THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, February 28, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:15 p.m. [ET] to study Bill C-34, An Act to amend the Investment Canada Act.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I serve as the chair of this committee.
I would like to introduce the members of the committee who are with us here today: Senator Bellemare; Senator Loffreda, our deputy chair; Senator Deacon, Nova Scotia; Senator Gignac; Senator Marshall; Senator Massicotte; Senator Miville-Dechêne; Senator Petten; Senator Duncan, who is joining us today, thank you, and Senator Yussuff.
Today we will continue our examination of Bill C-34, An Act to amend the Investment Canada Act. We are very pleased to welcome Patrick Leblond, Associate Professor, Graduate School of Public and International Affairs at the University of Ottawa. Welcome. Thank you for joining us and for your scheduling flexibility over the last few days. We are keen to hear your remarks, because I know you have insights into the whole issue concerning national security and this bill.
Patrick Leblond, Associate Professor, Graduate School of Public and International Affairs, University of Ottawa, as an individual: Thank you, Madam Chair.
[Translation]
Ladies and gentlemen of the committee, thank you for the invitation.
[English]
I’ll make my remarks in French. You are most welcome to ask your questions in English. I will respond in English to your questions in English, and in French to your questions in French.
[Translation]
I would like to open my remarks on Bill C-34, An Act to amend the Investment Canada Act, by saying that I would like to discuss three significant aspects of the bill: first, the nature of an investment constituting a threat to Canada’s national security; second, penalties imposed in case of non-compliance with undertakings made by a non-Canadian investor; third, transparency regarding decisions made by a minister.
Let’s start with the nature of an investment representing a threat to Canada’s national security. The bill amends section 11 by adding the idea that:
(c) an investment to acquire, in whole or in part, an entity […] that has a place of operations in Canada, an individual or individuals in Canada who are employed […] or assets in Canada used in carrying on the entity’s operations […]
It is then written that:
(ii) the non-Canadian could, as a result of the investment, have access to […] material […] technical information or material assets […]
When I testified before your House of Commons colleagues, I noted that the concept of an entity — unité in French — seemed to exclude direct asset acquisition. The law currently defines an entity as a corporation, a partnership, a trust or a joint venture.
My question is the following: what would happen if the same non-Canadian investor were to acquire the same material assets or material technical information without acquiring the entity itself? One could very well say that instead of acquiring the business, one is merely purchasing the data. One could also talk about an algorithm or an algorithm’s source code that manages critical infrastructure issues.
My question is the following: does the legislation cover these types of transactions? Matters of national security, non-material assets and so on are said to be sources of concern, but does the legislation cover the direct purchase of assets? In my speech to your colleagues at the House, I said no. While reading the amended version the House sent back to you, I saw two additions in that regard.
Subsection 12(1) of the bill refers to paragraph 25.1(b), where it says that if a state-owned enterprise buys assets, a red flag goes up. It should be amended. There should be a notice.
Then, subsection 25.1(2) clarifies what would happen if the bill passes: “paragraph (1)(c) includes an investment to acquire, in whole or in part, the assets of an entity referred to in that paragraph.”
Does that mean it also includes non-state investors who buy assets representing a risk for national security? I am not a legal expert, I do not want to comment on that, but one might think that should be the interpretation given to these amendments. However, I must admit it’s a somewhat obscure way of saying that the legislation will also apply to the acquisition of assets representing a potential national security threat.
In many subsections, one can find the notion that, in the case of state-owned enterprises, by amending a certain thing… Therefore, the recommendation I have for the committee is this: couldn’t the legislation be clear from the very beginning, rather than leading with the idea that asset acquisition is excluded? Somewhere down the road, under section 25, in the end, asset acquisition could be something to which the legislation applies. I think it’s a somewhat obscure way of doing things.
I don’t know if the House simply added these elements, saying that asset acquisition had to be done directly, and not acquired through an entity, and that it needed to be included. They therefore thought to include them, more or less through the back door. Does that have the same weight, legally speaking, as having it apply from the very beginning, by saying that a certain type of transaction is part of the transactions to which the law applies? That’s my first point.
The second point, and it has not changed relative to what was presented to the House, has to do with penalties imposed in case of noncompliance with undertakings made by a non-Canadian investor.
In the case of the transaction, if an investor makes undertakings to satisfy a minister, that’s fine, but what happens if that investor does not fulfill the undertakings? In the bill, there is a maximum monetary penalty of $500,000. Otherwise, it could also, in some cases, lead to a penalty of up to $25,000 per year.
