Canada promises to toughen up scrutiny of foreign investment, citing national security fears

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The Canadian government is proposing to toughen scrutiny of foreign takeovers, citing national security concerns, just weeks after its new Indo-Pacific policy identified China as an “increasingly disruptive” power.

“The world has vastly changed in the last few years,” Innovation Minister François-Philippe Champagne said as he unveiled a package of changes to the Investment Canada Act that he said represented the most significant update in more than a decade. “That’s why we must be prepared to face the challenges that could endanger our economic security and national security.”

China is not mentioned by name – and the government insists the rules apply equally to all countries – but the changes are geared toward stopping the transfer of intellectual property or trade secrets to foreign countries.

“Geopolitics has changed and we need to change as well. I think what we’re doing today is sending a signal,” Mr. Champagne said. “It sends a signal across town that we need to be more vigilant.”

Under changes tabled in the Commons, foreign investors hoping to buy controlling or partial acquisitions in Canadian companies that operate in sensitive sectors will be required to give Ottawa early notification of their intent to buy the asset, the government said. Right now a company can wait until 30 days after an investment has closed to inform Ottawa.

This change is intended to prevent any transfer of intellectual property or trade secrets before the government has ruled on the takeover.

“This is a way to prevent the horse from leaving the barn,” said Sandy Walker, a Dentons Canada LLP lawyer who is a specialist in the Investment Canada Act.

Ottawa hasn’t yet named all the sectors that would require “pre-implementation filing requirements,” but Mr. Champagne identified critical minerals and semiconductors, quantum computing and artificial intelligence, and companies handling personal data as some of them.

Failure to meet these early notification requirements would incur a penalty of $500,000, the government said.

He said the changes reflect a new mood in the West.

“Our Five Eyes partners, our Group of Seven partners, everyone is tightening up now,” he said.

The proposed changes would also allow the Canadian government to extend the time period for a national security review of a foreign investment. They would also hike penalties for foreign investors that run afoul of the foreign investment rules to a maximum of $25,000 a day per breach. That’s up from $10,000 a breach per day.

Another modification would allow the Innovation Minister to put conditions on any foreign investment before a national security review was finished – another effort to stop transfer of intellectual property before a deal is approved or rejected.

The measures arrive shortly after the Canadian government released a new foreign policy strategy for Asia and countries bordering the Indian Ocean that labels China as a disruptive force trying to bend the international order for its own purposes. This shift comes as Western countries grow wary of their dealings with China over its partnership with Russian President Vladimir Putin, its human-rights abuses and growing evidence of its foreign interference in other countries.

The changes would also authorize the Innovation Minister to accept binding undertakings from foreign investors – agreements to meet certain conditions, with penalties – to address and mitigate national-security risks arising from takeovers, Mr. Champagne said.

Mark Warner, a Toronto lawyer who previously worked on trade matters for the Ontario government and at the Organization for Economic Co-operation and Development in Paris, is skeptical about how much these rules will really change Ottawa’s scrutiny of foreign investment.

He said he wonders whether Canada is announcing these changes with an eye to an American audience, where the U.S. government is increasingly concerned about foreign investment threats from countries such as China.

“It reads tough but in reality I can’t see how this would have changed the outcome of any major decision in recent years,” he said.

“It’s mostly housekeeping changes that look to me like an attempt by Canada to get ahead of the process in a climate of heightened American attention to foreign investment.”

Richard Fadden, the former director of the Canadian Security Intelligence Service and former national-security adviser to prime ministers Stephen Harper and Justin Trudeau, said the changes will make the minister’s ability to conduct national-security reviews of proposed acquisitions of Canadian companies more efficient.

The minority Liberal government is expected to have enough votes to pass this legislation because of a support deal with the New Democrats.

The government said 24 foreign investments were subject to extended national-security reviews in fiscal year 2021-22. None was blocked that year.

So far in the 2022-23 fiscal year, the Canadian government ordered three divestments by Chinese state-owned companies in Canadian battery metals exploration companies.

Wesley Wark, senior fellow at the Centre for International Governance Innovation, said the changes to the act are not groundbreaking.

“This is useful tinkering, but certainly not a major overhaul of the act,” he said.

Mr. Wark said that one glaring omission is improved transparency. Currently, there is no requirement imposed on the industry minister, or governor-in-council (GiC), to provide an explanation around why certain foreign acquisitions of Canadian companies are allowed, or why some transactions are blocked.

“The whole process remains embedded in this unnecessary secrecy,” Mr. Wark said. “That’s just completely wrong and easily avoidable through legislation.”

Martin Turenne, chief executive of FPX Nickel Corp., a Vancouver-based nickel company, said he believes the recent crackdown on Chinese investment in the Canadian critical-minerals industry, and now the proposed changes in the Investment Canada Act, are the “stick” part of the carrot-and-stick approach from Ottawa.

“This is the part where we put our elbows out as a country a little bit, and declare the importance of critical minerals to our economy, and really ensure that we maintain ownership and control of how those resources are used.”

Mr. Turenne says the mining industry is now waiting for the “carrot” part of the equation to materialize. He hopes the federal government will provide financial help to small mining companies, who are finding it harder to raise capital because of the recent crackdown on inbound investment from China. Mr. Turenne says the industry would also welcome an easing in the regulatory burden on mining companies.

Ottawa said it would spell out in regulation what areas of the economy these early filing requirements would cover. In 2021, the Department of Innovation, Science and Economic Development published of a list of what it considered sensitive technology sectors for national-security reviews. It included: advanced ocean technologies, advanced sensing and surveillance, advanced weapons, aerospace, artificial intelligence, biotechnology, energy generation, storage and transmission, medical technology, neurotechnology and human-machine integration, next generation computing, position, navigation and timing, quantum science, robotics and space technology.

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