In brief

Canada has announced two complementary policies that will subject foreign investment in the interactive digital media (“IDM“) sector to enhanced scrutiny under the Investment Canada Act (“ICA“). IDM relates to digital content and/or digital environments where users can participate or collaborate, including certain mobile apps, video games, and virtual reality platforms.

The Minister of Innovation, Science and Industry’s policy is intended to stop hostile state-sponsored or state-influenced actors (“SOEs“) from leveraging Canada’s IDM sector to spread disinformation and manipulate information (“ISED Policy“). The Minister of Canadian Heritage’s policy introduces enhanced scrutiny of foreign investment in cultural businesses operating in Canada’s IDM sector, including initiating public interest reviews and requiring more rigorous undertakings to obtain investment approval (“Canadian Heritage Policy“).

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Key takeaways

Canada is focused on balancing the benefits of foreign investment against national security risks and a desire to maintain strong domestic businesses. Consistent with other recent policy decisions respecting foreign investment by SOEs, on March 1, 2024, the Government of Canada introduced the new ISED and Canadian Heritage Policies. These policies provide specific guidance for foreign investment in Canada’s IDM sector, including:

• While Canada remains open for business, foreign investment in Canada’s IDM sector will be subjected to enhanced scrutiny under both the national security review and cultural review provisions of the ICA.
• Foreign investors that are SOEs, in particular those from “hostile” states, investing in Canada’s IDM sector will now be scrutinized against new sector-specific and existing national security risk criteria, and should anticipate that their investments may be subjected to extended national security reviews. Foreign investors should involve legal counsel early to assess national security risk and determine what steps, if any, should be taken to mitigate such risk and ensure the national security screening and review process (which can take 200 days or more to complete) will not delay investment timelines.
• Foreign investments that require cultural net benefit approval will be scrutinized against new sector-specific and existing criteria, and foreign investors should anticipate that they will be required to provide more rigorous undertakings to obtain cultural net benefit approval. Foreign investments that raise concerns about intellectual property, corporate governance, transparency and creative independence are more likely to be subject to such rigorous undertakings.
• The Canadian government is expected to initiate more frequently public interest reviews of foreign investments in Canada’s cultural IDM sector that would not historically have been subject to review and approval. Thus, these foreign investments will be subject to the same cultural net benefit approval process described above.
• Foreign investors will increasingly need to be proactive, and establish a holistic approach to investing in Canada’s IDM sector that includes carefully considering timing strategies, clearly understanding a target’s IP rights, and in light of enhanced undertakings, being mindful of industry and economic pressures that can affect the acquired business post-closing.

Foreign investors should continue to monitor developments as Canada’s foreign investment review regime evolves.

In depth

Canada’s foreign investment review regime

Under the ICA, certain types of foreign investment are subject to mandatory review by the Foreign Investment Review and Economic Security (“FIRES“) Branch of Innovation, Science and Economic Development Canada, and for transactions involving cultural businesses, the Cultural Sector Investment Review (“CSIR“) Division of Canadian Heritage.

The establishment of a Canadian business requires a mandatory non-suspensory notification to FIRES and/or CSIR.

Where a foreign investor acquires control of a Canadian business, either a pre-closing, suspensory application for review and net benefit approval (where the applicable financial threshold is exceeded), or a non-suspensory notification, must be filed with FIRES. If the Canadian business is or involves a cultural business, as defined in the ICA, then an application for review and net benefit approval (where the applicable financial threshold is exceeded), or a non-suspensory notification, must be filed with CSIR. To obtain net benefit approval, the foreign investor is generally required to make legally binding undertakings to the Canadian government in respect of how it will operate the Canadian business over a specified duration after closing. Investments in Canadian cultural businesses frequently require net benefit approval because the applicable financial thresholds are quite low (e.g., CAD 5 million for direct and CAD 50 million for indirect investments).

Where only a non-suspensory notification must be filed, the Canadian government can initiate a discretionary public interest review if the investment relates to Canada’s cultural heritage or national identity. This would require the foreign investor to obtain cultural net benefit approval.

In addition, the national security provisions of the ICA permit the Canadian government to scrutinize all foreign investment to assess whether the investor and/or the investment poses a threat to Canada’s national security.

Canada’s IDM sector

Canada’s IDM sector plays an important role in the everyday life of Canadians. Its vibrancy attracts foreign investment, which for the Canadian government, heightens the risk of national security concerns, and highlights the importance of maintaining and increasing distinct Canadian-owned and created IP in the IDM sector.

The Canadian government defines IDM to include digital content and/or environments where users can actively participate or collaborate among multiple users for entertainment, information or education purposes. IDM is commonly delivered through the Internet, mobile networks, gaming consoles or media storage devices. Activities that fall under IDM include, among other things, video gaming (e.g., online and consoles) and technology platforms that can be used for entertaining, education, training, and e-commerce (e.g., mobile apps, virtual and/or extended reality devices). While IDM is defined similarly in both policies, the Canadian Heritage Policy is primarily focused on cultural businesses within the IDM sector, such as PC gaming, console gaming, cloud gaming, mobile gaming, and certain immersive technology/augmented reality.