I must admit that it seems small to me. It may look like a lot, but overall, when talking about businesses or millionaire or billionaire investors, $500,000 is a drop in the bucket. One question was raised: is the penalty tax deductible? I have no answer for that.
Why not consider a much higher penalty, like the one included in Bill C-27? When it comes to protecting privacy, we are talking about a fine representing 5% of global revenue or $25 million, depending on which is higher. Why, within the framework of a bill, do we consider protecting privacy to be something important? Even though, in some cases, it can actually be a threat to national security. In another case, the maximum penalty is set at $500,000. It seems to me that there is a very big gap between the two.
Personally, I am always afraid when a non-Canadian investor enters into undertakings and then says: “I will not fulfil them and I will pay the penalty.”
The minister would always have the power to say: “Remove that investor’s right to vote.” But again, if an investor buys assets, what does that mean? They no longer have the right to vote? Would that investor be forced to resell, like they do in the United States, by saying: “No, no, ultimately, you must cancel the transaction.”
[English]
The Chair: Mr. Leblond, I’ll ask you to please get to your third point as well, thank you.
[Translation]
Mr. Leblond: To conclude, there is also the issue of transparency, because otherwise, it’s uncertainty for investors. In the end, we want non-Canadian foreign investors to invest in Canada. That is the starting point. If there is a great deal of uncertainty regarding the application of these new measures in terms of national security; if there are questions about whether certain assets are covered or not and in which context, and about the definitions of material assets or material technical information; if all that is unclear for investors or Canadian businesses — who, in some cases, want to go up for sale — that could mean some businesses will leave Canada to set up shop elsewhere and go find investments, or some foreign investors won’t come here.
I will stop here; thank you. I look forward to answering your questions.
[English]
The Chair: Thank you very much. We’ll begin our questioning immediately with the deputy chair, Senator Loffreda.
[Translation]
Senator Loffreda: Thank you, Mr. Leblond, for being here with us today.
[English]
I’ve encountered conflicting views regarding the alignment of the Investment Canada Act with our international and Five Eyes counterparts with respect to threats to national security. Some feel we are up to par; some don’t share that opinion. You expressed some concerns, especially with respect to acquiring the assets directly rather than the entity and how our counterparts monitor or treat those transactions. What’s your perspective on this crucial matter? Do you believe this bill will enhance our standing?
Mr. Leblond: Thank you for the question. I’m not familiar with all of the rules or the investment laws in our Five Eyes countries. I’m more familiar with that of the U.S. and the whole Committee on Foreign Investment in the United States, or, CFIUS, process. In that case, yes, this bill will improve things. It will give the minister or the government more powers, more teeth, to protect Canada’s national security. It is a step in the right direction. For me, the big question is: Could we do more? Are there blind spots? The question of direct acquisition of assets to me is an important one. I don’t feel — at least in the way that I understand the bill — that it’s properly covered.
The Americans are much more powerful in terms of what they can do in the blocking the acquisition of assets, not just companies. They can undo transactions, even years afterwards. We’ve seen it happen with Grindr, the application for gay people that was acquired by China when the Americans said no. At first it went through, then it was judged that it was a threat to national security, and then they forced the sale. There are threats to do something similar with TikTok, for instance, in the United States. In a way, they have much more power not only before, but also after.
It’s much less clear here. If something comes up later on that we didn’t know was an issue, especially with technology and the way it evolves very quickly, then do we have the tools to undo what we might have allowed a few years ago? Or to modify things, go back and say they took these commitments, but the world has changed or the technology has changed. Whether it’s — artificial intelligence, or AI, right? We’re still not sure how AI will work and what the issues will be, but once the acquisition or the transaction has happened, can we go and change things?
The Americans have much more power to act and undo things after the fact. Maybe that’s something we should consider. Maybe it won’t be in this bill, but it will be the next one. If we can push the envelope a little bit more this time, it would be great.
Senator Loffreda: Just going back to the Americans, you say you’re very familiar with what they have.
Mr. Leblond: I am familiar. I wouldn’t go with “very.”
Senator Loffreda: What should we implement, if anything? Our bill mentions pre-implementation notification for investments that could grant access to sensitive information or assets. It’s clear there. Why would it not give us the power to do what they are doing and go back years later to reverse a transaction or not? We have pre-notification, even if the assets are acquired directly. What are they doing differently? What should we do that’s not being done in this bill?
