Proposed legislative reforms to Australia's foreign investment regime will affect deal-making for private equity firms. There are, however, pros and cons for private equity funds within the suite of proposed changes.

The Australian treasurer has announced major reforms to Australia's foreign investment regime.

The proposed reforms represent arguably the most significant change to the Foreign Acquisitions and Takeovers Act (Cth)  (the Act) since its inception. Underpinning the reforms is a desire of the government to strike the right balance between protecting Australia's interests from a national security perspective whilst also ensuring that it remains an attractive destination for inbound foreign investment.

Impact of reforms to FIRB's business exemption certificates

In the May edition of the APE&VCJ, we discussed how the temporary changes to Australia's foreign investment regime in response to the COVID-19 pandemic might impact private equity (PE) funds and the potential competitive advantages of holding a FIRB business exemption certificate (Business EC). 

The proposed new reforms announced by the government in early June 2020 are aimed at improving the treasurer's ability to monitor and investigate foreign investors' compliance with the Act consistent with regimes in other countries. As part of the suite of proposed changes, there are some changes that will impact PE funds that have already been granted a Business EC. These include: 

  • a requirement on such PE funds to report to Foreign Investment Review Board (FIRB) in certain circumstances, including as to whether or not the proposed investments or transactions covered by the Business EC occurred or not; and
  • proposed new powers for the government to:
    • remedy situations where foreign persons (such as PE funds) have been granted a Business EC which made an incorrect statement, or omitted an important piece of information and that statement or omission was material to the no objection notification or Business EC being given; and
    • accept enforceable undertakings to give weight to commitments made by foreign persons (such as PE funds) given at the time of applying for a Business EC and to encourage compliance by those foreign persons with any conditions imposed on the Business EC.


Some of the proposed new reforms are a welcome change as they will provide greater clarity to what is an extraordinarily complex regime to navigate for many foreign investors.

The proposed reforms endeavour to create a more streamlined experience for foreign persons seeking to invest in 'non-sensitive' industries and sectors in Australia.

The most positive of the suite of the proposed reforms for PE funds with passive Foreign Government Investors (FGI), is the relaxation of the 'aggregation rule' placed on them where their FGIs are not able to exert any control or influence over the decisions of the underlying funds. The government gives the example of a PE fund structured as a limited partnership with FGIs holding interests as limited partners, where the real control vests with the general partner. 

This exemption will apply in two main ways:

  • PE funds that have FGIs that hold an aggregate interest of at least 40% but less than 20% from any FGI of a single country will no longer be deemed FGIs; and

  • PE funds which have either a single FGI or FGIs of the same country holding at least a 20% interest (provided that FGI is (or FGIs are) not able to exert any control or influence over the investment or operational decisions of the fund) will still be deemed FGIs, however will be eligible to apply for a broad exemption certificate on a case-by-case basis (provided you are able to demonstrate the absence of FGI influence or control).

According to the document summarising the proposed reforms, any PE fund looking to avail itself of the exemption from the second limb above will be required, at a minimum, to show that their FGIs: 

  • do not have management rights in the underlying investment; 

  • typically do not know which and when particular investments will be made by the PE Fund (other than the broad nature of the PE Fund's investment strategy); and 

  • do not have any influence or control (either directly or indirectly) over the PE Fund or the investment, and could not be perceived to have any influence or control over the PE Fund or strategy (including decisions to increase holdings or divest holdings in a sector or industry) of the PE fund.

This change will reduce the red-tape around investments made by any PE fund which would otherwise have been classified as an FGI under the Act merely by virtue of its upstream passive FGI ownership and is a welcome development for PE funds which play an integral role in M&A in Australia.


Some of the more significant reforms that may adversely impacting PE funds include:

  • A new 'National Security Test': The most significant change arising out of the proposed reforms relates to the introduction of a new 'national security test' which will allow the Treasurer "to impose conditions or block investment by a foreign person on national security grounds regardless of the value of investment." Currently under the Act only foreign investments which exceed the relevant monetary screening thresholds are subject to a national security review to assess whether that proposed acquisition would be contrary to the national interest.
  • The new national security test will not be dependent on the monetary thresholds and will apply to all foreign persons, not just those deemed to be FGIs. However, the test will not affect PE funds or other foreign persons who invest in 'non-sensitive' industries or sectors (unless they subsequently undertake an activity that will raise national security concerns), it will only affect investors who are seeking to acquire a direct interest in a 'sensitive national security business'. What will constitute a 'sensitive national security business' remains to be seen, but based on the government's reform package it is likely to include:

    • businesses regulated under the Security of Critical Infrastructure Act 2018 or the Telecommunications Act 1997;
    • any business involved in the manufacture or supply of defence or national security related goods, services and technologies, or any business that can create vulnerabilities in the security of Defence and national security supply chain, the Defence estate and/or other core Defence interests;
    • any business or land situated in or proximate to Defence or national security installations; and
    • any business that owns, stores, collects or maintains sensitive data relating to Australia's national security and/or defence.

    A mandatory pre-investment notification will be required from foreign persons (including PE funds) who are looking to acquire a direct interest in a 'sensitive national security business'. This is designed to ensure foreign investments that raise national security concerns are screened by FIRB irrespective of the value of the investment or the investor's nationality, or whether the investor is deemed to be an FGI or not.


