Last week the Commonwealth Government announced a number of significant changes to Australia's foreign investment framework which are proposed to come into effect from 1 January 2021. The changes, for which draft legislation will be released shortly, are expected to have a number of ramifications for current participants and future investors in the Australian energy and natural resources sector.
The government has said it will:
- introduce a new national security test, which will require mandatory notification of any proposed acquisition by a foreign person of a direct interest (generally 10% but lower in some circumstances) in a sensitive national security business. The government has indicated that this will be narrowly defined, so it is unlikely to impact most energy and resources assets, however it is possible it will cover some projects (see below);
- bolster the existing compliance and enforcement regime; and
- exclude certain low-risk investments from the regime, including the acquisition of royalties.
A detailed paper describing the changes is available here.
Context and purpose of changes
The government has reiterated its commitment to a system that welcomes foreign investment, while at the same time ensuring that Australia's national interest is not jeopardised by such investment and the continuing recognition of the need to maintain the Australian public's confidence in the regime.
The changes will in some respects more closely align Australia's foreign investment regime with those in other jurisdictions, such as the CFIUS regime in the United States, including a focus on national security issues, compliance and enforcement powers, and a recognition of common global investment structures.
Helpfully, the government has foreshadowed that the current temporary measures in response to COVID-19, which involve a zero dollar threshold for foreign investment into Australia, will cease from 1 January 2021 with the implementation of these new changes.
The key changes are outlined below.
New national security test
Consistent with governmental responses in other jurisdictions, the Australian regime will require mandatory notification of any proposed acquisition by a foreign person of a direct interest (10% but can be lower if combined with governance or offtake rights) in a sensitive national security business. This concept is intended to be narrower than the current sensitive business test, and ensuring it is appropriately defined will be a critical part of the government's consultation process.
It's important to note that for investments that require approval under the current law (including pre-COVID), national security is already one of the important factors considered by the government in assessing the proposed investment. This change will simply expand the requirement to obtain approval to investments by private investors which are below the pre-COVID monetary or percentage interest thresholds where there are national security considerations in relation to the relevant business or asset.
The government will also have the power to 'call-in' any investment that would not ordinarily require notification for screening if it believes this is necessary on national security grounds. This is consistent with the position in a number of other significant jurisdictions around the world and so is unsurprising.
The Australian energy and resources sector is not explicitly identified in the government's paper as being an area of focus for the new national security test, but in theory some parts of it could be where, for example:
- a project is proximate to a military base or other strategic defence asset or has rights over other critical infrastructure; or<
- where the project involves products and minerals which are deemed critical to certain supply chains. The risk of disruption to supply chains was recently brought sharply into focus by COVID-19, but it has been a longstanding concern of the government and many of its key trading partners. There have been some recent proposed transactions involving investment into critical minerals-focused miners which did not proceed or were restructured due to national interest concerns, as we have previously discussed in detail here.
Streamlining of less sensitive investments
There are a number of sensible exemptions from or clarifications to the foreign investment regime proposed following suggestions from industry and law firms in recent years, including two that are directly relevant to investors in the Australian energy and resources sector.
Firstly, the government is proposing to carve out the acquisition of royalty interests in mining and production tenements, where the royalty interests do not include rights to occupy, or have direct control or influence over, land. This will be welcomed by the numerous existing participants in the sector who frequently sell interests in early stage mining projects in exchange for a future royalty right.
Secondly, acquisitions of exploration tenements by private investors (excluding foreign government investors) will generally be exempted, regardless of whether the tenement grants a right to occupy underlying land. While this has generally been the accepted position for exploration tenements in most States, this clarification will be helpful to put the matter beyond doubt.
It will be interesting to see to what extent acquisitions of interests in exploration tenements may nevertheless be made subject to the application of the new national security test, for example in relation to critical minerals interests.
Continued focus on compliance
Consistent with the changes to both guidance and the law in recent years, the proposed changes include a number of additions to the compliance and enforcement regime for breaches of Australia's foreign investment laws. These will bring the regime more closely into line with other Australian regulators, giving the government greater flexibility to deal with different types of non-compliance in an appropriate way. These changes will include higher maximum penalties in appropriate cases.
The government has indicated that it intends to simplify the current fee regime for notifications under Australia's foreign investment law. This will hopefully reduce the workload of Treasury officials related to fee waivers and resolving issues relating to fees.
The government expects to release draft legislation shortly at which point we will review and provide additional insight into its implications.
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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