Mr. Leblond: There is pre-notification, but at least the way I see things, there will be a decision by the minister to say, yes, we will allow this transaction to take place, whether it’s the acquisition of an entity or the acquisition of assets.
One of the issues with assets, especially when we’re talking about intangible assets, you can acquire them from a Canadian company, but the foreign investor can take those assets and move them outside of Canada, especially if you’re talking about data. Then, of course, you want to ensure that you address that risk in pre-notifications and pre-assessments beforehand. Afterwards, again, that might be too late.
In the U.S., at least in my understanding of their laws, the physical nature of the assets might have left, but they will have the power to find other ways to force this company or this investor not to operate in the country afterwards.
I’m just not seeing this strength, as I said in my opening remarks, especially the issue of technical knowledge and assets of an intangible nature, which can easily be moved and over which you have little control once the transaction is done. Is there a way that we could have more teeth in the law or at least more powerful sanctions?
Senator Loffreda: Thank you.
Senator Marshall: Thank you for being here today. You listed your three items, and the third one was transparency. You talked about the uncertainty for companies to invest in Canada. We want more foreign direct investment, and this will push down on that. Where is the uncertainty? Is it back to the matter where you’re saying some of the legislation is unclear?
The other issue I’d like for you to comment on is that we haven’t seen the regulations yet, and the good stuff is in the regulations. Could you talk about the transparency and the fact that you think certain sections are unclear, especially the amendments that were made over in the House of Commons?
Mr. Leblond: As I said, a step forward that has been made in terms of communications and trying to be transparent. Obviously, there are also provisions in the bill that protect privacy, whether businesses or individuals, especially when we’re talking about national security, and I think that’s correct.
I guess it’s more of a long-standing issue with the Investment Canada Act, about its application and the transparency of the decision. At least when something goes wrong and a transaction doesn’t happen, often we don’t know why it didn’t happen, or at least we have some idea but it’s not clear.
So there is a fair degree already with the existing law before these changes in terms of the act and its application as to, well, would this transaction pass or not? Obviously, investors want to know that before they go ahead. It’s not like, oh, well, let’s take our chances and see what happens. We’re often talking about hundreds of millions of dollars, if not billions of dollars, and they want to feel confident that their investment will be approved in the end.
So yes, the regulations will be important. What are important assets? What are these technical requirements or knowledge? What are those and what’s important?
Then, as I said earlier, technology changes very quickly. A few years ago, no one was talking about critical minerals. Now they are strategic. They are critical. A few years ago, people were talking about AI as something that was going to happen. Now that’s about the only thing we talk about, along with critical minerals.
Will the regulation adapt or, again, will decisions be made in a more ad hoc way? Already we’re seeing companies — I just saw a recent article about mining companies in Canada that are saying they might just relocate their operations — not the operations, but their head office and legal basis to a country where they won’t have this kind of national security or investment protection happening, so they are free to get funding from whomever they want.
Senator Marshall: I realize things will change in the future — they have the Canadian Critical Minerals Strategy now. We see all this legislation coming forward, but it seems like, to me, as an accountant, it’s coming in bits and pieces, and at no point in time do you feel like you have a clear picture.
We had some just before Christmas that got passed. Now here’s some more. They are saying there’s more coming, and oh, the regulations will take about 24 months to do. Does that make a difference? It would have to, wouldn’t it?
Mr. Leblond: It does for investors and for the Canadian companies that are looking for these investments. I’m thinking about if you’re a young start-up, an AI company trying to get funding and you’re dealing with some kind of investment fund that might have sovereign wealth funds in it or other types of investors that we might not be sure about, well, will that create uncertainty? Where in the end they may say, if we want to have that funding, maybe we should move to the U.S. in order to get it.
Is there something that imposes greater transparency right off the bat, where if a decision is made, there has to be a report let’s say by the minister on why we accepted this, or this is why we did not accept it, or even why the investor withdrew? Often the investor withdraws but we don’t know why.
Senator C. Deacon: Thank you, Professor Leblond, for being with us. You’re touching on a lot of issues that we spent a lot of time studying last spring, such as how we are maximizing the value of intangible assets and protection of the value of intangible assets in our economy. We need to have the ability for our investors to get an exit, often to a multinational, in order to keep our entrepreneurs and teams building and innovating. It’s part of the process, but when it’s highly strategic in nature, we need to find that line.
