Industry Committee on May 15th, 2023

[The Vice-Chair, Conservative, Rick Perkins]

I call the meeting to order. As you'll note, I'm not the usual chair. Joel is having some transportation issues today and I will be filling in. I hope you will bear with me.

Welcome to meeting number 74 of the House of Commons Standing Committee on Industry and Technology.

Today's meeting is taking place in a hybrid format pursuant to the House order of Thursday, June 23, 2022.

Each witness gets five minutes to start. We have four witnesses today.

We'll start with Mr. Bhattacharjee.

[Subrata Bhattacharjee, Partner and National Chair, Competition and Foreign Investment Review Group, Borden Ladner Gervais LLP, As an Individual]

Mr. Chair and members of the committee, thank you for the invitation to appear this afternoon.

I chair the competition and foreign investment practice at the Canadian law firm Borden Ladner Gervais LLP. My comments today are made in my personal capacity and not on behalf of the firm or its clients.

I have practised Canadian competition law and foreign investment regulation for over 25 years. I've previously taught competition law, including foreign investment regulation, at the Dalhousie law school as a part-time faculty member for about 10 years. I'm also currently appointed by the commissioner of competition as a non-governmental adviser to the International Competition Network.

My remarks on the bill today are going to focus on the issue of prescribed business activities. I'm also going to refer to them as sensitive sectors. There's been considerable discussion, I think, both within this committee and among stakeholders, about what a prescribed business activity should be for the purposes of what the bill proposes to be a mandatory pre-closing notification requirement. It is essentially an early warning system for sensitive-sector foreign investments in Canada.

As an aside, I do note that the minister has suggested that these sectors will be reflected, to some degree, in the regulations to the new act. In response to some questioning I had reviewed in some of the other sessions, I agree that it is preferable, by the way, to leave those sectors for inclusion in regulations, as opposed to within the act itself, to preserve a degree of flexibility.

Having said that, my remarks today won’t really be about what should specifically be on the list or not. My primary concern before you this afternoon is really to discuss how we ensure clarity and comprehensiveness in how that list is expressed in the regulations.

I have two things to say about that. The first is that we need to ensure we describe each prescribed business sector in a meaningful way and certainly beyond what we presently have in the existing guidance and policies that have been issued by industry.

If you look at the existing guidance, what we have done to date is set out very broad buckets with varying levels of context. That’s because that list currently is for the purpose of evaluating the application of the substantive test to be applied by the minister or the Governor in Council in making a national security determination. If you look at annex A to the national security review guidelines, it lists 15 sensitive technology areas without a lot of elaboration. Those areas include aerospace, biotechnology, medical technology and quantum science. That's fine for that purpose, but for the purpose of implementing a mandatory and suspensory notification system that's going to be triggered, really, by tying an activity to one of these prescribed business sectors, as the bill proposes, we'll have to make this a bit more detailed, as some other jurisdictions have done.

I am personally a little cautious about importing ideas from other countries’ regulatory regimes holus-bolus into our policy architecture, especially in foreign investment regulation, where in fact Canada has been active for a longer time than many of our major trading partners. There are many things we learned on our own that we should be quite ready to deploy. However, I will make an exception here. I will invite the committee to review what the U.K. has done in their approach to identifying the sensitive sectors under their National Security and Investment Act. Their regime actually identifies 17 sensitive sectors, which are sort of similar to those contemplated in our guidelines.

The U.K. government did two things beyond just listing them. The first thing was that they had fairly comprehensive—I think it's about 50 pages' worth—regulations where they set out 17 schedules, like a schedule per sector, with definitions accompanied by technical detail. Then there's a requirement that within three years after implementation—I think within a three-year period after—the minister has to review the schedules to make sure they are achieving the U.K. Parliament's objectives. That, I think, is a useful thing they have done.

