OTTAWA — The federal government is proposing new requirements for foreign investors trying to buy into sensitive technology sectors, in an effort to prevent IP and data from falling into hostile hands. Legislation introduced Wednesday would also give Ottawa new powers to set conditions for international deals involving domestic firms.

The tightened rules come as the Liberals signal new vigilance in Canada’s relations with China while trying to position the country in an unfolding global technology arms race. “Geopolitics has changed, we need to change as well,” said Innovation Minister François-Philippe Champagne. “We need to have processes in place, we need to be more vigilant.”

Bill C-34 would modify the Investment Canada Act to require foreign investors to notify the government before closing any deals in specified fields that would give them access to sensitive data, IP or trade secrets. The rules will provide “increased visibility of investments in sensitive sectors to prevent national-security injury,” according to a briefing document that Innovation, Science and Economic Development Canada (ISED) provided to reporters. 

That will allow authorities to head off any such harm, sparing the involved firms the impact of having to reverse a transaction after the fact, government officials said. Such briefings are routinely conducted on the condition that participating officials not be named.

ISED’s deck cites the hypothetical example of a foreign investor trying to take over a domestic quantum computing company, allowing it to “immediately access important Canadian IP.”

The Logic first reported that Ottawa was considering a pre-closing notification requirement in October 2021; the measure was among several suggested to combat potential economic threats to national security on which Public Safety Canada consulted with industry associations and think tanks last spring.

Under the current act, the federal government already has the power to launch a national-security review when a foreign investor tries to set up a new Canadian subsidiary, or take control of or acquire a domestic firm. Following the investigation, the cabinet can block the transaction, impose conditions on it or direct that it be reversed. Between the 2017–18 and 2021–22 fiscal years, Ottawa reviewed 70 deals, ordering seven divestitures and blocking two.

If Bill C-34 passes, ISED will publish regulations specifying which sectors the notice requirement will apply to, and how much time investors will have to provide it. Senior government officials speaking to reporters Wednesday pointed to updated guidelines for national-security reviews published in March 2021, citing critical minerals, sensitive personal data and technologies like robotics and biotech. 

“We are leaders in quantum [and] AI, and we need to protect these technologies,” Champagne told reporters on Wednesday. “This is going to be another tool in the toolbox to do so.” He also cited cybersecurity and semiconductors as fields requiring safeguards.

The changes to the law and the regulations, once published, will “much more clearly define [the government’s] national security areas of interest,” said Subrata Bhattacharjee, national chair of the competition and foreign-investment review group at the law firm BLG. “[It is] saying, ‘These are the areas that we’re concerned about. You are effectively going to have to get advanced approval.’”

The legislation would also give the innovation minister power to impose conditions on a deal during a review, such as blocking an acquiring firm from accessing a target company’s IP or the personal information it’s collected. And it would let Ottawa extend a review or reach a settlement for approving a takeover, without cabinet orders. It would also increase the standard fines for non-compliance to $25,000 a day per infraction, and introduce a penalty for breaking the new notification rules; the amount will be set by regulation.

Investors making deals subject to the new requirements can expect “longer timeframes for approval, or at least for review,”  said Bhattacharjee. He also suggested Ottawa’s ability to impose conditions for closing deals could be a positive, reducing long-standing uncertainty around transactions that raise national security issues. “It may give investors some comfort that in some cases … there is a process by which you can try to resolve the concern.”

Bill C-34 does not alter the net-benefit test, a part of the act that allows the government to review very large deals to ensure they’re not economically damaging to the country.  “The number of investments that are subject today to a pre-closing filing and review requirement is relatively small” and fall under that section, said Charles Tingley, a partner at Davies, Ward, Philipps & Vineberg. So the new national-security notification requirement is “a significant change,” he added.

The Liberal government has tried to signal that it’s being more vigilant about foreign investments. In April 2020, it warned it was watching for state-owned enterprises “motivated by non-commercial imperatives” doing deals for businesses involved in public health or supplying critical goods and services.

Champagne’s bill comes as Ottawa takes a stronger line on relations with Beijing. Canada’s new Indo-Pacific Strategy, unveiled last month, cites China as “an increasingly disruptive global power,” noting that it is “making large-scale investments to establish its economic influence, diplomatic impact, offensive military capabilities and advanced technologies.” 

In November, Champagne ordered Chinese companies to divest from three Canadian lithium miners, citing an updated policy that state-owned enterprises would only be allowed to acquire critical-minerals producers in exceptional circumstances. Ottawa has solicited U.S. government investment, however, providing a list of 70 projects for consideration to a U.S. Defense Department program designed to encourage the production of such metals. 

“The government is getting more comfortable in its national security skin,” said Tingley. While the number of such reviews has increased over time, Ottawa has also allowed more transactions to proceed. Previously, “if you were in any way under national-security scrutiny, it probably didn’t bode very well for your investment.”

Bill C-34 does not introduce any new restrictions on acquisitions by foreign state-owned enterprises, and on Wednesday officials insisted the act will remain “country-agnostic.” The new notification requirements and other rules won’t include any carve-outs for allies, as Public Safety Canada’s consultation paper had contemplated. The U.S., for example, exempted Australia, Canada and the U.K. from parts of the new China-focused review process it launched in February 2020.

The legislation would, however, allow Canada to trade information about specific deals with authorities in other countries, to deal with shared security threats. 

The new rules aren’t restricted to takeovers, but also apply to international funders taking smaller stakes in firms. Many of the most prominent Canadian startups and scale-ups in AI, cybersecurity, quantum and semiconductors have attracted significant venture capital from foreign financiers, or have sold to multinational buyers, particularly from the U.S. 

Champagne said he wasn’t concerned that the measures would deter money flowing into the country. “Canada is a very attractive place to invest,” he said, noting that allies are “happy that we take things seriously.” Other members of the Five Eyes and G7, he added, are also “tightening up now in light of the new geopolitical reality that we have to face.” 

This story has been updated with comments from investment lawyers.