I was particularly struck by your comments about the missing point around the fines or penalties when data could be a key part of what is acquired and then ultimately whatever agreement is breached.
I would like more explanation, if you could, around the data side of things. Canadians are at the wrong end of a data vacuum right now. It’s leaving the country at a furious rate. How do you see us finding that balance? Because the balance is key for our entrepreneurs and innovators to create wealth, and then we get better and better at maximizing its value over time. Data is everything right now. We identified that in our report. It’s at the corner of it all.
Mr. Leblond: I guess to start with, I would say one has to separate the data that could represent a risk to national security. If we are talking about personal data where, let’s say, a malignant investor would have access to information about individuals and then they could be blackmailed, that would put national security at risk. This is one thing that is clearly a risk that has to be taken into consideration.
The other part — and maybe that’s the one, if I understand correctly, you’re referring to — is the value of the data. Obviously, that is associated with Canadian companies. When we look at whether this is a net benefit to Canada, how much do we take this data into account? This goes back to the point about transparency — we don’t know. If we get a decision, it will say we looked at this or that, but in terms of the weight of what goes in there, it’s very difficult.
Sometimes with business data, it’s also very difficult to quantify. That’s something that people struggle with in terms of what’s the real value of this? Maybe for a small company the value is not that great, but for Google or Meta or something, now that they have access to this and they link it to what they already have, it’s worth a lot more. But we have to allow for the fact that that’s also how the market functions. Ultimately, it would be for the seller to try to capture some of that value. It’s not for the government to say, “Well, I think this is worth that much. You’re selling for that much, so we’re not going to allow the transaction to take place.” I don’t think that’s the government’s role.
This may be something for the government to look at once they do regulations. If we could have a sense of how they reach their decisions, what they weigh and the importance that they give in terms of the net benefit calculation or the national security risks that might be association with it, we could have a better understanding of what goes into their decisions. Investors and sellers might also find it easier when they are selling some part of their business or their assets.
Senator C. Deacon: In order to plan better in advance?
Mr. Leblond: As much as possible, yes. That’s a challenge. Unfortunately, I don’t have the right solution as to how you can phrase it in the law, but this is a concern that I see. We want to have more information but if we make a mistake, can we go back and rectify it?
Senator C. Deacon: [Technical difficulties]. Thank you.
[Translation]
Senator Miville-Dechêne: I’ll continue, if I may, on transparency. I’m quite impressed, in a way, but also surprised that you’d go so far in saying that for every decision, you need a report, you need to know what happened and why this investment was accepted or not. The public servants who testified before us said: “Be careful! No, if there are company secrets, we can’t go that far.” Clause 19 states that the minister may, if he wishes, make the decision public.
How do you explain this rather significant difference of opinion, all the same?
Mr. Leblond: On the one hand, it’s true that corporate secrets need to be protected. In some cases, this may involve personal data. This issue is important, otherwise things will stall even more, especially if investors see that, all of a sudden, all this information will be made public.
Between a situation where the minister can act and one where they can do nothing at all, there may be something in between that can be done. Making the full decision public with all the details might not be a good idea. However, there could be a mandatory summary containing the most important points, the pros and cons of a particular decision, and perhaps the reason why certain factors were considered important. These points could be made public, without going into details that could have a negative or detrimental impact on the company or investor.
Senator Miville-Dechêne: If we say that the company will steal our state secrets, you will understand that the company, on the one hand —
Mr. Leblond: Well, I’d like to know. If they say the company is going to steal our state secrets and we agree to the deal anyway, I, as a member of the public, would like to know.
Senator Miville-Dechêne: Naturally.
Mr. Leblond: If I’m told that no, precisely, we haven’t because we feel… There’s always a way to phrase things by saying they’re bandits, so no, we didn’t accept the transaction.
However, you can always say that there is a significant risk that such and such a transaction could have an impact on data or information. It seems to me that there are ways of doing this. In general, public servants are pretty good at this. At the very least, if accountability is mandatory, the law should state that the minister must report. After that, you will have to see what you put in there and how far you can go. It seems to me that this kind of matter can be discussed.
Senator Miville-Dechêne: Many countries already have laws of this type. Do the laws that exist all over the world have a certain transparency that resembles the transparency we are after?
Mr. Leblond: Unfortunately, I can’t answer yes or no. I haven’t done the research. I’ll make a note of that and get back to you, if you like.