The second thing they did, in addition to the regulations they had, was to issue accompanying guidance that fairly comprehensively interprets the scope of each one of those 17 schedules. Actually, when you go to the website, you will see they even outline a series of evaluative considerations that are particular to each one of those silos. I would suggest to you that this approach, which combines reasonably comprehensive sector descriptions with the detailed guidelines and on top of that has a requirement that the government review the list periodically, is a good thing for us to look at in Canada.

My second observation is maybe a bit more substantive. It's to simply note that we should maintain a calibrated approach to identifying prescribed business activities as opposed to a more reflexive one. That's for two reasons.

First, our approach to identifying sensitive sectors should be broadly consistent with the positions taken by our allies, not just in the Five Eyes, which I know folks have talked about in committee, but also in bilateral relationships like our Canada-U.S. joint action plan on critical minerals, where we are coordinating our approach to that supply chain to some degree with what the U.S. is contemplating.

My second and final point is simply that national security obviously requires a whole-of-government approach. It’s probably good to remember that, though the Investment Canada Act is a way we can assess and address potential national security concerns, it’s unrealistic, in my view, to assume that the legislation can accommodate the entire universe of legitimate national security concerns that may emerge, and will no doubt continue to emerge, in the future. It's really just one piece of the puzzle. Obviously it's a very important piece of the puzzle that we want to get right, but again, it is just one piece.

With that, I'm done. I thank the committee for its time. I'm happy to answer further questions as required.

Thank you.

[The Vice-Chair, Conservative, Rick Perkins]

Thank you, Mr. Bhattacharjee.

Mr. Hersh, you're next.

[Chris Hersh, Partner, Norton Rose Fulbright Canada LLP, As an Individual]

Thank you, Mr. Chair.

Members of the committee, thank you for having me participate today.

I am the head of the Norton Rose Fulbright LLP Canada competition and foreign investment group, and I am appearing here in my individual capacity. As with Mr. Bhattacharjee, my views are my own and not those of any clients or the firm.

I want to start off by saying that as a Canadian, I think the national security review provisions of the Investment Canada Act are probably some of the most if not the most important provisions of the ICA, from my perspective. While it's important to ensure we protect national security interests, it's also important to ensure we don't do so in a way that creates an unnecessary or overly onerous burden for the vast majority of investments that are compatible with Canada's foreign investment strategy.

By way of details, ISED's 2021-22 annual report indicated that over the past five years, only 70 investments have been subject to the formal process at all and only 39 of those proceeded to a full review. Of those, 15 were allowed, 14 were withdrawn, seven required divestiture orders, two were blocked and one was ongoing. I think it's important that as we think about the best way to deal with assessing investments from a national security perspective, we also understand that the vast majority of investments are in line with Canada's foreign investment policy. Also, I think it's very important that any regime is as clear as possible, understanding that national security, by definition, involves information and not being able to share all the information that might otherwise be the case. It's important for investors to understand the rules and how to apply them.

Touching on some of the areas that Mr. Bhattacharjee touched on, the notion of “prescribed business activity” and the notion of a mandatory premerger or pre-implementation regime I think acknowledges that there are situations where it's important to be able to assess and potentially stop certain types of investments before they happen—in particular investments relating to sensitive technology, data or intellectual property—and especially where not taking a proactive approach might actually impair the ability to take effective remedial action.

I think there's a real concern with the draft legislation that the term “prescribed business activity” is quite vague. As others have said, I think it's important to appropriately define this.

There are also other terms, such as “material non-public technical information” or “material assets”, that are quite vague. It's very important that people understand how the law will apply to them and understand, as they assess whether to make an investment or not, what regime will apply to them.

While Mr. Bhattacharjee talked about the U.K. approach, I think we have a lot to learn from the U.S. CFIUS approach. In particular, they have adopted an approach, a mandatory regime, to non-controlling investments in what they call “TID U.S.” sectors or “TID U.S. businesses”. Those are businesses that relate to critical technology, critical infrastructure and sensitive personal data. It's important to make it very clear for people whether an investment is subject to the mandatory process.

