Canada restricts foreign SOE investment in critical minerals sector and supply chains

On October 28, 2022, the Government of Canada issued a new policy (the policy) on applying the Investment Canada Act (the ICA) to investments by foreign state-owned enterprises (SOEs) in Canada’s critical minerals sectors and critical minerals supply chains.¹ The policy also applies to private investors with close ties to foreign governments.

Under the policy, review applications for acquisitions of control of Canadian businesses involving critical minerals by SOEs will only be approved in exceptional cases. Further, the policy provides that SOE participation in any investment involving a Canadian business operating in a critical minerals sector or supply chain will automatically be scrutinized on national security grounds. 

The Minister of Innovation, Science and Industry (the ISED Minister) and the Minister of Natural Resources made a joint statement indicating the policy is designed to protect the critical minerals sectors from foreign SOEs.

A subsequent statement confirms that the policy has already been applied – resulting in orders requiring the divestiture of investments by foreign investors in Canadian critical minerals companies.

Overview of the Investment Canada Act

In general, any acquisition of control of a Canadian business by a non-Canadian is either notifiable or reviewable under the ICA, depending on the structure of the transaction and the value and nature of the Canadian business being acquired. With limited exceptions, the federal government must be satisfied that a reviewable transaction “is likely to be of net benefit to Canada” before the transaction can be completed. Notifiable transactions (that are not subject to a net benefit review) have to be reported to the federal government before or within 30 days of closing.

The establishment of a new Canadian business by a non-Canadian is also notifiable under the ICA.

Separate and apart from the net benefit review or notification processes, the ICA also provides that any investment in a Canadian business by a non-Canadian can be subject to a national security review, regardless of its structure or value, if the ISED Minister has reasonable grounds to believe such an investment could be injurious to national security.

Investments that are not notifiable under the ICA but that may raise national security concerns can also be voluntarily notified to the government, including the acquisition of a non-controlling interest in a Canadian business.²

Key takeaways from the new critical minerals policy

Reviewable transactions will only be approved on an exceptional basis 

The Government of Canada has previously recognized that critical minerals are integral to Canada’s future prosperity and national security. In March 2021, the government updated its Guidelines on the National Security Review of Investments, which included the critical minerals sector among the sectors that could be subject to enhanced scrutiny under the ICA’s national security review processes.³  

Under the policy, reviewable transactions involving acquisitions of control by an SOE of a Canadian business involving critical minerals, will only be approved under the ICA on an exceptional basis.⁴ A non-exhaustive list of factors that will  be examined to determine whether such a foreign investment would be of net benefit to Canada include:

• The degree to which a foreign state can exercise operational and strategic control over the Canadian business;
• The current level of competition and the risk of concentrating foreign ownership in the sector; 
• Whether the SOE respects Canadian standards and principles of corporate governance and relevant laws and business principles; and
• Whether the acquired business will continue to operate on a commercial basis (for example: where products will be exported or processed, the participation of Canadians in the operations, and the impact of the investment on productivity and industrial efficiency in Canada).

Enhanced national security scrutiny

The policy also provides that SOE participation in any investment involving a Canadian business operating in the critical minerals sector will support a finding that there are reasonable grounds to believe that the investment could be injurious to Canada’s national security, thereby triggering the ICA’s national security review process. The policy applies to any investments, whether direct or indirect, whether controlling or non-controlling, and across all stages of the value chain (e.g., exploration, development and production, resource processing and refining, etc.).

The policy, which is in addition to the enhanced scrutiny announced in March 2021, includes the following factors that could be considered on an non-exhaustive basis by the government in assessing whether a transaction involving critical minerals would be injurious to national security:

• The size, scope, and location of the Canadian business;
• The nature and strategic value to Canada of the mineral assets or supply chain;
• The degree of control or influence an SOE would likely exert on the Canadian business, the supply chain and the industry;
• The effect the transaction may have on the ability of Canadian supply chains to exploit the asset or access alternative sources; and
• The current geopolitical circumstances and potential impact on allied relations.

The geopolitical circumstances factor is broad and will likely provide the Government of Canada with significant leeway in ensuring that only liked-minded countries can invest in Canada’s critical minerals.

On November 2, 2022, the Government of Canada publicized that it had ordered the divestiture of investments by three foreign investors in Canadian critical minerals companies specialized in lithium. The orders followed the review of the investments under the national security review provisions of the ICA. At least two of the investments to be divested are in lithium mining companies headquartered in Canada but with operations primarily outside Canada. While the outcome of a national security review is highly fact-specific, it is clear that foreign investments in Canadian critical minerals companies whose assets are based outside of Canada can be blocked on national security grounds. In the related statement, the ISED Minister emphasized the government’s interest in attracting foreign direct investments from partners with similar interests and values to Canada.

The Government of Canada also released the Investment Canada Act 2021-22 Annual Report showing a record number of investment filings in the past year. In particular, notifications, which must be filed when non-Canadians establish a new Canadian business or acquire control of a Canadian business, saw a 50% increase in the fiscal year 2021-22 compared to the previous year.⁵ There has also been increasing scrutiny of transactions on national security grounds and since the introduction of the national security provisions in 2009, the Governor-In-Council has ordered 52 national security reviews with almost half of these being in the last two years.

Conclusion

The policy and the divestiture orders issued by the government are a clear message that Canada will not hesitate to protect its valuable critical minerals sector from foreign investments that threaten national security or that do not benefit Canada. Parties contemplating foreign investments in Canadian businesses involved in the critical minerals sectors and supply chains should ensure they consider the impact of this policy with experienced ICA advisors well in advance of proceeding with any proposed investment.

The authors wish to thank articling student Carl Farah for his assistance with this publication.