China Minmetals Corp. surprised Canadian officials in fall 2004 when it made a $6 billion bid for Noranda Inc., one of Canada's largest mining companies. Needless to say, the prospect of Communist control of a flagship Canadian company met with widespread public disfavor. Noranda eventually merged in June 2005 with another Canadian mining giant, Falconbridge Ltd. That killed the China Minmetals deal, but not the public furor.

The governing party couldn't help but notice.

“The Liberals saw an opportunity to take advantage of public concern over the Noranda affair,” says Dany Assaf, co-chair of Ogilvy Renault's competition practice.

On June 20, David Emerson, the federal industry minister, introduced Bill C-59 to amend the Investment Canada Act (ICA). The amendments would allow the Cabinet of Canada–the executive committee of the Canadian government–to review any foreign investment that “could be injurious to national security.”

While Emerson insisted that the amendments reflect “an update of our security system, not a change in our investment policy,” critics complain that the broad ambit of the new legislation smacks more of protectionism than protection.

“At best, the bill introduces a significant wildcard into the calculation of completion risk by foreign investors,” says Deborah Salzberger, an associate in Stikeman Elliott's competition law group in Toronto. “At worst it presents a potential forum for politically motivated protectionism.”

The amendment raises the prospect that any foreign investment in Canada could be subject to the government's review. And that means U.S. companies, by far the largest foreign investors in Canada, may face significant hurdles in their Canadian operations if the bill passes. It's a situation for which they are for the most part unprepared.

The Old Law

Parliament passed ICA in 1985. It allowed the government to review certain foreign investments to determine whether they provided a “net benefit” to Canada.

The Act's scope was narrow. It authorized the minister of Canadian heritage to review all investments in “cultural businesses” such as publishing and broadcasting. And the minister of industry could review investments in certain sensitive industries, such as transportation, uranium production and some financial services if the transaction's value exceeded $4 million on a direct acquisition (where a foreign company purchased a Canadian asset) and $41 million on an indirect acquisition (where a foreign company used a Canadian subsidiary to invest).

The ICA spelled out clearly what transactions fell under these two headings. If the transaction did not fit either category, the minister could review them only if they were “direct” and only if their value exceeded $200 million.

“ICA is predictable and easy to apply, so it's not usually a problem to advise whether a transaction is reviewable,” says Jeff Thomas, national leader of Borden Ladner Gervais' international trade law practice group.

In fact, most transactions aren't reviewable under the ICA as it stands: the ministries involved have reviewed an average of only 40 of the hundreds of foreign investments made in Canada each year.

And while “net benefit” is arguably an imprecise standard for deciding whether reviewable transactions should be allowed to proceed, the ICA provides the criteria on which the ministers must base their assessment.

In any event, foreign investors have a high success rate when the government reviews their transactions. “Virtually every investment that is reviewed that does not fall under the ambit of 'cultural' or 'sensitive' gets through,” says Henry S. Brown, chair of the government services group at Gowling Lafleur Henderson.

The proposed amendments change the situation dramatically.

The New Law

“Bill C-59 scraps the predictability of the investment-review regime,” Thomas says.

To begin with, it is uncertain which investments the amendments will affect. They don't define “national security” or provide guidance regarding what kind of investments might impact national security.

“Bill C-59 significantly broadens the government's ability to review and potentially block a host of foreign investments that may have historically been beyond its jurisdiction,” Salzberger says.

And unlike the ICA, which offers criteria for determining whether there is a “net benefit,” Bill C-59 offers no basis for determining whether a reviewed transaction will be allowed to proceed or what the conditions that the minister might attach.

This leaves room for a lot of speculation about what transactions will come under the expanded right of review. According to Brown, the Canadian government could review an American investor's purchase of a home with a view of Toronto's international airport.

More significantly, American companies anxious for a stake in Canadian resource companies may now find that energy is a matter of national security–much as opponents of the Chinese purchase of Noranda suggest it is.

“By way of contrast, a lot of energy assets moved south in the pre-Enron period, and with virtually no opposition,” Brown says.