The other thing is that while it's important to focus on the types of industries where we believe out of the gate that there could be a national security concern, that's only part of the test. There's a two-sided analysis. There are the activities the Canadian business is engaging in and if those activities are potentially raising national security concerns, and there is also the identity of the investor.

I think it's fair to say that there are some investors whose investments are almost generally compatible with Canadian interests, and there are other types of investors who may be viewed as raising potential concerns from a national security perspective. To treat all investors the same way, forcing all investors to go through the same process, seems, quite frankly, to be an overly broad approach, an approach that is going to be wasteful of time and wasteful of resources.

One example, again drawing from the CFIUS experience, is their notion of foreign excepted states and foreign excepted investors, where investors are tied to a state or country that the U.S. has deemed to be a safe state or a trusted trading partner. They've so far designated Canada, Australia, the U.K. and, just recently, New Zealand as those exempt states. Certain investors who meet certain criteria are viewed as exempt foreign investors, and they do not have to go through the mandatory regime. I liken it to a NEXUS-type approach to foreign investment. You have a no-fly list, you have a trusted traveller or trusted investor list, and you have everybody else.

[The Vice-Chair, Conservative, Rick Perkins]

I'm sorry, Mr. Hersh. That's a little over five minutes. Maybe you can get to some of the items that remain during the questioning time.

Mr. Joneja is next, please.

[Navin Joneja, Partner and Co-Chair, Competition, Antitrust and Foreign Investment Group, Blake, Cassels and Graydon LLP, As an Individual]

Good afternoon, Mr. Chair and honourable members. Thank you for inviting me to discuss the proposed amendments to the Investment Canada Act.

My name is Navin Joneja. I'm co-chair of the competition, antitrust and foreign investment group at Blake, Cassels and Graydon. I'm here as an individual and in my personal capacity, not on behalf of the firm or any of our clients.

I have been practising in the area of foreign investment, and the Investment Canada Act in particular, for over 20 years. As with my colleagues, I've had the opportunity to see first-hand the evolution of the ICA, from before we had a national security review regime to when the national security review regime that we currently have was enacted in 2009 to now the more recent trend of an increase in the number of national security reviews. I want to make a few brief observations on the proposed legislation based on these experiences. I look forward to any questions from the committee afterwards.

My comments are really directed at one of the key themes that have come up repeatedly in this committee's work on this legislation—that is, how to best balance the dual objectives of strengthening Canada's national security and, at the same time, encouraging the investment and capital needed to strengthen Canada's economy.

First, as a general matter, the framework set out in the bill contains, in my view, a number of very well-reasoned features directed at accomplishing both of these objectives. In particular, the mandatory pre-closing filings for certain sensitive sectors, if implemented properly, would allow the government to better screen for investments of concern from a national security perspective. Additionally, the improved information sharing with international counterparts should also allow Canadian government officials to make better-informed decisions on national security matters.

Another useful feature, and the one that I want to focus on more in my remarks, is the newly proposed authority for the minister to accept undertakings—in other words, binding commitments—to mitigate national security risks. In my view, this tool is lacking in the current legislation and has the potential to allow the Canadian government to do a much better job of balancing the two objectives of strengthening national security and encouraging foreign investment.

An undertakings process or undertakings regime would allow foreign investors to remedy the specific national security concern at issue without sacrificing the entire investment in the proper cases and in the appropriate circumstances. Potential undertakings could include safeguarding or restricting access to sensitive information, restricting certain lines of business or customers, or other more targeted and focused remedial measures. Other countries, such as the United States, have a more robust practice of using such mitigation measures to address national security concerns. It makes sense for Canada to have a similar tool to do so.