Senator Miville-Dechêne: Yes, that would be great. Thank you.
[English]
Senator Petten: In your opinion, what impact do you think Bill C-34 will have on foreign investment?
Mr. Leblond: It’s hard to say. It will have an impact because it provides the government with more teeth to some extent, but it’s limited. However, it’s a step forward. As we’re already seeing, I think it will result in some companies deciding to relocate — maybe not their physical operations but their head offices. They will say, “We’re going to be incorporated in Dubai,” or somewhere else. “We know that no one will bother us there if we’re trying to get funding for certain things and we can avoid the risk that a transaction might not happen or we might have to sell.” For example, if it concerns mining operations that are not in Canada, they might say, “Why is this an issue now? Yes, we’re a Canadian company. But we’re operating in another country. Why is getting funding from China a national security issue for Canada?” That has ultimately led to some companies saying, “We’re not going to take a chance.” Does that mean we lose head offices along with the benefits that they provide to the economy? Do we lose certain investments as a result — that is, bigger Canadian companies that become major players and might eventually bring back more money to Canada and to Canadians?
Again, when you’re talking about national security which is a bit of a loosey-goosey concept. Some companies and investors might say, “I’ll look elsewhere. I’ll relocate somewhere else to make sure things are clear.” It may not be in the U.S., though, because that might be problematic too. They might look to places where security issues are not a concern.
The Chair: Next is Senator Gignac, the sponsor of this bill in the Senate. Please go ahead.
[Translation]
Senator Gignac: Welcome, Mr. Leblond, and thank you for your testimony. You alluded to this in your opening remarks. Since your testimony in the other place, amendments have been made to the bill. You may now be more sympathetic to the theme of entities and assets, whereas there was no mention of it in the first version, although there is undoubtedly room for improvement.
Are there any other points you may not have mentioned that may or may not have been subject to amendments?
Mr. Leblond: I must confess that I focused on these points, because I was trying to see what had changed, given that this was one of the important issues. I was surprised to see that the matter of sanctions, which had already been raised, had not been touched. The importance of intangible assets and intellectual property was mentioned. Except in the case of acquiring assets directly, which I think is one of the fundamental features of the associated risk, if we’re talking about national security, I have to admit that I focused on that, and not on the other features that could have been subject to amendment.
Senator Gignac: Of course, much has been written about accountability. But I’d like to take you on a different journey.
There has also been much discussion about the power given to the minister. Previously, this power was vested in the cabinet, but now the minister has very significant power. Do you have any comments or observations to make on this topic? Unless I’m mistaken, the process is somewhat similar in the United States, where power is more concentrated. Obviously, we don’t have the same political system, but national security is quite concentrated in the U.S.
Mr. Leblond: From what I understand of the American system, it’s the Committee on Foreign Investment in the United States (CFIUS) that makes the decisions. So it’s a committee, not the Secretary of the Treasury. Again, it’s true that in the end, the decision is made by a single person, especially if there is no accountability. In other words, if we leave it up to the minister to decide whether or not to make the decision public, or part of the decision, it’s a question of trust. We have to ask ourselves how much trust we have.
I think a committee, whether it’s cabinet, as it used to be, or some other committee similar to what exists in the U.S., might be the answer.
Senator Gignac: Can you tell us briefly about this committee that exists in the United States?
Mr. Leblond: These are experts who look into things. Here, public servants do a lot of the work, but again, we don’t know them, whereas the members of the American committee are known; so there’s a certain independence, and there, a recommendation is made to the secretary.
Senator Gignac: Would you recommend we take inspiration from what we see in the United States?
Mr. Leblond: Yes. The advantage of having this kind of committee would be to bring more perspective and perhaps even a better understanding of the issues potentially related to decisions, especially if they become increasingly complex.
Senator Massicotte: Thank you, Mr. Leblond, for being with us today. It’s much appreciated.
I would like to share with you my concern about the consequences, to see how you will react. When you look at all the measures that have been taken — you were talking a little earlier about methods, structures and certain transactions, including a long-term lease. There are a lot of exemptions. I’m afraid we’re going to have to work very hard to find the ideal transaction — we’re not talking about a large number of transactions, after all — and in 10 years’ time, we’re going to realize that it was ridiculous to do it this way. Our economies are based on free trade, and consequently, there are major advantages to economic growth. It’s so easy to say no. I’m afraid it’s a waste of time and we’ll get nowhere.
