The threshold for certain pre-closing net benefit reviews under the Investment Canada Act (ICA) and the threshold for a pre-closing merger notification under the Competition Act have been increased for 2016.
Canada uses a two-part test for determining whether a pre-merger notification is necessary. The two-part test is based on the size of the parties and the size of the transaction. The transaction size component can be adjusted annually for inflation.
Under the size of the parties test, the parties, together with their affiliates, must have aggregate assets in Canada or annual gross revenues from sales in, from or into Canada, in excess of $400 million. Under the size of transaction test, the value of the assets in Canada or the annual gross revenue from sales (generated from those assets) in or from Canada of the target operating business and, if applicable, its subsidiaries, must be greater than $87 million. The 2015 transaction size threshold was $86 million.
These changes took effect on February 5, 2016.
Investment Canada Act
In general, any acquisition by a “non-Canadian” of control of a “Canadian business” is either notifiable or reviewable under the ICA.
Whether an acquisition is notifiable or reviewable depends on the structure of the transaction and the value and nature of the Canadian business being acquired, namely whether the transaction is a direct or an indirect acquisition of control of a Canadian business. With limited exceptions, the federal government must be satisfied that a reviewable transaction “is likely to be of net benefit to Canada” before closing can proceed; notifiable transactions only require that the investor submit a report after closing. Separate and apart from the net benefit review, the ICA also provides that any investment in a Canadian business by a non-Canadian can be subject to a national security review.
In April 2015, the metric used to calculate the review thresholds changed. Prior to April 24, 2015, the acquisition of control of a Canadian business by a non-Canadian was generally subject to pre-closing review and approval by the responsible minister where the book value of the assets of the Canadian business exceeded a prescribed threshold ($369 million in 2015). Lower thresholds ($5 million) existed for the acquisition of control of a business related to Canada’s national identity or cultural heritage, or where the buyer was not from a member of the WTO.
As of April 24, 2015, the threshold for the net benefit review will generally be based on the enterprise value of the Canadian business. The threshold will be $600 million for two years, followed by two years at $800 million, and then $1 billion for a year, after which it will be adjusted annually for inflation.
Under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), Canada committed to significantly increase the threshold for review under the ICA to $1.5 billion for investors from members of the European Union in most industry sectors. Given the most-favoured-nations clauses in other free trade agreements Canada has signed, many of Canada’s other trading partners are poised to benefit from this provision as well. Pursuant to the newly concluded Trans-Pacific Partnership (TPP), Canada also committed to increase the threshold for review under the ICA to $1.5 billion for investors who are nationals or are controlled by nationals of the TPP parties. As neither the CETA nor TPP has been ratified, these changes have not yet taken effect.
How enterprise value will be determined will depend on the nature of the transaction:
|Publicly traded entity: acquisition of shares||Market capitalization plus total liabilities (excluding operating liabilities), minus cash and cash equivalents|
|Not publicly traded entity: acquisition of shares||Total acquisition value, plus total liabilities (excluding operating liabilities), minus cash and cash equivalents|
|Acquisition of assets||Total acquisition value, plus assumed liabilities, minus cash and cash equivalents transferred to buyer|
The enterprise value test will not apply to all transactions. The lower review thresholds remain for: (i) cultural industries; (ii) investors from non-WTO members; and (iii) SOEs. These investments will continue to be reviewable based on a book value of assets test using the current monetary thresholds, which can be adjusted annually to account for changes in gross domestic product. Effective February 5, 2016, this threshold is now $375 million.
By Kevin Ackhurst, Norton Rose Fulbright