        Under the present regime, where an investment is to be made by a foreign person in a sensitive sector, lower thresholds apply for notifications to FIRB. In addition, in the context of Business ECs, there is typically a carve-out for any investments made by the foreign person in sensitive sectors (which includes media, transport and telecommunication businesses among others). The summary document setting out the proposed reforms suggests that this new 'National Security Test' and the proposed new definition of 'sensitive national security business' is intended to be narrower than the definition of 'sensitive business' under the existing framework. However, it is not clear whether this new 'National Security Test' and the proposed new definition of 'sensitive national security business' is intended to replace or be in addition to the current definition of 'sensitive businesses' under the existing framework.


       We think it likely that any Business ECs granted after the introduction of these reforms would include a carve-out for investments made in any 'sensitive national security business'.

  • New 'Call In' Power:  The Treasurer (through FIRB) will be granted new discretionary powers to 'call in' any investments that the Treasurer considers raise national security concerns at any stage of the investment (i.e. this power may extend to previous investments by PE funds even where the original investment did not require notification to FIRB). The requirement to submit to a government initiated review process is an entirely new feature for the Australian foreign investment landscape.
  • To offer greater certainty, foreign investors will be able to voluntarily notify FIRB of investments to preclude subsequent 'call in' following the expiry of a limited 'call in' period. It remains to be seen what this 'limited call in period' will be, but public guidance will shortly be issued to provide further clarity around where and when this proposed new power could be used. However, even these voluntarily notified investments will be subject to the new 'last resort' power explained below and a great deal more guidance will be required from the Government on the circumstances in which it is likely to exercise these powers. 

  • New 'last resort' Power:  In addition to the above 'Call In' power, the treasurer will also be granted a discretionary 'last resort' power enabling it to reassess previously approved investments made by foreign persons (including PE funds) and impose additional conditions, vary existing conditions or, as a last resort, even require divestment of foreign interest in a business, entity or land where such interests are deemed by the Treasurer to be against the national interest. 
  • The government indicated in their summary document highlighting the proposed reforms that this new 'last resort' power will not be applied retrospectively and will only be applicable to any future foreign investment that is reviewed under the Act. We therefore understand that foreign persons (including PE funds) who hold an existing Business EC at the time the legislative changes take effect, will not be impacted at least for investments previously made in reliance of Business ECs.

    The new 'last resort' power will fundamentally change a key principle of Australia's current foreign investment regime, that approved transactions are precluded from subsequent review or regulatory action. If this power was to be used other than in exceptional circumstances, the resulting uncertainty could adversely impact Australia's reputation as a stable and attractive investment destination. The government's guidance and future use of this power will be important in potentially allaying these concerns.

  • Tracing rules to apply to limited partnerships: To consider whether a foreign person requires approval for a proposed acquisition of an interest in securities of an Australian entity or assets of an Australian business, it is necessary for FIRB to determine what interests are held further up the chain of ownership in the relevant entities looking to make the proposed investment. The current tracing provisions under the Act only apply to interests in trusts and companies, they cannot be applied to unincorporated limited partnerships. The proposed reforms will 'plug the gap' in the existing tracing rules by extending them to apply to unincorporated limited partnerships within any ownership structure.
  • Expanded information sharing provisions: Additionally, the proposed reforms are designed to improve the Australian government's ability to monitor and investigate foreign investor's compliance with, and enforcement of, Australia's foreign investment regime. In an effort to achieve a more coordinated approach to screening foreign investment applications, the government proposes to expand the scope of the information sharing provisions to allow for greater sharing of information between Australian government agencies (including the Australian Taxation Office (ATO) and the Australian Competition and Consumer Commission (ACCC)). While FIRB currently consults with other government departments in the course of considering applications, we expect this change will see a more defined process for FIRB to follow in consulting with other government stakeholders and that this will, in turn, lead to additional questions and scrutiny of applications. Although the government's summary document of the proposed foreign investment reforms states that a more coordinated approach will expedite processing of applications, in practice this may prolong the time it takes for FIRB to grant its approval.
  • New 'Register of Foreign Ownership': Lastly, the government has proposed a new Register of Foreign Ownership, which will be administered by the ATO, in an effort to provide greater visibility of foreign investment in Australia. All foreign persons including PE funds will be required to register, among other things, any acquisitions made which required FIRB approval.
  • Importantly, this register will not be searchable by the public due to obvious commercial sensitivities and privacy considerations.

    It is not yet clear whether foreign investments which were made by a foreign person in reliance on an existing Business EC will also be included on the register, however given the proposed new requirement on holders of existing Business ECs to report proposed investments to FIRB, we expect that these will be included. 

    The current proposal is that it will require foreign investors (including PE Funds) to notify the ATO of any divestments, disposal of assets or any changes in their 'foreign person' status. 


    In essence, this register will assist the Treasurer to monitor compliance and track acquisitions and divestments by foreign investors.

What is the impact on holders of existing Business ECs?

Other than the proposed changes mentioned in Part II of this article, which expressly impact holders of existing Business ECs, it is not clear how the other proposed changes will impact holders of existing Business ECs.

Taking into account that Business ECs can be granted for a period of up to five years (but are typically one to three years) and that the proposed legislative reforms will only take effect from 1 January 2021, investments made in reliance on Business ECs may be "grandfathered" from the impact of some of the proposed changes. 

This is another reason why foreign investors (including PE funds) should consider applying for a Business EC now – before the proposed legislative reforms take effect. 

Next steps

As with all proposed legislative reforms, the devil will be in the detail. The Australian Government will shortly release exposure draft legislation for consultation on the reforms prior to its introduction into Parliament. If that legislation is ultimately passed, it will come into effect on 1 January 2021.

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.