A recent Globe and Mail article reported on comments made by Richard Fadden, a former head CSIS, who suggested that the planned takeover of a Canadian mining company, TMAC Resources, by the Shandong Gold Mining Corporation, a Chinese State-Owned Enterprise (SOE), could pose risks to Canada’s national security. This deal is one of the first that will be processed though Canada’s new COVID-19 related Foreign Investment Review process, though this review process will be different than the one Mr. Fadden suggests is in order. Here, it would be worthwhile to clarify the differences between different foreign investment review processes, namely, a national security review like Mr. Fadden proposes and the net-benefit reviews that are governed by the Investment Canada Act (ICA) and how the Shandong Gold – TMAC deal is presently slated to be processed.
The Investment Canada Act serves to regulate foreign direct investment in Canada in part by mandating net-benefit reviews, meant to determine whether a given transaction would be in Canada’s economic interest. According to section 14.1 subsection 1.1-2 of the ICA, a deal qualifying for net-benefit review usually involves a foreign investor obtaining control of a Canadian company and the transaction value meeting or exceeding a specified threshold; different thresholds and specifications apply to SOE and non-SOE investors.
The Minister of Innovation, Science, and Industry is also afforded broad powers to declare an entity to be an SOE and to declare an otherwise non-reviewable acquisition by an SOE to be subject to review. This amendment was introduced in bill C-60 in 2013, and it means that if the Minister determines that an investor is an SOE and it is acquiring control of a Canadian business, then the applicable review threshold is the lower SOE-specific threshold and not the significantly higher threshold for non-SOE investments. The review threshold for non-SOE investors is over CA$1 billion, more than double that for SOE investors. While This gives Canada a rules-based framework for regulating foreign investment and a flexibility within that framework to be exercised at the Minister’s discretion.
Under the new Policy Statement on Foreign Investment Review and COVID-19, minimum thresholds for net-benefit reviews have been removed for SOE acquirers in response to the fear that Canadian businesses may be undervalued amid the COVID-19 related economic slowdown and thus be vulnerable to predatory or non-commercially motivated investment. The review threshold in 2020 under the ICA is $428 million, considerably higher than the $207.4 million Shandong Gold Mining Co. intends to pay for TMAC Resources Inc. Therefore, under the regime that has been in place since 2013, the TMAC Resources acquisition would only be subject to review at the discretion of the Minister. Under the newly updated foreign Investment guidelines published in March of 2020, however, all deals involving SOEs are subjected to “enhanced scrutiny under the Act. [Which] may involve the Minister requesting additional information or extensions of timelines for review as authorized by the ICA, in order to ensure that the Government can fully assess these investments.” Therefore, in the case of TMAC, it is likely the deal would not be reviewed under the existing ICA net benefit review process but that it will be subject to review under the new, COVID-related, regulations. This is because, as stated in the Globe and Mail article, TMAC is suffering a depressed valuation which is one of the key points of vulnerability that the new regulations aim to address. The Globe and Mail article seems to call for a national security review above and beyond the net benefit review on the grounds that TMAC occupies a strategically important position in the mining industry. A national security review has not yet been announced and thus it remains at the Minister’s discretion to determine whether or not to have the transaction reviewed for security considerations.
Unlike net-benefit reviews, national security reviews are never automatically triggered by a review threshold or other specifications, instead, it is the responsibility of the Minister of Innovation, Science and Industry to initiate a review of any deal seen to infringe on national security that relates to: “(1) the establishment of a new Canadian business or an entity carrying on operations in Canada; (2) acquisitions of control of a Canadian business of any dollar value; (3) and acquisitions of all or part of an entity carrying on operations in Canada.”
As of yet, the government has made no indication that they will initiate a national security review of Shandong Gold’s acquisition of TMAC Resources. However, analysis of the Canadian Foreign Investment Review Annual Report by the Davies Ward Phillips & Vineberg law firm does highlight a shift in emphasis towards national security concerns this year. Their analysis points out that attention to national security has shifted from its historic “bread and butter” of infrastructure, technology, and telecom, to a more diverse portfolio of a variety of industries “including hardware manufacturing as well as “credit intermediation” and online shopping.” Oil and gas have also been subject to some of the most protectionist reactions from the Canadian government, though as of yet the same cannot be said for the mining sector. This is one reason why some may see Richard Fadden’s call for a security review of the TMAC acquisition as warranted.