Similarly, foreign health-service providers seeking a share of the expanding private healthcare market in Canada may find the government poised to review their acquisition of private clinics with state-of-the art technology or pharmaceutical companies that manufacture drugs in short supply.

“There are a lot of people–including politicians–who would tell you that control of MRI machines and influenza vaccines is a matter of national security,” Brown says. “Under the current wording of Bill C-59, national security can be writ as large as the government wants it to be.”

Indeed, Bill C-59 is so broad that it has the potential to become a strategic weapon in hostile takeover battles. “I can see target Canadian companies using the legislation as a takeover defense,” says Peter Franklyn, chair of the competition and antitrust group at Osler, Hoskin & Harcourt.

And finally, critics say, Bill C-59 turns the current clear, apolitical investment-review system into a nebulous political instrument.

“Lobbyists will proliferate if Bill C-59 goes through,” Brown says. “There's no question that NGOs such as labor unions and the Council of Canadians [an influential citizens group] will pressure the government to review transactions that really have nothing to do with real national security issues like terrorism.”

Fortunately, Bill C-59 is only in its first reading (legislation must have three “readings” in Parliament before it becomes law) and it's uncertain whether or in what form it will pass.

Liberal Leanings

It's important to remember that Bill C-59 is the creation of a minority Liberal government. Even with the support of the leftist New Democratic Party (NDP), the Liberals fall just short of a majority in the House of Commons, which means Bill C-59 is not guaranteed to pass.

On the other hand, the government needs NDP support to survive–which comes with a price. Earlier this year, the NDP forced the government to rescind tax cuts promised in its budget. It also forced the government to direct the extra revenue derived from maintaining tax levels to social programs. Similarly, it could use its muscle to force Bill C-59 through the House.

Still, the Liberals have promised to bring the bill to a vote early in 2006. The groundswell of opposition to Bill C-59 could prolong the parliamentary process.

“Frankly, I don't see how the controversy will be resolved by December,” Assaf says. “A lot of people will want to comment.”

Still, Assaf cautions that the legislation will ultimately pass in some form.

“After all, how strong an argument can you make against scrutiny of takeovers that truly threaten national security?” he asks.

China Minmetals Corp. surprised Canadian officials in fall 2004 when it made a $6 billion bid for Noranda Inc., one of Canada's largest mining companies. Needless to say, the prospect of Communist control of a flagship Canadian company met with widespread public disfavor. Noranda eventually merged in June 2005 with another Canadian mining giant, Falconbridge Ltd. That killed the China Minmetals deal, but not the public furor.

The governing party couldn't help but notice.

“The Liberals saw an opportunity to take advantage of public concern over the Noranda affair,” says Dany Assaf, co-chair of Ogilvy Renault's competition practice.

On June 20, David Emerson, the federal industry minister, introduced Bill C-59 to amend the Investment Canada Act (ICA). The amendments would allow the Cabinet of Canada–the executive committee of the Canadian government–to review any foreign investment that “could be injurious to national security.”

While Emerson insisted that the amendments reflect “an update of our security system, not a change in our investment policy,” critics complain that the broad ambit of the new legislation smacks more of protectionism than protection.

“At best, the bill introduces a significant wildcard into the calculation of completion risk by foreign investors,” says Deborah Salzberger, an associate in Stikeman Elliott's competition law group in Toronto. “At worst it presents a potential forum for politically motivated protectionism.”

The amendment raises the prospect that any foreign investment in Canada could be subject to the government's review. And that means U.S. companies, by far the largest foreign investors in Canada, may face significant hurdles in their Canadian operations if the bill passes. It's a situation for which they are for the most part unprepared.

The Old Law

Parliament passed ICA in 1985. It allowed the government to review certain foreign investments to determine whether they provided a “net benefit” to Canada.

The Act's scope was narrow. It authorized the minister of Canadian heritage to review all investments in “cultural businesses” such as publishing and broadcasting. And the minister of industry could review investments in certain sensitive industries, such as transportation, uranium production and some financial services if the transaction's value exceeded $4 million on a direct acquisition (where a foreign company purchased a Canadian asset) and $41 million on an indirect acquisition (where a foreign company used a Canadian subsidiary to invest).