Mr. Leblond: It’s a risk. I’m not saying you’re wrong; yes, it could be a shot in the dark. On the other hand, it’s an opportunity for reflection. In my opinion, and this is the purpose of my statement and my comments, it gives us an opportunity to really think about the ultimate tools we have when it comes to protecting the country’s national security because in the end, that’s what this bill is all about. We also need to establish that the Investment Canada Act was developed for fairly specific transactions.
The issue is whether, when we talk about transactions, we could broaden… Are we only talking about the creation of new businesses or the purchase of a business? Should we think more broadly? Do we need to look at the tools we have to protect our economy, enhance its value and protect our national security?
Basically, what we’re seeing right now is more of a modification that’s a bit on the fringe. We’re maintaining the current structure of the law, but adding certain elements to give it a bit more bite. But in the end, will it change anything? That remains to be seen.
I think we have to ask ourselves, when we talk about investments, whether they’re simply transactions by an investor purchasing shares in a company or a corporation. There are more complex types of transactions — or simpler ones, in a way. Some transactions involve leasing to purchase, or not. In practice, it’s the same thing, whether you own it or not, whether you have a lease, whether you have access to the data.
What I would like, when we discuss investments, is for us to be able to rethink the whole thing and that it’s not just… There’s an entity and you buy shares in that entity, and that’s a transaction. We need to broaden our concept of what an investment is and what shape it can take, especially today, if we’re talking about intangible assets, or simply access to information. In some cases, are there transactions where you gain access to information and is that something that would go completely undetected? Possibly.
So, as I was saying, it’s a question that arises in the case of a start-up receiving funding from an investment company; who’s behind it, and what access do they have to the information? Do we work our way back up the whole chain?
Senator Bellemare: I’d like to come back to some questions asked by other senators, in particular Senator Gignac. You explained that in the United States, there’s a board. I’m concerned about the increased authority given to the minister and the whole ministerial side of things when it comes to shares. In terms of transparency, it might be a good idea to provide a board or committee with a framework that includes specific criteria for its review of various files, and to perform, for example, a cost-benefit assessment, to take into account access or investment in intangible assets.
If we were to go that route, what attributes do you think members of such a committee should have?
Mr. Leblond: The work of such a committee, in principle, would or should be done by the public servants who apply the law. When there’s a transaction, those people do the math. Ultimately, they do it for the minister in place. It’s a much more closed system. Indeed, if there were a committee made up of public servants and the minister, precisely with different perspectives…
I think in that case, it could include, if we’re talking about what we can go out and find… I know you’re an economist by training, but it requires more than just economists. You also need people with sectoral expertise. Would we want people with expertise in the agricultural sector, the mining sector or the high‑tech sector, so that we can say we have an expert in that field who can state that this is how it works? Yes, the investor or the company selling tells us so, but you have to be able to challenge us, whereas sometimes public servants don’t always have the necessary expertise, because they’re doing a whole series of transactions in different fields. So, I would say that, at a minimum, it requires sectoral expertise at the very least, perhaps engineers in some cases, in other cases economists, in other cases lawyers, farmers perhaps; why not?
Senator Bellemare: Absolutely. Are you envisioning a nine‑person committee? If we went down that road, perhaps some research might be in order?
Mr. Leblond: I think it would be worth considering that possibility; the opportunity is there.
Senator Bellemare: Compared with the United States, that could be an advantage for us. At least it wouldn’t create a disadvantage if our structure is too different from theirs. In that case, investors would have a similar process in both countries.
Mr. Leblond: We’d have to look at the protocols for appointing people on the US side and see how it’s done. I’d have to examine that more closely.
[English]
Senator Yussuff: Thank you, Mr. Leblond, for coming. I have two questions. One has to deal with non-compliance. You are raising a concern that the penalties may not be adequate in the context of a company that may not meet the requirements of Canada. Given what you have said, do you think the number should be higher than what the government is proposing?
Mr. Leblond: The question was about whether the number should be higher if there is non-compliance, if I may rephrase your question.
I think so. Nowadays, for a lot of investors, half a million dollars is nothing. That’s not even the average price of a house in Canada. To what extent is that going to be a deterrent to say, I committed to this just so I could get the transaction and the deal done, but afterwards — we see this in so many parts of society where, yes, I will do this, and then it doesn’t happen. Then you sanction, it’s very low, and it’s too late.
