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Covid-19 | Newsletter

The Long Arm of the Law: No deal is Too Small – or Too Offbeat – for the Feds to Examine Under its National Security Review

Fasken
Reading Time 4 minute read

Capital Perspectives - Newsletter

You're far more important than you think – at least, your innovation, unique know-how, or product is – in the eyes of federal security officials. And in the era of COVID-19, the subject matter of your business could attract federal attention like never before.

Some of Canada's most important innovations began as ideas in a Kanata basement. Humble beginnings can have the effect of diminishing one's perception of the possible importance of an innovation or new product, but that won't stop Canada's Investment Review Division (IRD – an arm of the federal department of Industry, Science and Economic Development) from taking a close look at what you've built and to whom you might wish to sell. Recently, the Minister responsible for IRD signalled that a whole new level of scrutiny will be applied to "opportunistic investment" in the form of M&A activity related to distressed Canadian businesses.

For Canadians considering a proposal from a foreign buyer, it's anything but business as usual.

Canada's National Security Review, a component of the Investment Canada Act, has been derided for years as a "black box" into which no light shines. For their part, federal authorities maintain a cloak of secrecy commensurate with the important work done by such entities as the Canadian Security Intelligence Service (CSIS), Department of National Defence and our electronic spies, the Communications Security Establishment (CSE).

There is no minimum financial threshold to trigger a National Security Review. This can come as a shock to a developer who's banked his retirement on selling his invention to a foreign buyer. But even more surprising is that deals coming under enhanced scrutiny due to COVID-19 are those relating not just to high tech but to industries in the 10 areas of Critical Infrastructure defined by the Government of Canada: Energy and Utilities, Information and Communication Technologies, Finance, Health, Food, Water, Transportation, Safety, Government and Manufacturing.

Enhanced Scrutiny in the COVID-19 Era

"Critical infrastructure" means those goods, services and institutions that provide for the basic safety and security of citizens. In the COVID-19 era, this means ownership of production or processing facilities for goods like food, key textiles and ventilator parts (to name only a few) will be closely monitored by the federal government to ensure that Canadian supply is assured. For the first time in a generation, we are beginning to see a pull-back from a form of globalization that maximized freedom to trade but when times became hard, did not allow for robust resiliency and self-sufficiency in the domestic supply chains of many countries, including Canada. Shortages of medical equipment demonstrated a profound and dangerous gap in Canada's readiness to confront a crisis and has prompted political leaders to seriously re-examine how Canada can be ready to "go it alone" should that need arise again, as it surely will.

Protect yourself, protect Canada

In protecting yourself from the effects of enhanced federal scrutiny, you can protect Canada's essential security interests:

  1. Know thyself. Drop the false modesty and accept that you're in a field that matters and if your tech or means of production fell into the wrong hands, Canada and its allies could sooner or later be hurt as a result.   
  2. Know your buyer. Investments which ostensibly originate in friendly countries are easily seen through by our security agencies and you don't want to be caught unawares. Choosing who you do business with is critical throughout the life of a startup – and nowhere more so than in foreign deal-making. 
  3. Engage early. If you're adamant that you must take investment dollars from a non-like-minded state, figure out what your pitch is, and go to see the government at the earliest opportunity. If you're going to fail to get approval, it's so much better to fail early than to suffer the trauma of a late-stage deal collapse.   
  4. Get the right help. The Investment Canada Act is notoriously hard to comprehend but compared to navigating the pitfalls of the federal government, it's a cinch. Many a brilliant electrical engineer or developer has been dashed on these rocks. What you don't know can indeed hurt you. 

Surviving a National Security Review in the COVID-19 era is achievable. Sometimes it's a question of when, not if, you should do a particular deal. In other cases, there will never be a good time to sell a given business to a particular foreign buyer. Knowing the difference is key to achieving everything from retirement dreams to scale-up success.

Andrew House serves as Counsel with Fasken's Ottawa and Toronto offices. He is a national security lawyer who specializes in government relations and ethics.


To read the full Capital Perspectives: Ottawa Newsletter, please click here (PDF).