Foreign investors will need to give greater priority to understanding the impact of Australia’s foreign investment review framework following the major reforms announced on 5 June 2020. The reforms are yet to be legislated and are subject to consultation, but if implemented are expected to take effect from 1 January 2021.
These are the first major reforms since the overhaul of Australia’s foreign investment regulation in 2015, although they follow the temporary measures introduced on 29 March 2020 in response to the COVID-19 crisis.
The reforms have been introduced to address what the Government perceives as an “increasing risk to the national interest”. The changes represent a significant shift in Australia’s approach to foreign investment regulation and foreign investors will need to be suitably prepared well ahead of any investment decision.
The key reforms
The new reforms indicate that the Foreign Investment Review Board (FIRB) will have an expanded mandate and increased powers and resources to ensure Australia’s national interest is protected. As a result, the foreign investment regulation will become a more prominent feature of doing business in Australia.
The key reforms are:
- New national security test: All new investments in, and start-ups of, ‘sensitive national security businesses’ by foreign persons will require mandatory notification to FIRB, regardless of the business value. The Government will consult on the exact definition of ‘sensitive national security businesses’, but expects them to include telecommunications, critical infrastructure, defence or national security businesses, sensitive data storage businesses and businesses that can create vulnerabilities in defence or national security installations or which have operations or land situated near such installations. These investments and start-ups will be assessed against factors relevant to Australia’s national security and the Treasurer will be able to impose conditions on, or block investments by, a foreign person on this basis.
Foreign investors will need to give careful consideration to whether their investment or start-up might be a ‘sensitive national security business’, no matter its size. It will be relatively straight forward to classify the target business industry type as sensitive or not. However, the need to identify defence or national security installations in the vicinity of the target business will require a new level and quite different type of investigation for every new investment and start-up than is currently the case. An assessment of whether a business is capable of creating vulnerabilities in defence and critical infrastructure installations may not necessarily be simple either. For technology businesses or producers of ‘internet of things’ hardware, the future application of their products by defence and critical infrastructure operators may be unknowable. Many, if not all, such products may be capable of creating vulnerabilities, due to the inevitability of them containing security flaws when initially released.
- New ‘call in’ power: If the Treasurer considers that any investment raises national security concerns it may be ‘called in’ for review under the national security test at any stage of the investment. This ‘call in’ power will extend to businesses 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. Foreign investors may understandably have concerns regarding political risk, especially in light of the Government’s decision to ban the use of Huawei in 5G networks. 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. 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: The ‘last resort’ review power will allow the Treasurer to reassess approved foreign investments where subsequent national security risks may emerge. Under these powers, the Treasurer may impose conditions, vary existing conditions or, as a last resort, require the divestment of foreign interests in the business, entity or land. This power will only apply to investments made after the new reforms come into effect.
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. Again, foreign investors could understandably feel considerable uncertainty as a result of this reform and the Government’s guidance and future use of this power will be important in potentially allaying these concerns. The Government might consider allowing foreign persons to apply for advance exemptions from the ‘last resort’ power in certain circumstances. This would not be inconsistent with the ‘no action’ letters that can be sought from the Australian Securities and Investments Commission.
- Removing FGI restrictions for investment funds: The more stringent restrictions placed on investment by Foreign Government Investors (FGIs) are going to be relaxed for investment funds where their underlying FGIs have no management rights and cannot otherwise influence or control the investment fund’s decision making. This is expected to be achieved by no longer classifying any entity as an FGI if it has FGI ownership of more than 40% (with no influence or control over decision making), but no single FGI owning 20% or more. And, if there is a single FGI that owns 20% or more, the entity can apply to be exempted from classification as an FGI, which may be approved for a fixed time period and could include conditions. The other foreign person thresholds and new powers described above will apply to these entities in any event.
This change is intended to streamline investment by investment funds, which regularly have significant passive investment from foreign government related bodies such as pension funds. The existing regime makes notification a constant issue for investment funds which must face the often challenging task of identifying all of its investors’ ownership interests to determine whether it crosses the relevant thresholds. FIRB must then also assess the relevance of these ownership structures. As the Government has acknowledged, FIRB’s experience has been that these entities do not typically give rise to national interest concerns, so we consider this a welcome improvement to the current regime.
- Stronger penalties, compliance and enforcement powers: The Government proposes to increase the scope of the information sharing provisions to allow greater sharing of information across government agencies (including with the ATO and the ACCC). The Government will also introduce new information sharing provisions to allow sharing of protected information with international counterparts. Additional funding will be provided to FIRB to allow it to better monitor foreign investments and ensure compliance with the notification obligations and any conditions imposed by FIRB when approving foreign investments.
While FIRB regularly 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. This may contribute to the time and cost taken to seek foreign investment approval.
What does this all mean?
These significant proposed changes to the foreign investment regime reflect the Government’s recognition that there are increasing risks to Australia’s national interest, particularly national security, as a result of recent developments, including rapid technological changes and changes in the national security environment.
These changes imply significantly greater scrutiny will be applied to foreign investment and that, more than ever, foreign investors will need to be well prepared to address Australia’s foreign investment regime.
The devil will be in the detail with such extensive reforms. The Australian Government will shortly release exposure draft legislation for consultation on the reforms prior to its introduction into Parliament. Norton Rose Fulbright will be involved in the consultation process and would be happy to involve you in this, including championing any specific areas of concern where appropriate.
For further information about the foreign investment reforms, please contact any of our FIRB specialists.