We know that in some cases, such as in Europe with their data protection regulations, it’s, what, 4% of global revenues. Yes, the sanctions are lower than this. Even for very large companies, sometimes a billion dollars is nothing, but to me, if we’re doing it in another bill, why can’t we be consistent? If it’s 5% of global revenues or the highest of minimum $25 million, why are we at $500,000 in this bill? If national security is so important and we will ask for commitments on the grounds of national security, to me, it seems the sanctions should be much higher. It should hurt.
Senator Yussuff: In terms of the whole issue of intangible assets, it’s not a new principle in concept, but in the context of the attention it is getting, given the value of it, do you think that the department is very much aware of what a consequential decision might be when they make a decision, given a company whose primary objective is to trade in data because they understand the value of it? Do you think they really understand that as a concept in terms of takeovers and mergers that are happening in the country on a regular basis?
Mr. Leblond: I certainly cannot speak for the people who conduct the analyses.
Senator Yussuff: From your observation of what you’ve seen so far?
Mr. Leblond: Sometimes it’s a bit difficult to know — again, going back to transparency — what was taken into account, and how it was taken into account when a decision was made. I think they are aware, certainly. There have been enough discussions about these things, but it goes back a bit to what Senator Deacon was saying in terms of finding a balance. Because, on the other hand, we don’t want to say, no, data has to stay here, or intellectual property has to stay in Canadian hands. Will it then affect investments in research and development to get those things going in the first place? They will say, if I can’t sell at the end of the day because I will be blocked, then I won’t do it or I’ll do it somewhere else.
I would presume that this is being considered when looking at the net benefit analysis, to say, okay, this is one issue. The data will now be in foreign hands. I’m leaving the national security concerns, just the creation, or intellectual property, saying now it will be owned by a foreign investor and they will get the revenues out of this.
Yes, it has to be taken into account. On the other hand, on the issue of intellectual property or other intangibles sometimes, again, does it fit in the Investment Canada Act? Or is it something that should be considered somewhere else, like the discussion around patent pools, where they say small companies could have patent pools that the government could facilitate or something like that?
The question is, will we just look at every piece of legislation on its own and say, okay, this only deals with this, this only deals with that? Or should we have a more holistic approach when we are thinking about economic security, national security and investing in intangibles where there’s value creation and look at all the tools that the government has? How do they connect and ensure that there are no gaps?
One of the fears that I’ve expressed is the one about buying assets, but there might be others that I’ve not necessarily thought about. I guess this is my call to you and your colleagues in the House to maybe force the government to think more holistically about these different bills as opposed to saying, okay, we’re just going to do this now, and then this. What will fall through the cracks?
Senator Duncan: Thank you very much for your presentation today. I’d like to follow up on a couple of themes.
You’ve alluded to the complexity of investment. There’s attracting foreign investment, and there’s the need and balance for that. There’s also the monitoring aspect of foreign investment. While I appreciate my colleagues talking about data and information sharing, I’d like to talk about the resources and not just the critical minerals. We have individually owned, I believe — Senator Petten will probably correct me — fishing vessels, for example, that have a certain catch and a tremendous value that could be sold privately. Individual family farms could also be sold privately.
In Yukon, we have the situation of gold mining operations, which are single, family-owned operations. They are like the family farm. Any of those could be sold internationally at any point in time. The Investment Canada Act is designed to catch the big picture. Who is monitoring the small fry?
Mr. Leblond: No one.
Senator Duncan: So at what point does someone in the Government of Canada look at that foreign investment in our country and determine if it is a national security risk or not?
Mr. Leblond: My understanding of these things is that if someone raises it, then it might be looked at, but it’s certainly not because it falls under the thresholds, unless something comes up and someone identifies a clear national security risk — then the thresholds don’t apply.
Obviously, if there’s a transaction involving foreign state-owned enterprise, this may — but again, a lot of these transactions are very small and would probably fall under the radar.
I would say that right now, yes, it would not come about. Maybe at some point a journalist or someone might say, oh, there’s something going on there, and then someone might look into it, but it would not necessarily be in the context of the Investment Canada Act.
Senator Duncan: In other words, the threshold is too high in this to deal with the SMEs?
Mr. Leblond: I don’t want to say the threshold is too high. Again, we have to look at the risks. Can we be proactive? Certainly, the law as it’s intended now is not proactive. It doesn’t look for things. Basically, you have to tell us. We might come across something and then look into it; otherwise, you notify us. If you don’t, then there could be penalties and consequences.
