This article summarises the changes to Australia's foreign investment laws that came into effect on 1 January 2021.
Summary of changes
The key legislative reforms are:
- certain investments that raise national security concerns now require prior approval regardless of their value;
- the Treasurer can “call in” and review investments on national security grounds;
- the Treasurer has “last resort” powers to impose or vary conditions relating to, or otherwise unwind, investments (including those previously approved); and
- certain investments made by entities currently classified as “foreign government investors” (FGIs) are exempt from review.
Additionally, the temporary $0 monetary screening threshold for foreign investments introduced in March 2020 has been lifted (other than in the case of businesses that fall into the newly created “national security business” category).
On 9 December 2020 the Commonwealth Government passed some of the most significant reforms to Australia’s foreign investment review regime in over 45 years. The amendments commenced on 1 January 2021.
Under the new laws, the Treasurer and the Foreign Investment Review Board (FIRB) will have greater oversight over investments by foreign persons in sectors deemed to be relevant to Australia's national security. Additionally, the Commonwealth Government will have broader monitoring and investigation powers and more flexible enforcement options.
A review of the impact of the changes on foreign investment in Australia and the broader Australian economy commenced in February and is required to be completed by 10 December 2021.
Monetary threshold and national security actions
Under Australia’s foreign investment regime, foreign persons proposing to invest in Australia are required to seek the Treasurer's approval if their investment meets certain thresholds, which vary depending on the type of investor, the industry sector in which the investment is proposed to be made and the value of the investment.
In March 2020, as part of the Government’s COVID-19 emergency response, the Treasurer temporarily reduced all monetary screening thresholds to $0 for all foreign investments. The $0 thresholds were subsequently lifted on 1 January 2021 for investments in most businesses. However, the $0 mandatory threshold remains in place for certain investments into “national security businesses”.
The definition of a “national security business” is contained in the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) and is intended to capture endeavours that, if disrupted or carried out in a particular way, could create national security risks. The definition covers businesses in the critical infrastructure and telecommunication sector, and ones that conduct business relating to military services, nuclear facilities, and encryption and security technologies.
Relevantly, the new laws require mandatory notification of:
- any proposed acquisition by a foreign person of a direct interest (at least a 10 per cent interest or coming into a position to control) in a “national security business”; or
- businesses or entities owned by a foreign person starting to carry on a “national security business”.
Notifiable national security actions are assessed by the Treasurer against a new national security test unless the action is also a significant action, in which case the established national interest test applies.
The Treasurer has 30 days to issue either a prohibition order, interim or disposal order, or a conditional or unconditional no objection notification in respect of a notifiable national security action. Failure to notify and obtain pre-approval from the Treasurer before entering into a notifiable national security action is an offence.
The Treasurer has a new power to “call-in” and review certain investments by a foreign person believed to raise national security concerns – even if the action is not otherwise notifiable under the legislation.
The Treasurer’s “call-in” power is activated by a new class of ‘reviewable national security actions’. These are actions expected to grant or increase the direct or indirect control and influence of foreign persons in the banking and finance, communications, critical technology and information, data and cloud sectors (among others).
Such investments may be “called-in” before, during or after the making of an investment and will be assessed against the national security test to determine whether they raise national security concerns.
Last resort powers
The Treasurer also has “last resort” powers to reassess certain foreign investments if subsequent national security risks emerge. Previously, the Treasurer lacked the power to unilaterally amend a no objection notification once FIRB approval has been granted.
Under the new laws, once all other options have been exhausted, the Treasurer can rely on “last resort” powers to impose conditions, vary existing conditions, or – in extreme circumstances – order the divestment of foreign interests in an Australian business, entity or land.
For example, the Treasurer can utilise this power if an approved FIRB application contained a material misstatement or omission that directly relates to national security risks posed by the acquisition, or if the approved investor’s activities have changed substantially and now pose national security risks.
“Last resort” powers only apply to foreign investments made after 1 January 2021.
Definition of foreign government investors
Under Australia’s foreign investment regime, certain acquisitions by FGIs of an Australian business or entity require FIRB approval.
Changes to the definition of FGI mean that entities that have more than 40% foreign government ownership in aggregate are no longer deemed FGIs if there is no single FGI with a 20% or more interest and no single FGI has influence or control over the operational decisions of the entity or its underlying assets. Entities in this position can apply for an exemption certificate.
The latest amendments to the foreign investment regime have also resulted in significant changes to the way in which certain notification fees are calculated.
The applicable fee will now depend on the kind of action proposed and the consideration value of the target. For acquisitions involving commercial land, tenements, businesses and entities, the notification fees will now generally increase for each $50 million worth of consideration (up to a maximum fee of $500,000).
Some actions which may not have a clear consideration amount, such as starting a new business or internal reorganisations, will retain their prior fee.
It is likely that as a result of the changes:
- less transactions involving FGIs will fall within Australia's foreign investment review regime (though a significant proportion of private equity funds will still be captured);
- certain transactions may become more conditional and will need to contemplate the risk of a call in and transaction documents will need to be drafted to reflect this;
- investors will need to consider more carefully certain transactions, particularly those involving “national security businesses” and the potential that they may be unwound at a later date (which may impact deal pricing);
- foreign persons will need to be prepared for greater scrutiny and monitoring by government agencies if they conduct, or intend to transition into or start to carry on, national security businesses; and
- the Treasurer will have the ability to extend the foreign investment review process without consent.