Think Canada for Global Projects and Global Expansion: Why Trade and Investment Agreements Matter for Global Investment and M&A

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International trade has consistently been a key pillar of Canada's economy, given the nation's status as a G7 and G20 economic power. Canada’s international trade is bolstered by more than 100 trade and investment agreements with other countries and international organizations. These agreements helped facilitate US$45.8 billion in direct foreign investment in Canada and US$100.1 billion in Canadian direct investment in 2023.^{[1] [2]}

This article focuses on Canada’s bilateral investment treaties, known as FIPAs, and the opportunities they provide for foreign investors in Canada and for Canadian investors abroad. For information concerning foreign expansion to and from Canada, including corporate and tax considerations, please refer to our previous article here.

Recent Disputes

Although tax considerations are a key consideration in structuring international investment and mergers & acquisition (M&A) transactions,^[3] recent cases exemplify the importance of considering Free Trade Agreements (“FTAs”) and Foreign Investment Promotion and Protection Agreements (“FIPAs”) as important structural elements in an overall international transaction structure. They also serve as a reminder to foreign investors of governmental risk that should be considered as part of international structures and highlight the availability of mechanisms that can be used to protect their interests when foreign investment risks materialize.

In 2014, Bear Creek Mining Corporation (“Bear Creek”), a Canadian corporation, obtained rights under a concession agreement that allowed Bear Creek to operate the Santa Ana silver mining site in Peru. The Peruvian government then enacted a decree that revoked Bear Creek’s concession, resulting in Bear Creek ceasing activities at its mine site and incurring significant damages. In response, Bear Creek brought arbitration proceedings against Peru under the Canada-Peru Free Trade Agreement, arguing that the Peruvian government’s actions breached the requirements of the agreement, namely to protect investors against unlawful expropriation, to afford them fair and equitable treatment, to grant them full protection and security, and to not impair the investment with unreasonable and discriminatory measures. Bear Creek was awarded damages of approximately US$18 million by a tribunal in Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/2.^[4]

More recently, First Quantum Minerals Ltd. (“First Quantum”) initiated proceedings against Panama in the International Court of Arbitration, seeking US$20 billion over the shutdown of its Cobre Panamá copper mine.^[5] First Quantum’s claim stems from the Supreme Court of Panama’s ruling that the contract to operate Cobre Panamá was unconstitutional.^[6] First Quantum has sought other claims against Panama, including for compensation for semi-processed copper ore located at the mine site.^[7]

These cases evidence the risks associated with investment in foreign enterprises or acquisitions of foreign assets for Canadian investors and Canadian companies.

Types of Trade and Investment Agreements

Canada has numerous types of trade and investment agreements, such as FTAs, FIPAs, Plurilateral Agreements and World Trade Organization agreements. Of these, FIPAs and FTAs are the most common.

FTAs are treaties between the Canadian federal government and either other countries or international organizations that reduce trade barriers, regulate fair conditions and promote trade in general. FTAs can also address additional “non-trade” related issues, such as the protection of intellectual property rights. Canada currently has 15 FTAs with 49 countries, including the Canada-United States-Mexico Agreement (CUSMA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).

FIPAs are bilateral agreements between the Canadian federal government and another country. FIPAs are designed to protect and promote foreign investment through legally binding rights and obligations. Generally speaking, FIPAs aim to result in foreign investors being treated like domestic investors and prevent governments from seizing investments without adequate compensation. Like FTAs, FIPAs help to open markets and create more predictable, fair and transparent conditions for investors. Canada currently has 36 FIPAs in place with countries including Argentina, Egypt, Hungary, Poland, Romania, Slovakia and Uruguay, and are in the negotiation phase with countries such as Ghana, the Democratic Republic of the Congo, and Mozambique. A full list of Canada’s FIPAs is available here.

Foreign Investment Promotion and Protection Agreements

The current 2021 Model FIPA establishes standard provisions which can be accessed here. However, because FIPAs have been in place well prior to 2021, the contents of FIPAs vary. The 2021 Model FIPA includes:

1. provisions to encourage parties to create favourable conditions for investors, and obligate fair and equitable treatment of investors and investments in accordance with the principles of international law;
2. most-favoured nation and national treatment provisions, which obligate parties to treat investors and investments equally to the country’s own investors or any third party in similar circumstances with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of an investment in its territory;
3. provisions to compensate for losses, to ensure that investors who suffer a loss because their investments are negatively affected by armed conflict, national emergency or a natural disaster receive equal treatment;
4. provisions prohibiting the nationalization or expropriation of investments except for a public process, under due process of law, with adequate and effective compensation; and
5. dispute resolution provisions, which can occur through domestic dispute resolution processes or alternatively via international mediation and arbitration.

Impact of FIPAs on Structuring Investments and M&A Transactions

FIPAs can benefit both foreign investors in Canada and Canadian investors abroad in potential investments and M&A transactions with foreign companies. FIPAs, broadly, encourage the promotion of investment and create favourable conditions for investors, while also constructing a framework for stable and predictable investment conditions.

Particularly in the current geopolitical climate, when evaluating an international transaction, investors may identify changing political regimes and/or an unfavourable legal regime as a meaningful risk to their investment. These risks could include expropriation but also include certain unfavourable tax measures or otherwise exclude foreign investors from certain types of opportunities afforded domestic investors. By structuring an international transaction with a non-Canadian business operating in a country where a FIPA is in place, investors will have protection (or at least recourse) in the event that the foreign government breaches the FIPA. More specifically, in the event of a breach of an obligation in a FIPA, FIPAs typically provide investors direct and enforceable rights to seek a remedy.

Conclusion

FIPAs, as bilateral trade agreements, create more predictable and fair conditions for foreign investors by limiting the circumstances where an investment may be negatively affected and by providing dispute resolution mechanisms to receive compensation for losses. Although there are general exclusions and exemptions that may affect FIPA provisions, and variations from agreement to agreement, FIPAs typically provide foreign investors in Canada, and Canadian investors abroad, with the right to treatment that is equal to domestic investors, allowing for competition and a market that is more accessible for foreign capital.

The Capital Markets Group at Aird & Berlis LLP will continue to monitor developments with respect to FIPAs and other types of trade and investment agreements, particularly in the context of non-Canadian investments and M&A transactions. If you have any questions or require assistance with any matter related to FIPAs or other types of trade and investment agreements, please contact the authors or a member of the group.

[1] Invest in Canada – FDI Report 2023.

[2] Statistics Canada – Foreign Direct Investment 2023.