include:

The potential effects of the investment on Canada's defence capabilities and interests, including the defence industrial base and defence establishments;

Potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada, including consideration of whether the investment provides access to information not in the public domain related to the research, design or manufacture of sensitive technologies. These sensitive technology areas include those that have military, intelligence or dual military/civilian applications, and include several fields: Advanced Materials and Manufacturing; Advanced Ocean Technologies; Advanced Sensing and Surveillance; Advanced Weapons; Aerospace; Artificial Intelligence (AI); Biotechnology; Energy Generation, Storage and Transmission; Medical Technology; Neurotechnology and Human-Machine Integration; Next Generation Computing and Digital Infrastructure; Position, Navigation and Timing (PNT); Quantum Science; Robotics and Autonomous Systems; and Space Technology.

Potential impact of the investment on critical minerals (Critical Minerals List) and critical mineral supply chains.

Potential of the investment to enable access to sensitive personal data that could be used to harm Canadian national security through its exploitation, including: personally identifiable health or genetic (e.g., health conditions or genetic test results); biometric (e.g., fingerprints); financial (e.g., confidential account information, including expenditures and debt); communications data; geolocation; or, personal data concerning government officials; including members of the military or intelligence community.

Potential impact of the investment on the security of Canada's critical infrastructure, meaning “processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government.”

In 2020, for the first time, “national security became understood as being about critical infrastructure” because of the COVID-19 pandemic, says House, who previously served as chief of staff to successive ministers of Public Safety & Emergency Preparedness. Before that, voices raised in concern “weren't clearly heard or heeded, until the pandemic set in; and then suddenly, national security went well beyond terrorism and espionage and became about basic survival, and the people, products and processes that sustain and safeguard life in Canada.”

This has profound implications for M&A, and supply chains of needed goods to Canada, he adds. “Suddenly, in 2020, grocers, truckers and farmers, are players in national security.” Pharmaceuticals, life-saving medications, and textiles used to make personal protective equipment are now matters of national security, he says. “The percentage of acquisitions impacted by national security considerations has just grown exponentially.”

Canada in the past has been guilty of skating to where puck has been rather than where it’s going, House adds. “COVID-19 has been a really sharp wakeup call to think about the future,” whether  that’s the national emergency stockpile of medical supplies, domestic vaccine production, or the strength of our food supply. “Any of these things, if they fail, have really profound implications for all Canadians; and that brings the M&A business right down to the local level,” including who owns grocery and pharmacy chains, he says, noting former U.S. President Donald Trump’s threat to block shipment of medical-grade masks to Canada last April.

“These things matter to Canadians in a way that maybe they didn't realize previously.”

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