The long arm of the law: No deal is too small for feds to examine under its National Security Review

Editor's Note

This article is sponsored by Fasken Ottawa.

You’re far more important than you think. At least, your innovation, unique know-how or invention is – in the eyes of federal security officials. 

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 (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. 

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, Department of National Defence and our electronic spies, the Communications Security Establishment (CSE).

But unlike the federal Net Benefit Test, which applies in most cases only when deal value runs north of a billion dollars, 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 for less than a million dollars. In Ottawa, that’s not even the value of the average federal pension.

Enter the feds 

Under the Investment Canada Act, 

  • The sale of a business triggers federal jurisdiction;
  • Even when a business is not “sold” per se, but a foreign owner takes a significant percentage of shares (33 per cent or more), this is viewed as a “change of control.” 
  • In certain cases, something less than acquisition of a significant share of the company can still be deemed by the government as “control in fact”;
  • The test applied is, “would the investment be injurious to national security?”
  • If the answer is, “yes,” the sale can be blocked or conditions imposed which can render the deal unpalatable. Fighting to achieve reasonable conditions is absolutely key.  

How could this exotic process apply to my modest innovation, invention or patented process, you ask? Because in an era of terrorism, espionage and interference in critical infrastructure by “non-like-minded states” (the list is exactly as you imagine), the government can’t afford to turn a blind eye to the sale of unique technology to (sometimes) hostile foreign interests simply because that tech is still in its infancy.

Protect yourself, protect Canada

In protecting yourself, 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 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 pinch. 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 and coasting into retirement or your next big venture is imminently doable. Sometimes it’s a question of when, not if, you should do a particular deal. In other cases, there will never be a good moment to sell to a particular foreign buyer. Knowing the difference is key to securing the right partners and moving an idea out of your basement and into scale-up success.

Andrew House is a Counsel with Fasken’s Ottawa and Toronto offices. He is a national security lawyer who also specializes in government relations and ethics. Andrew can be reached at ahouse@fasken.com.