Furthermore, as we look at the proposed legislation as a whole, this tool will likely prove to be more useful and more important, as national security reviews will likely become more frequent. In other words, given the recent trends toward greater scrutiny and the increased powers contained in the bill—for example, in requiring mandatory pre-closing notifications for certain sectors—one can expect a greater number of national security reviews covering perhaps a wider range of industries. Having the ability to apply a more targeted set of undertakings in a regime that substantively addresses the national security concerns at issue will likely prove to be very useful going forward in balancing those two objectives.

That being said, there are also elements of the bill and its implementation that are of some concern and that could be improved in order to increase its effectiveness. My colleagues have spoken to a number of those points.

First of all, the bill allows the minister to impose interim conditions on the investor prior to the conclusion of a review. This particular aspect is quite novel and expansive. While its stated purpose is to prevent the risk of national security injury taking place before a review is complete, it also has the potential to be quite broad in application. In my view, it risks chilling otherwise benign and legitimate investments. In practice, foreign investors are typically accustomed to conditions being applied, if they are needed, to allow closing to occur. However, I do worry that a perceived threat of interim conditions prior to closing could actually deter investments from legitimate partners even signing on to an agreement to invest in Canada.

Second of all, the effectiveness of the bill and its implementation would be improved if there were greater disclosure and transparency to investors during the national security review process. There's no doubt a need to ensure that information sensitive to national security is protected, but from my perspective, there are ways to ensure that additional information is made available generally. Such disclosure and transparency also have the added benefit of allowing current and future investors to plainly recognize government concerns so they can be addressed at an earlier stage.

Finally, there are clearly a number of new and expansive elements contained in the bill. The investment review division will need to be adequately resourced and staffed in order to meet what appear to be considerably greater demands to review filings, conduct reviews and engage with investors.

In summary, in seeking to both strengthen protections for national security and encourage investment to Canada, there are a number of well-thought-out elements in the proposed legislation. There are also ways in which the legislation and its implementation could be improved and enhanced.

Thank you again for the opportunity to present today. I look forward to answering the questions you have.

[The Vice-Chair, Conservative, Rick Perkins]

Thank you very much.

Our final witness is Mr. Krane.

[Joshua Krane, Partner, Competition, Antitrust and Foreign Investment, McMillan LLP]

Mr. Chair and committee members, thank you for the invitation to appear today. I'll keep my opening remarks very brief.

My name is Josh Krane. I'm a partner in the competition and foreign investment group at McMillan. I've represented many foreign buyers and Canadian businesses in connection with investment transactions that have been subject to the ICA.

My comments will focus on the proposed judicial review amendment at proposed section 25.7. I'd like to start by offering some context.

All the foreign investors I encounter in my law practice are looking to make investments in Canada because they see an opportunity to tap into an educated workforce, expand their sales channels or find opportunities to grow their businesses. The people I meet are genuinely interested in building successful enterprises. They are receptive to feedback and sensitive to the political environment in Canada. I also appreciate that there are state forces at work that we cannot always see. I believe that Canada needs to be prudent about foreign state interference in our economic system.

The challenge I see is that the proposed amendments don't fix a fundamental issue with the ICA, which is that investors are not provided with sufficient information to decide whether to continue to pursue an investment caught up in a national security review or to withdraw their investment. This is the challenge for investors and their advisers because the pathway forward can become very unclear.

In a paper that I published last year, we proposed that the process include the creation of a national security amicus or intermediary to help bridge the communication and information gap between investors and the government. We recommended that this amicus be authorized to review a packet of confidential evidence used to make a security assessment, and then brief the investor on the strength of the government's position without disclosing sensitive information. This includes the benefit of encouraging investors to withdraw their investments before the government has to make a national security order. If a matter proceeds to judicial review, which the amendments now contemplate, the amicus could challenge the accuracy, reliability and sufficiency of the evidence collected to ensure that the government is appropriately held to account before a court of law.