To look at these transactions where someone might say, well, I’m buying a farm, why should I notify anyone about this? Except the local authorities to say now that land is mine as opposed to being the previous person’s. Or this fishing vessel. When we think about national security, we know that sometimes small transactions or an accumulation of small transactions that keep falling under the radar could become problematic. Is there somewhere within the government apparatus where at least we are thinking about these potential risks? If so, how do we identify them?
Right now, certainly that’s not what we have here, but maybe that’s something we need to look at. Is there a way we can use technology — now we talk about machine learning and AI, which has the capacity to process lots of information. I don’t know. Could transactions somehow be — in terms of big data, where you have a machine that looks at this based on protocols and determine that here are all the acquisitions that are taking place at the municipal or provincial level, whatever, and then it just goes through the machine. At least the machine would say, oh, fishing vessel. Maybe someone should look at that. That could be one way of doing it, but certainly right now, the system is not geared towards that kind of preventive approach. But at the same time, we can’t say we’re just going to hire millions of people to look at every transaction. That would be too burdensome.
The Chair: Thank you very much for that. We’re going to go to a final comment from our deputy chair in just a moment, but just for everybody’s sake, I’ve asked the analysts to try and a list of the suggestions that we have heard from our various witnesses that might be observations or might turn into something else. You should all be thinking about that as well before we come back because we’ll be in the final stages when we return after the break weeks.
Senator Gignac: Will the minister come?
The Chair: Yes, after the break. There’s a witness tomorrow and then one more witness when we come back, then the minister.
Senator Gignac: Okay, so we have to —
The Chair: Have your thinking ready for all of that. The final comment goes to Senator Loffreda.
Senator Loffreda: I’m glad to have the final comment.
When we discuss acquisitions, we often think of control, but there is also an acquisition of significant influence. In my accounting days, I remember that 20% was a significant influence, which is an extremely important element. Your main concern is that this bill does not cover, as well as it should, the acquisition of assets rather than the entity directly when a national security threat exists. You’ve expressed that clearly.
Staying on that line of thought, another concern that comes to mind is when an investor proceeds to acquire a non-majority interest in an entity, yet still gains a significant influence due to there being various shareholders. We can think of many public entities where there is less than a 10% ownership. At times, it can even result in — not necessarily control, because control is over 50%, but not far from it. Do you believe this is also a significant concern that we have yet to address? Are you aware of how the U.S. treats such issues?
If our adversaries are looking for loopholes, would those transactions fall under the radar and acquire maybe 20% or 25%, get their foot in the door and try to influence where it’s going?
Mr. Leblond: My understanding of the law and the bill is that those types of transactions are considered. It’s not just control, it’s also influence.
Senator Loffreda: How do we determine influence? How is that defined?
Mr. Leblond: They will look at transactions and 20% or 25% will be flagged. Below that, it’s a question of how many seats on the board, and whether you have your own people who will be the CEO. In my understanding of how this is looked at, it will take those things into consideration.
The issue is maybe for lower thresholds if it’s just 10% or less than 10%. It still gives you access to the information. Does it give you access to this technical knowledge that could be important because you have a representative who sits on the board? Maybe that’s something that would not be considered, either because it doesn’t meet the threshold or it would not be notified because we don’t having control, we’re just buying, we’re just going to have a seat or two on the board. It doesn’t give you real influence, but it gives you access. To what extent and when is this access problematic?
If it’s a Chinese investor or having a couple of seats on the board, would that be sufficient to raise a national security flag if it’s a construction company? Well, I would hope so. The law allows for that. It probably would not be notified, so how do we make sure that we catch those types of transactions where someone will say that we should look into this?
Senator Loffreda: So, it’s notification.
Mr. Leblond: If not notified, how do we make sure that we look at it anyway?
The Chair: Those are excellent points. Thank you for raising that. We have our work cut out for us here.
Our thanks to Dr. Patrick Leblond, the CN-Paul M. Tellier Chair on Business and Public Policy and Associate Professor at the Graduate School of Public and International Affairs at the University of Ottawa. That’s a long title. We’ll also add a senior fellow at the Centre for International Governance and Innovation. We do appreciate your testimony and thank you for your patience in terms of rescheduling.
Ladies and gentlemen, I think you have your assignments to go and think about this before we come back, and we will wrestle it then.
(The committee adjourned.)