On March 4, 2024, while attending the 2024 Prospectors & Developers Association of Canada’s annual convention, Canada’s Minister of Innovation, Science and Industry[1], François-Philippe Champagne, received a question about Québec-based SRG Mining Inc.’s (“SRG”) proposed plan to redomicile to the United Arab Emirates after agreeing to sell 19.4 percent of the company to China-based Carbon ONE New Energy Group Co., Ltd. (“Carbon One”).
Despite SRG’s belief that redomiciling would obviate the need to obtain the Government of Canada’s approval of the proposed deal, Minister Champagne reacted by stating that Canada would challenge the proposed avoidance of the Government of Canada’s review: “It’s never smart to try to circumvent the rules…[The federal government is prepared to use] every tool at our disposal [to make sure Canadian law is respected].”
Shortly after Minister Champagne’s comments, SRG announced that it was no longer proceeding with the Carbon One transaction.
Background
On July 10, 2023, SRG announced that Carbon One had offered to purchase a 19.4% stake in SRG for $16.9 million. In a press release, SRG stated that it intended to use the proceeds from the share sale to advance SRG’s Lola Graphite Project in the Republic of Guinea in West Africa. The press release also said there would be a voluntary notification filing under the Investment Canada Act (“ICA”).
The Government of Canada considers graphite to be a “critical mineral” and, as such, the transaction would have been subject to the Government of Canada’s Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act. The Globe and Mail subsequently reported that SRG had told its investors that the deal was subject to a national security review under the ICA.
On November 29, 2023, SRG announced that it would redomicile outside of Canada and, as such, the proposed transaction would no longer require clearance from the Government of Canada pursuant to the ICA. On February 26, 2024, SRG disclosed that the company had selected the Abu Dhabi Global Market in the United Arab Emirates as its preferred location for redomiciliation. In a press release, SRG explained that: “The UAE Redomiciliation will provide the Company with expanded strategic optionality. Additionally, the UAE has a double taxation treaty and a bilateral investment treaty with the Republic of Guinea, where SRG’s main asset, the Lola Graphite Project, is located.”
Could the Minister have blocked the redomiciliation?
Despite the Lola Graphite Project being in West Africa, it appears likely that, absent redomiciliation, the national security review provisions of the ICA would have applied to the proposed transaction with Carbon One, as paragraph 25.1(c) of the ICA provides that the national security review provisions of the ICA would apply to a proposed investment by a non-Canadian to acquire, in whole or in part, an entity carrying on any part of its operations in Canada if the entity has a place of operations in Canada.
Based on our assessment that the Minister had jurisdiction under the ICA before SRG’s planned redomiciliation to the UAE, the Minister could have issued a notice of a possible national security review under subsection 25.2(1) of the ICA to Carbon One. Such a notice would have prohibited Carbon One from implementing the investment and, likely, steps in furtherance thereof (such as redomiciliation), pending the government’s decision on whether to issue an order for a national security review.
Alternatively, the Minister could have secured an order under section 25.3 of the ICA for the review of the investment by the Governor-in-Council. Once Carbon One and SRG received notice of the order, they would have been unable to proceed with the transaction unless and until an order was issued permitting them to do so.[2] Another option open to the Minister would be to issue a demand under section 39 of the ICA that Carbon One cease the contravention or show cause why there is no contravention, failing which the Minister could seek a range of court orders of varying severity.
If the Governor-in-Council failed to act prior to the redomiciliation, challenging the investment would be more difficult if for no reason other than the issue of securing jurisdiction in personam over the parties (although the existence of SRG’s Canadian stock listing may have been helpful to the Minister in that scenario). Subject to this potentially significant limitation, there would seem to be little difficulty in linking the redomiciliation to the Carbon One investment.
Redomiciling without a contemplated transaction
If SRG had unilaterally decided to redomicile to a foreign jurisdiction for a bona fide business reason (other than a reason connected to an actual transaction), the right of the Minister to intervene under the ICA would arguably have been weaker.
However, the act of redomiciling is likely only one of a number of factors to consider in attempting to effectively remove the ICA’s jurisdiction over a Canadian business. The net cast by section 25 of the ICA is a very broad one and the extent to which a Canadian business must sever its ties to Canada to avoid ICA jurisdiction is unclear. Arguably, any ongoing connection with Canada, even a single individual in Canada who is employed or self-employed in connection with the entity’s operations, could create a sufficient nexus for the Minister to make the case for continued jurisdiction under the ICA.
Feel free to reach out directly to a member of Fasken’s Competition, Marketing & Foreign Investment or National Security teams with any questions.
The information and guidance provided in this bulletin do not constitute legal advice and should not be relied on as such.
[1] Innovation, Science and Economic Development Canada is the Government of Canada department responsible for the administration of the non-cultural aspects of the ICA, including in respect of national security matters.
[2] It’s noteworthy that if the National Security Review of Investments Modernization Act (which has received royal assent and is expected to come into force later this Spring) had been in force, the Minister could have simply issued an order for a national security review of the investment under the revised subsection 25.3.
