Canadian companies whose business operations involve Controlled Goods must report changes to their Controlled Goods Directorate registration before an acquisition. This means that companies and their in-house and outside lawyers must ensure that the closing checklist includes the Controlled Goods Directorate reporting requirement. The due diligence checklist should also include questions about Controlled Goods registrations so that the reporting requirement is included on the closing checklist.
Subsection 9(2) of the Controlled Goods Regulations provides as follows:
“A registered person shall, by the later of 32 business days before the date of an acquisition or one business day after the day on which they become aware of an acquisition, advise the Minister of the name and address of any person that will, as a result of the acquisition, own 20% or more of the outstanding voting shares or interests of the business.”
The requirement to report is based upon the Controlled Goods Registration. The target does not have to have a Controlled Goods registration to trigger the reporting requirement if the Buyer is a registrant. If the target is a registrant, then the Seller has a reporting requirement. If both companies are registrants, both have reporting requirements.
The primary requirement is for notification to occur not later than 32 days before the closing date of the acquisition. However, if the registrant misses this notification deadline, the registrant is still in compliance so long as the reporting occurs no later than one day after the day they became aware of an acquisition – this means within one day of the closing date. It is going to be difficult for a registered Canadian company to persuade the Controlled Goods Directorate that the officers and directors on file did not know about an acquisition. As a result, any failure to notify the Controlled Goods Directorate that extend after the closing date will be scrutinized and will likely be considered to be a failure to comply with the reporting requirement. Therefore, it is very important that the parties to M&A transactions to be aware of the reporting requirement and take all necessary steps to comply on time.
Controlled Goods are goods on the Controlled Goods List, which is a schedule to the Defence Production Act. Controlled Goods are primarily goods, including components and technical data (including blueprints and technical specifications in paper or electronic format) that have military or national security significance. The Controlled Goods List includes (a) a good of U.S-origin that is a defense article as defined in section 120.6 of the International Traffic in Arms Regulations of the United States Code of Federal Regulations, and (b) a good, other than a good of United States origin, that is manufactured using technical data of United States origin, as defined in section 120.10 of the International Traffic in Arms Regulations of the United States Code of Federal Regulations, (if the technical data is a defense article).
Failure to report as required can lead to the suspension or revocation of a registration. If a person transferred Controlled Goods when their registration is suspended or revoked, this could lead to fine of at least $25,000. Depending on the seriousness of the situation, the fine can be as high as $2,000,000.00.
An officer or a director, or an agent or a mandatary, of a corporation that commits an offence under the Defence Production Act may be prosecuted if he or she directed, authorized, assented to, acquiesced in or participated in the commission of the offence. Information about the key officers and directors is provided to the Controlled Goods Directorate in the application and regular updates – so there is a list of persons who should provide notification of changes in ownership of the company of file at the Controlled Goods Directorate. The personal liability can include fines up to $2,000,000 and/or a prison term of up to 10 years if the individual is convicted.
For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@lexsage.com. We often work with law firms to update their due diligence checklists to include customs, export controls, economic sanctions, Magnitsky sanctions, and other international trade questions.