The ICA spelled out clearly what transactions fell under these two headings. If the transaction did not fit either category, the minister could review them only if they were “direct” and only if their value exceeded $200 million.

“ICA is predictable and easy to apply, so it's not usually a problem to advise whether a transaction is reviewable,” says Jeff Thomas, national leader of Borden Ladner Gervais' international trade law practice group.

In fact, most transactions aren't reviewable under the ICA as it stands: the ministries involved have reviewed an average of only 40 of the hundreds of foreign investments made in Canada each year.

And while “net benefit” is arguably an imprecise standard for deciding whether reviewable transactions should be allowed to proceed, the ICA provides the criteria on which the ministers must base their assessment.

In any event, foreign investors have a high success rate when the government reviews their transactions. “Virtually every investment that is reviewed that does not fall under the ambit of 'cultural' or 'sensitive' gets through,” says Henry S. Brown, chair of the government services group at Gowling Lafleur Henderson.

The proposed amendments change the situation dramatically.

The New Law

“Bill C-59 scraps the predictability of the investment-review regime,” Thomas says.

To begin with, it is uncertain which investments the amendments will affect. They don't define “national security” or provide guidance regarding what kind of investments might impact national security.

“Bill C-59 significantly broadens the government's ability to review and potentially block a host of foreign investments that may have historically been beyond its jurisdiction,” Salzberger says.

And unlike the ICA, which offers criteria for determining whether there is a “net benefit,” Bill C-59 offers no basis for determining whether a reviewed transaction will be allowed to proceed or what the conditions that the minister might attach.

This leaves room for a lot of speculation about what transactions will come under the expanded right of review. According to Brown, the Canadian government could review an American investor's purchase of a home with a view of Toronto's international airport.

More significantly, American companies anxious for a stake in Canadian resource companies may now find that energy is a matter of national security–much as opponents of the Chinese purchase of Noranda suggest it is.

“By way of contrast, a lot of energy assets moved south in the pre-Enron period, and with virtually no opposition,” Brown says.

Similarly, foreign health-service providers seeking a share of the expanding private healthcare market in Canada may find the government poised to review their acquisition of private clinics with state-of-the art technology or pharmaceutical companies that manufacture drugs in short supply.

“There are a lot of people–including politicians–who would tell you that control of MRI machines and influenza vaccines is a matter of national security,” Brown says. “Under the current wording of Bill C-59, national security can be writ as large as the government wants it to be.”

Indeed, Bill C-59 is so broad that it has the potential to become a strategic weapon in hostile takeover battles. “I can see target Canadian companies using the legislation as a takeover defense,” says Peter Franklyn, chair of the competition and antitrust group at Osler, Hoskin & Harcourt.

And finally, critics say, Bill C-59 turns the current clear, apolitical investment-review system into a nebulous political instrument.

“Lobbyists will proliferate if Bill C-59 goes through,” Brown says. “There's no question that NGOs such as labor unions and the Council of Canadians [an influential citizens group] will pressure the government to review transactions that really have nothing to do with real national security issues like terrorism.”

Fortunately, Bill C-59 is only in its first reading (legislation must have three “readings” in Parliament before it becomes law) and it's uncertain whether or in what form it will pass.

Liberal Leanings

It's important to remember that Bill C-59 is the creation of a minority Liberal government. Even with the support of the leftist New Democratic Party (NDP), the Liberals fall just short of a majority in the House of Commons, which means Bill C-59 is not guaranteed to pass.

On the other hand, the government needs NDP support to survive–which comes with a price. Earlier this year, the NDP forced the government to rescind tax cuts promised in its budget. It also forced the government to direct the extra revenue derived from maintaining tax levels to social programs. Similarly, it could use its muscle to force Bill C-59 through the House.

Still, the Liberals have promised to bring the bill to a vote early in 2006. The groundswell of opposition to Bill C-59 could prolong the parliamentary process.

“Frankly, I don't see how the controversy will be resolved by December,” Assaf says. “A lot of people will want to comment.”

Still, Assaf cautions that the legislation will ultimately pass in some form.

“After all, how strong an argument can you make against scrutiny of takeovers that truly threaten national security?” he asks.