Foreign Investment in Australia: The New National Security Regime
Foreign Investment in Australia: The New National Security Regime
The Australian Government has introduced major changes to its foreign investment review framework, which imposes new mandatory notification requirements on foreign investors to protect Australia's national security
For over 40 years, Australia's foreign investment review framework (as set by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and associated legislation and regulations) has screened individual investment proposals on a case-by-case basis to ensure that they are not contrary to Australia's 'national interest'.
Effective 1 January 2021, the Australian Government has introduced major changes to its foreign investment review framework. The most significant change is a new 'national security test' (which operates alongside the previous 'national interest' test). Under the new 'national security test', foreign investors must mandatorily notify the Foreign Investment Review Board (FIRB) and obtain the approval of the Australian Treasurer, before investing in a 'national security business' or 'national security land' in Australia.
These concepts are defined broadly, and now capture investments in Australian entities, businesses and land which were not previously notifiable actions under the FATA. Moreover, they now cover matters which would not intuitively be thought to pose national security concerns.
Foreign investors and their advisors therefore need to make careful inquiries to understand an Australian target's business and operations to determine whether their proposed transaction falls within the scope of the new national security regime, and accordingly, whether the investor needs to seek FIRB approval. Foreign investors should also be cognizant of the need to engage with FIRB early to ensure that transaction timelines and overall transaction objectives are met.
New National Security Regime
The key elements of the new national security regime include:
• a new category of 'notifiable national security actions' which are mandatorily notifiable to FIRB and must not be taken without approval from the Australian Treasurer;
• a new 'call in' power, which enables the Treasurer to initiate a review of actions that are not mandatorily notifiable and that have not been voluntarily notified, where the Treasurer considers that the action may pose national security concerns; and
• a new 'last resort' power, which, in exceptional circumstances, gives the Treasurer the ability to make divestment orders and unilaterally impose new conditions or vary existing conditions after FIRB approval has been given with respect to a particular action.
Mandatory Notification Requirements
Notifiable National Security Actions
A 'notifiable national security action' must be mandatorily notified to FIRB, regardless of the value of the proposed investment or the nature of the investor. Significant penalties apply for a failure to notify.
A 'notifiable national security action' is triggered where a foreign investor:
• starts a 'national security business';
• acquires a 'direct interest' (usually at least 10%) in a 'national security business' or in an entity that carries on a 'national security business'; or
• acquires an interest in Australian land (including an interest in an exploration tenement) that, at the time of acquisition, is 'national security land'.
What is a 'national security business'?
A 'national security business' is defined broadly to include:
• responsible entities and direct interest holders of 'critical infrastructure assets' (as defined in the Security of Critical Infrastructure Act 2018 (Cth) and currently comprising critical electricity, gas, water assets and critical ports);
• carriers and nominated carriage service providers under the Telecommunications Act 1997 (Cth);
• businesses that develop, manufacture or supply critical goods or technology for (or intended for) a military or intelligence use by, or that provide or intend to provide critical services to, Australia's defense and intelligence personnel or a foreign defense force or intelligence agency; or
• businesses that store or have access to classified information, or store, maintain, collect or have access to personal information of Australia's defense and intelligence personnel which could compromise national security.
However, a business is only a 'national security business' if it is publicly known or could be known through reasonable inquiries that it falls within one of these categories.
In certain cases, it may be difficult to ascertain based on publicly available information whether a business is in fact a national security business. For example, the 'Register of Critical Infrastructure' is not made public. Similarly, it is unlikely to be public knowledge that a business has access to information with a security classification.
Accordingly, investors and their advisers must make reasonable inquiries (through a comprehensive due diligence and information exchange process) to determine whether a target is considered to be a 'national security business', and in turn whether FIRB approval is required in respect of the proposed transaction.
What is 'national security land'?
National security land is generally land which is a defense premises or where it is publicly known (or could be known through reasonable inquiries) that a national intelligence agency has an interest in the land.
'Call in' Powers
The Treasurer may 'call in' for review actions which are not otherwise notifiable (and which have not been voluntarily notified) if the Treasurer considers that the action may pose 'national security concerns'. This applies to both 'significant actions' (which are generally high-value transactions involving a change in control) and a new category of 'reviewable national security actions' (which apply regardless of value and generally involve a lower influence threshold).
'Reviewable national security actions' are broadly defined, and will capture a large proportion of foreign investment activities that do not fall within the other screening categories. These may include actions involving:
• acquisitions of interests of any percentage in an Australian entity;
• acquisitions of interests in, or interests in the assets of, an Australian business;
• acquisitions of interests in Australian land;
• issuing securities in an entity;
• entering agreements relating to the affairs of Australian entities;
• entering or terminating a significant agreement with an Australian business;
• altering the constituent document of an entity; and
• starting an Australian business.
Broadly, reviewable national security actions are actions which give foreign persons potential influence and rights, such as the ability to influence or participate in the central management or policy of an entity or business, or the right to occupy Australian land.
Once called in, the Treasurer may make orders (such as a prohibition or disposal order) in respect of the transaction where the Treasurer is satisfied that it would be contrary to national security. The 'call in' power may be exercised for up to 10 years after the action has been taken.
For greater certainty, foreign investors may choose to extinguish the Treasurer's ability to use the 'call in' power (but not the 'last resort power' discussed below) by voluntarily notifying a reviewable national security action. In this case, FIRB approval will likely be a condition precedent to transaction completion to remove the risk of the call-in power being exercised post-completion.
However, voluntary notification to FIRB must be balanced against the time and cost of making such application and the increased conditionality injected into the relevant transaction. This has flow-on impacts on the overall transaction timeline and competitive dynamics, particularly in an auction sale.
'Last resort' Powers
The Treasurer also has 'last resort' powers, whereby the Treasurer may:
• prohibit an action or order a disposal if satisfied that an action is or would be contrary to national security; and
• impose conditions or vary existing conditions if satisfied that it is reasonably necessary for reducing the national security risk.
The 'last resort' powers only apply in respect of actions notified and taken after 1 January 2021, although there are no time limits on when the Treasurer may exercise such powers post transaction.
The powers may only be exercised if the action gives rise to a national security risk and:
• the foreign person notifying the action made a material false or misleading statement or omission directly relating to that risk;
• the person's business, structure, organization or activities have materially changed, creating an unforeseeable national security risk; or
• the relevant circumstances or market have materially changed, altering the national security risk.
Certain checks and balances apply, including requiring that the Treasurer considers relevant advise from the national intelligence community, takes reasonable steps to negotiate in good faith with the foreign investor, and is satisfied that other available regulatory systems would not adequately reduce the national security risk.
That said, by giving the Treasurer the power to review previously approved transactions, the 'last resort' power goes further than other countries' foreign investment regimes. Investors should therefore ensure applications are carefully prepared and accurate, to mitigate the risk of FIRB exercising its 'last resort' powers.
The new national security regime gives the Australian Government greater oversight on foreign investment in areas which are thought to pose national security concerns. However, the actual impact of the new regime on foreign investment into Australia and the broader Australian economy is yet to be seen. The Australian Government is conducting an evaluation of the new foreign investment reforms to determine whether the right balance has been struck between welcoming foreign investment and protecting Australia's national interest.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.