The Situation: The Australian government has introduced significant changes to its foreign investment review framework. The centrepiece of the changes is an enhanced review of acquisitions of property or businesses which are sensitive to Australia's national security.
The Result: There are increased obligations on investors and companies acquiring businesses and land in Australia to obtain Foreign Investment Review Board ("FIRB") approval for acquiring direct interests in national security businesses. The Australian government also has increased powers to review foreign acquisitions, including a new 'call-in' power to review acquisitions or actions that may pose a national security risk and a 'last resort' power to review previously approved transactions.
Looking Ahead: For those pursuing M&A deals in Australia, specific attention should be given to whether FIRB notification and approval is required, and whether any transaction will involve an acquisition of property or business that is sensitive to Australia's national security. Those with existing investments in Australia (whether in sensitive industries or otherwise) will need to monitor passive movements in their investments, as these may now trigger obligations under the foreign investment regime.
On 8 and 9 December 2020, the Foreign Acquisitions and Takeovers Fees Imposition Amendment Act 2020 (Cth) ("Fees Amendment Act") and the Foreign Investment Reform (Protecting Australia's National Security) Act 2020 (Cth) ("FIR Act") passed both houses of parliament and on 10 December 2020 received Royal Assent.
The changes came into effect on 1 January 2021. On the same date, the temporary $0 monetary screening thresholds for all investments that were introduced in response to COVID-19 were removed. However, mandatory screening of investments in sensitive national security businesses continue with a $0 monetary threshold.
Protecting Australia's National Security
FIRB Approval Required for a 'Notifiable National Security Action': Under the current Foreign Acquisitions and Takeovers Act 1975 (Cth) ("FATA"), a foreign person must obtain FIRB approval prior to undertaking an action which is a 'significant action' or a 'notifiable action'. The FIR Act adds a new requirement for a foreign person to seek FIRB approval for a 'notifiable national security action', which includes:
- Starting a national security business;
- The acquisition of a direct interest (10% or more, or in a position to control or influence) in a national security business, regardless of the investment value; and
- The acquisition of an interest in Australian land that is national security land, regardless of the value of the investment.
What is a 'National Security Business'? 'National security business' is defined under the Foreign Investment Reform (Protecting Australia's National Security) Regulations 2020 (Cth) ("FIR Regulations") as a business carried on wholly or partly in Australia whether or not for profit or gain and it is publicly known, or could be known upon the making of reasonable inquiries, that the business is a:
- Critical infrastructure business (a business which holds critical assets such as electricity, gas, water or ports);
- Telecommunications business;
- Military goods or defence or intelligence technology business;
- Critical service provider business to defence or intelligence forces;
- Business which stores or has access to classified security information; or
- Business which stores, collects or maintains personal information of defence and intelligence personnel, and which, if accessed, could compromise Australia's national security.
What is 'National Security Land'? 'National security land' is defined under the FIR Regulations, and refers to:
- 'Defence premises', which includes an area of land, place, or building in Australia that is owned or occupied by the Commonwealth for use by the Defence Force; or
- Land in which the Commonwealth has an interest that is publicly known, or could be known upon the making of reasonable inquiries.
New 'Call-In' Power
The Power: Under the FIR Act, the Treasurer has a new power to review actions that have been taken (or are proposed to be) if the Treasurer considers that it may pose a national security risk.
The actions are those prescribed in the FATA as 'reviewable national security actions' or significant actions that were not notified, i.e., where FIRB approval was not compulsory and was not obtained. 'Reviewable national security actions' include where a foreign person undertakes an action, and as a result of that action, acquires a direct interest in an entity, is in a position to influence or participate in the central management and control of an entity, or is in a position to influence, participate in or determine the policy of an entity.
Under this 'call-in power', the Treasurer may issue a no objection notification (unconditional or with conditions), or make prohibitive or disposal orders. The Treasurer may commence a review of an action that has been taken within the previous 10 years (for investments after 1 January 2021).
Investor-Specific Exemption Certificate: It may be very difficult for investors to determine what actions constitute 'reviewable national security actions' or pose a potential national security risk. To address this uncertainty and avoid the risk of a 'call-in', investors may apply for time-limited investor-specific exemption certificates, which enable them to make eligible acquisitions without case-by-case screening. Investors will only be approved where they have been assessed as not posing a risk to national security, and this will be subject to certain monetary and time thresholds.
Exemption certificates may be a useful tool for investors going forward to address the regulatory uncertainty and risk of 'call-ins'.
New 'Last Resort' Power
The FIR Act also introduces a new 'last resort' power, under which the Treasurer may review previously approved transactions where national security risks have emerged after FIRB approval has been given. The Treasurer may review an action if (amongst others):
- The Treasurer is satisfied that the relevant foreign person made a statement that was false or misleading; the business, structure or organisation of the relevant foreign person has materially changed since the FIRB approval was granted; or the Treasurer is satisfied the circumstances or market in which the action was taken have materially changed since the FIRB approval was granted, as applicable;
- The Treasurer has notified the relevant foreign person of the review, unless it would prejudice Australia's national security interests to do so; and
- In deciding whether a national security risk relating to the action exists, the Treasurer must obtain, and have regard to, advice from a relevant national intelligence agency.