The process we proposed is not without precedent. It's used in the immigration security certificate process, which also has national security dimensions. The Canadian International Trade Tribunal also allows external counsel to receive confidential information on the condition that they sign strict confidentiality undertakings with significant penalties for a breach. We've provided Mr. MacPherson with a copy of the paper, which I understand The Canadian Bar Association has endorsed in its brief.

Those are my submissions, and I look forward to addressing any questions you may have.

[The Vice-Chair, Conservative, Rick Perkins]

Okay. Thank you very much.

We'll begin our questioning now. I appreciate the testimony from the witnesses.

We'll begin with Mr. Williams for the first round of six minutes.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you very much, Mr. Chair.

Thank you to all of our witnesses for joining us today.

This is actually great. Mr. Bhattacharjee and Mr. Hersh, you're right on our wavelength. You must have been listening intently to our discussions at our last meeting on these lists, on who manages the lists and on how we make the recommended changes in legislation to ensure that, when Bill C-34 is passed in the House, we're doing the bare minimum—what CFIUS and the U.K. are doing—but making it great for Canada. Mr. Krane, you touched on a important part: How do we ensure that we also maintain the maximum investment we can in Canada?

I want to focus, Mr. Bhattacharjee, on the comments you were making.

I agree with you to have a list that isn't baked into legislation and that couldn't be reopened in 22 years. I agree with you that we need to look at ways to make it flexible. What recommendations could you make, from a legal perspective, for the legislation that would allow at least a review of that list maybe once every three years? You could tell me if you feel it's different. What we heard before was to have that done.... I'm trying to remember the term right now. It wasn't “in council”. Perhaps it was “in governance”.

[A voice]

It's Governor in Council.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Governor in Council, yes, but there was another term we had. “In governance” I think it was.

We had staff here as witnesses last week as well. We're also asking them how they handle that.

I'm going to start my first round with that question, sir.

[Subrata Bhattacharjee]

I'm agnostic as to whether the ability to review the sufficiency of the list is in the act or the regulations. In the U.K. example I provided, it's actually in the regulations, not the act. For whatever reason, they chose to do that.

I feel strongly that the list itself should remain a regulation. I say this because my colleagues and I have all been at this for a while, and one thing we learned and can tell you is that the evolution of the landscape from 2009, when this power found its way into the law, to where we are now is really quite something. The preoccupations and concerns that we collectively, as a nation, were looking at in 2009 have obviously shifted since that time.

I think the list itself should be left flexible in regulations. I think there should be an ability for Parliament to order some sort of review or a report on the sufficiency of that list. That's the best you can probably do to have the balance of both worlds. You have a list that's flexible and the ability to go back and take a look at it.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Do you have a recommendation for specific wording? What section of Bill C-34 would you make recommendations on based on that?

[Subrata Bhattacharjee]

I do not presently, but I could certainly send one to the clerk.

[Ryan Williams, Conservative, Bay of Quinte, ON]

That would be great.

Mr. Hersh, the other thing we talked about is the department looking after this. CFIUS is multi-agency. It's not just one. It's not Economic Development. It's across the whole spectrum. This legislation, Bill C-34, and RDI are only for ISED itself.

Do you think there's a recommendation that we need to expand that, just like CFIUS does, or is it okay for it to sit within ISED?

[Chris Hersh]

Whether it sits within ISED or other agencies.... First of all, I think a multi-agency approach is probably the right one. Analyzing and assessing the potential national security implications isn't just for ISED. There's the national security apparatus and a whole bunch of other things.

The most important thing I have found, in my experience with ISED, is that they don't have the national security experience. It doesn't reside in ISED, so they are often playing shuttle diplomacy or shuttle communication between the national security group and the investor. At the very least, I would house some of that expertise within ISED. I think having a multi-agency or whole-of-government approach to assessing these things and putting the right people in the right place so we can deal with this efficiently is the most effective way to assess national security risk and develop mitigation strategies, if those are appropriate.

I think a combined approach is the correct one.

