Australia: Modernising the foreign investment regime - conditional approvals and enforceable undertakings

A highly successful aspect of Australia's foreign investment regime has been the use of conditional approvals. The ability to approve investments with conditions has been instrumental in ensuring investors behave in a way that is consistent with Australia's national interest.

The regime could however be improved. Now, as Treasury is taking steps to modernise the 40 year old foreign investment rules, the Government should consider amending the conditional approval regime so that it is better able to be enforced and conforms to the equivalent policies used by ASIC and the ACCC.

Under current law the Australian Treasurer has the power to block a foreign investment proposal from proceeding or limiting it if he or she believes it would be contrary to the 'national interest'.

In practice the Government often allows a foreign investment proposal to proceed subject to conditions. These conditions are often framed as behavioural undertakings designed to preserve the national interest. For example, a common requirement is that the location of the organisation's management stays in Australia.

The ability to grant approvals with conditions has allowed the Foreign Investment Review Board (FIRB) and the Government considerable flexibility and many proposals are approved with conditions. Since 2006, more than half (56%) have been approved with conditions.


2006 / 07

2007 / 08

2008 / 09

2009 / 10

2010 / 11

2011 / 12

2012 / 13

2013 / 14

Total considered









Total approved









Approved unconditionally









Approved with conditions









Percentage approved with conditions










Source: Applications considered (number of proposals) Foreign Investment Review Board Annual Report 2013-14


State-owned entities have been particularly prominent in approvals that have been granted with conditions. Since 2008, the Government has managed concerns about SOEs investing in Australia by imposing behavioural undertakings to try to ensure SOEs operate like normal corporate players.

These conditions (as we have previously discussed) have been readily accepted and complied with by SOEs are an important part of protecting the national interest.


A significant limitation of the existing conditional approval regime is the lack of options available to the Government in the case of a condition being breached.

As it stands today if an investor breaches a condition, FIRB has to treat it as if the entire acquisition is in breach of the Foreign Acquisitions and Takeovers Act (FATA). There is no nuanced response available. The transaction would infringe the national interest and be liable to be unwound and punished by criminal penalties.

The conditional approval policy will be improved by the proposed new civil penalty and infringement notice regime. But an explicit enforceable undertaking regime might further enhance the Government's enforcement of FATA and the Policy.

A logical step would be to align FIRB's conditional approval policy with the equivalent policies used by the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC).

An enforceable undertaking is an administrative sanction available to various Australian regulators at both the federal and state level. It is used in a number of instances to deal with alleged breaches of the law and a preventative measure to address potential competition concerns in a merger.

The similarity between the models adopted in Australia, particularly ASIC and the ACCC has been recognised in a number of judgments, and there is a significant body of judicial opinion.

As Marina Nehme points out regulators should have available a mix of enforcement strategies and sanctions. This mix allows the regulator to react in a manner proportionate to the committed offence.

The judgments in relation to these provisions are regularly cross-referenced and have built up a considerable body of law. For example, a court in deciding if an undertaking is breached or not, will apply an objective test and will not consider "intent" where intent is not a requirement of the law that has been breached.

As a practical matter it may mean that some of the more vague language of FIRB conditions will need to be improved. Courts will require the terms of an enforceable undertaking be formulated with precision so they are capable of being obeyed.

If the FATA undertaking provisions were drafted in similar terms to the ACCC and ASIC legislation, a breach of an undertaking may cause the court to order the enforcement of the undertaking. However, the court has gone further than that in the past and has made declaratory orders, issued injunctions and made punitive and non-punitive orders.

Furthermore, a breach of an undertaking may result in the aggravation of any applicable penalty. Like ACCC and ASIC the Government would need to adopt templates and guides in relation to the content of these conditions that take into consideration the different decisions made by the courts in relation to the enforcement of ACCC and ASIC undertakings.

There is now an opportunity to improve the conditional approval regime as part of Treasury's current efforts to modernise the 40 year old FATA. By borrowing from the ACCC and ASIC the Government could better enforce its system of granting investment approvals that are subject to conditions regulating the behaviour of applicants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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