Today, Prime Minister Harper announced that Canada and the European Union have entered into the Canada-European Union Comprehensive Economic and Trade Agreement (“CETA”). The goal of CETA is to eliminate tariffs, encourage foreign investment, and promote the movement of labour.
From a foreign investment review perspective, a key aspect of CETA is that Canada will increase the pre-merger review threshold under the Investment Canada Act (the “ICA”) from $1 billion to $1.5 billion for EU investors who acquire control of a Canadian business.
Under the current ICA review thresholds, acquisitions by WTO-controlled investors of control of Canadian businesses having a book value in excess of $344 million are subject to pre-merger review by Industry Canada and must be of “net benefit” to Canada before they will be approved. In May of this year, the government announced that the current threshold for WTO investors would be gradually increased to $1 billion (based on enterprise value) over the next four years. However, state-owned enterprises (“SOEs”) will continue to be subject to the current book-value threshold of $344 million (which will be adjusted annually based on Canada’s GDP). Investments by non-WTO investors and investments in the cultural sector (including those by EU investors) will remain subject to a $5 million review threshold.
While sections of CETA will likely be phased-in over the next two years, it is unclear when the higher ICA review thresholds for EU investors will come into effect. A practical implication of the higher ICA review threshold under CETA is that they may afford EU investors an important commercial advantage over non-EU investors in some situations. This may be particularly relevant in auction situations as (i) bids by EU investors will not require ICA approval where those by non-EU investors will and (ii) EU investors may be able to offer shorter transaction timelines as they will not have to undergo a pre-merger ICA review (which can, and often does, take 75 days or longer).
Under CETA, Canada has preserved its ability to review and potentially block foreign investment on national security grounds, regardless of the value of the Canadian business.