[Ryan Williams, Conservative, Bay of Quinte, ON]

On that note, would you have a recommendation on where that kind of wording would live in Bill C-34, as a change?

[Chris Hersh]

I'd have to think about that. I don't have the ability to draft a statute off the top of my head, unfortunately. I wish I did.

I don't know whether it's an issue that should be in this legislation or a construction of the agency. Certainly, if you wanted to do that, it could be.... I don't know whether that would be in this legislation or some other legislation, but I don't have a good sense of whether it's actually necessary. If it is necessary, it should probably go towards the front of the legislation, but I couldn't give you any specific guidance on that point.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you.

Mr. Krane, we've talked about a list of certain critical technologies we want to protect in Canada. Certainly, we want to see maximum investment in that. Are there any changes you could recommend for Bill C-34 and the legislation, or anything you think needs to be removed, to maximize that?

[Joshua Krane]

Yes.

I think we should consider adding a special advocate provision to proposed section 25.7, which is included in the Immigration and Refugee Protection Act. There is a precedent or model there. If an investment goes into judicial review, we should consider having a similar process included in this statute as well.

I would direct this committee to look at subsection 83(1.2) of the Immigration and Refugee Protection Act as a good precedent for inclusion in proposed section 25.7 of the ICA.

[The Vice-Chair, Conservative, Rick Perkins]

Thank you, MP Williams.

Go ahead, MP Lapointe.

[Viviane LaPointe, Liberal, Sudbury, ON]

Thank you, Mr. Chair.

My question is for Mr. Bhattacharjee.

In your opening statement, you talked about the U.S. Inflation Reduction Act and the opportunities it presents for Canada's critical minerals and the mining sector.

In your opinion, how will the updated Investment Canada Act help encourage foreign investment while also mitigating potentially harmful foreign investments in critical minerals?

[Subrata Bhattacharjee]

I think that is the million-dollar question. What I was referring to wasn't the IRA, but our agreement with the U.S. on critical minerals. However, I think the principle is the same.

It goes a bit to what my colleague Mr. Hersh talked about in his remarks, which is that we have a system of foreign investment regulation that has a net benefit regime and a national security regime. We have made the decision to subject fewer and fewer investments to review under the economic test within the net benefit regime, while at the same time as expanding, I think, our views of the sorts of things we should be looking at under national security.

However, even under the national security regime, as Mr. Hersh pointed out, it is not a situation where we have a vast number of deals that are going through this process. They are significant matters that have raised issues and have obviously progressed through reviews, but many of them are cleared after a degree of appropriate scrutiny and allowed to proceed.

I think the challenge we have is in trying to have a national security screen that allows us to be a bit more proactive in order to find out what's happening in areas that are emerging so that we're not playing catch-up afterwards, after an investment has been completed. We have a lot more stuff now that we will have to look at in advance. Our hope is that we don't scare off legitimate investors because, for example, we have a mandatory filing policy that may reach out to an extraordinarily large number of sectors.

It's one of the reasons that I wanted to bring the committee back to the U.K.'s attempt to try to put some sort of guidelines around that. Their approach is, in fact, a little wackier than ours. It's not wackier, but it's much broader, because it also technically applies to domestic deals. It's not just a foreign investment review regime.

For them, it was particularly important to have that sort of structure. It's important for us as well, because it will help avoid the chilling effect that I think is implied in your question.

[Viviane LaPointe, Liberal, Sudbury, ON]

Are there other witnesses who want to respond to that question? I can repeat it.

As Canada looks at some pretty incredible opportunities with critical minerals, how can we encourage foreign investment while also mitigating potentially harmful foreign investments in critical minerals?

Seeing no one, my next question is for Mr. Bhattacharjee as well.

The bill proposes interim conditions that would allow the Minister of Innovation, Science and Industry, after consultation with the Minister of Public Safety, to impose interim conditions on investment. Do you support the need for interim conditions, and if you do, why?