ISED Policy subjects foreign investment in Canada’s IDM sector to enhanced national security scrutiny

Over the last several years, the Canadian government has increasingly focused on the national security risks arising from foreign investment in Canada. The ISED Policy’s focus on protecting Canada’s IDM sector from national security threats aligns with other recent policy changes, including introducing a voluntary filing mechanism under the national security provisions of the ICA, updating its Guidelines on the National Security Review of Investments, and issuing policy statements relating to Russian foreign investment and investments by SOEs in Canada’s critical mineral sectors. While it has yet to be passed, the Canadian government has also introduced legislation that will modernize the national security review process, including introducing a mandatory, pre-closing filing for foreign investment in prescribed business sectors. Canada’s IDM sector is expected to be a prescribed business sector.

The ISED Policy applies to all foreign investment in Canada’s IDM sector, but in particular to investments by SOEs from “hostile” states. It confirms that the Canadian government will subject such investments to enhanced national security scrutiny. This enhanced scrutiny is intended to counter the risks of state-sponsored or influenced information manipulation, including omitting facts, inauthentically amplifying narratives, doctoring audio/visual content, trolling, and efforts to censor or coerce self-censorship of information.

The ISED Policy provides IDM sector-specific information about the factors that the Canadian government may consider when assessing whether an investment would be injurious to Canada’s national security. This non-exhaustive list of factors, includes:

• The reach and audience of the product’s content
• Whether the products have online elements (e.g., in-game chat logs, in-game purchases, microphone/camera access)
• The nature and extent of the foreign investor’s ties to a foreign government
• Whether the Canadian business is likely to be used as a vehicle by a foreign state to propagate disinformation or censor information in a manner that is inconsistent with Canadian rights and values through the investment
• The composition of the board of directors of the Canadian business
• The degree of control or influence the foreign investor would likely exert on the Canadian business, including product content

Foreign investors and Canadian businesses must carefully consider the national security implications of any foreign investment in Canada’s IDM sector, and consult with legal counsel early to assess national security risk and develop a holistic regulatory strategy. A full national security review process can take 200 days or more to complete, significantly prolonging investment timelines, and can result in the government blocking an investment that has yet to close, requiring the investor to divest part or all of a previously acquired Canadian business post-closing, or requiring the investor to take mitigation measures.

Canadian Heritage Policy enhances scrutiny of foreign investment in cultural businesses operating in Canada’s IDM sector

The Canadian government has a long history of protecting and promoting investment in Canadian cultural businesses. The Canadian Heritage Policy reflects this history and is intended to ensure a strong Canadian IDM sector into the future. Under the Canadian Heritage Policy, foreign investment in cultural businesses operating in Canada’s IDM sector will also be subject to enhanced scrutiny to ensure that the foreign investment is of net benefit to Canada.

The Canadian Heritage Policy applies to all foreign investment in Canadian cultural businesses operating in Canada’s IDM sector. It identifies IDM sector-specific factors that the government will consider when assessing whether investments that require an application for review are of “net benefit” to Canada. In particular:

• The extent to which a foreign state is likely to exercise direct or indirect operational and strategic control over the Canadian business as a result of the transaction
• Whether the Canadian business to be acquired owns or creates its own intellectual property
• The degree of competition that exists in the sector, and the potential for significant concentration of foreign ownership in the sector as a result of the transaction
• The corporate governance and reporting structure of the foreign enterprise, including whether it adheres to Canadian standards of corporate governance and to Canadian laws and practices, including free market principles in its Canadian operations
• Whether the Canadian business to be acquired is likely to continue to operate on a commercial basis

The Canadian Heritage Policy also confirms that foreign investment in cultural business operating in Canada’s IDM sector that involve IP creation and ownership will be closely scrutinized to ensure Canadian voices and values are maintained. The government intends to require foreign investors to offer more rigorous legally binding undertakings as part of the cultural net benefit approval process. In addition to customary undertakings, foreign investors may be expected to make commitments to preserve creative independence, enforce robust corporate governance and transparency, and fulfill ongoing reporting, auditing, and inspection requirements. Foreign investors may also be required to offer these legally binding undertakings for a longer duration than the three years that has historically been required.

Foreign investments in Canada’s IDM sector that would only have required a notification may also be subject to enhanced scrutiny through public interest reviews. The Canadian government may initiate a public interest review of foreign investment in a Canadian business that relates to Canada’s cultural heritage or national identity. Once a public interest review is initiated, the foreign investor is required to obtain cultural net benefit approval. The Canadian Heritage Policy indicates that the Canadian government intends to more frequently initiate public interest reviews of foreign investments in cultural business operating in the IDM sector, which would subject these investments to the cultural net benefit approval process described above.

The Canadian Heritage Policy marks a shift in the Canadian government’s enforcement practices, as historically, public interest reviews have only rarely been initiated. Going forward, foreign investors should anticipate the possibility of a public interest review of foreign investments that only require a notification where such investments raise concerns about intellectual property, corporate governance, transparency and creative independence.