After the Treasurer reviews an action, he may impose conditions, vary existing conditions, or require the divestment of foreign interests in a business, entity or land, if certain conditions have been met. The 'last resort' power will only be applicable to FIRB approvals given on or after 1 January 2021.
Streamlining Certain Foreign Government Investor Investments
Under the current regulations, the definition of a 'Foreign Government Investor' ("FGI") captures some privately controlled institutional investors which have large investments by FGIs, resulting in those investments requiring FIRB approval.
Under the FIR Regulations, the definition of an FGI has been relaxed to exempt entities from being treated as an FGI, where:
- That entity has 40% (or more) foreign government ownership but less than 20% from any single foreign government: and/or
- No FGI is able to influence any individual investment decisions, or the management of any individual investments.
This change is particularly relevant to those institutional investors and private equity funds with large FGI bases, and who are currently subject to the $0 FGI thresholds.
New Fee Regime and Increased Penalties, Compliance and Enforcement Powers
The changes significantly increase the maximum criminal and civil penalties in relation to all types of investments (i.e., residential and non-residential). For corporations, the maximum criminal penalty for residential and non-residential investments will increase from A$832,500 to A$33.3 million, and the maximum civil penalty for non-residential investments will increase from A$277,500 to A$555 million. The FIR Act also expands the government's powers to issue infringement notices.
The Fees Amendment Act and its accompanying regulation will also impose a simplified regime for FIRB fees, using a 'fee constant' and applying a fee formula for different circumstances and notifiable actions, with a proposed fee cap of A$500,000.
Increased Integrity of the Foreign Investment Review Framework
The changes are aimed at improving the integrity of the foreign investment framework. Most notably, the FIR Act clarifies the operation of the 'change in control' test for certain types of 'significant actions'—once a foreign person controls an entity or business, the change of control test is no longer relevant in determining whether an action is a significant action. This is, however, limited to acquisitions of interests in securities of an entity and issuing of securities in an entity.
The FIR Act will capture the increase of a foreign person's interest in the securities of an entity, including if the number of shares has not increased but the percentage holding has increased. This can affect increases resulting from selective capital reductions or share-buy-backs, whether or not the person participated in those actions. This means that a passive increase in holding can trigger a notification requirement, and must be monitored.
Limits to the Moneylending Exemption
Section 27 of the FATR currently relieves foreign moneylenders from obligations to notify FIRB or obtain approval if they acquire entities or land for the purposes of securing payment obligations under a moneylending agreement (or enforcement of that security). The changes will narrow this exemption so that it does not apply to foreign moneylenders who acquire 'national security land' or 'national security businesses' by way of enforcement of a security.
This means that if a secured moneylender acquires an interest in national security land, a national security business or shares in a national security business by way of enforcement of a security, then this acquisition will be subject to FIRB notification requirements (unless the enforcement is via a receiver, or a receiver or manager).
Information Gathering and Sharing
The changes also aim to facilitate, subject to certain safeguards, more streamlined sharing of information within state and federal governmental agencies. In particular, the FIR Act enables the Australian Taxation Office to communicate protected information directly to FIRB (rather than through the Treasury) for the purpose of advising the government on foreign investment issues.
There are also new information sharing provisions for sharing protected information with international counterparts in limited circumstances where national security considerations are present. In addition, protected information may now be disclosed for the purposes of administering the Competition and Consumer Act 2010 (Cth), a development which may lead to the increasing involvement of the ACCC in the FIRB approval process.
The increased involvement of governmental agencies in the FIRB process also means that these agencies can influence the assessment of what is considered to be against the national interest as well as likely affecting the time for decisions.
Joyce Chng, Charlotte Froelich and Hugh Montgomery, associates in the Melbourne and Sydney offices, contributed to the preparation of this Commentary.
Five Key Takeaways
- Australia's foreign investment review framework has changed to increase focus on national security, and introduce a new requirement to seek FIRB approval for acquisitions of national security businesses.
- The Treasurer now has a power to 'call-in' or review actions that have been (or are to be) taken if the Treasurer considers that the action may pose a national security risk. The Treasurer also has a 'last resort' power to require the disposal of an asset that has been acquired if national security risks emerge after FIRB approval has been given.
- Passive changes in holdings can now trigger notification requirements, and should be monitored.
- The changes introduce increased penalties and enforcement powers, and implement a new fee regime design to make paying and calculating fees simpler.
- There will likely be increased intergovernmental collaboration and information sharing between government agencies as part of the FIRB approval process.
Originally published JANUARY 2021
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