The potential impact of the Commonwealth's proposed reforms to Australia's foreign investment regime
With the release of a Discussion Paper on 5 June, the Commonwealth Government announced its intention to introduce sweeping reforms to Australia's foreign investment review laws. As summarised in our recent article (which can be found here) the Commonwealth Government is intending to amend the foreign investment regime to address what it sees as a gap in the regime with respect to Australian national security considerations.
The proposed wide ranging reforms set out in the Discussion Paper are intended to form the base for draft legislation to be released later this year, and then to be legislated and become effective from 1 January 2021. The last significant reforms made to the foreign investment rules in 2015 saw Foreign Investment Review Board (FIRB) approval go from being largely treated as a procedural issue to be addressed in the ordinary course of a transaction, to a complex, time consuming and expensive approval process. The latest proposed amendments, although arguably sensible given some current gaps and political concerns, appear set to make the rules even more complex.
McCullough Robertson's FIRB team has prepared a series of six articles on the proposed reforms and how they could impact different sectors, investment structures and the overall regulation and enforcement of the FIRB rules. Part 1 of the series will discuss the new national security review regime, arguably the widest reaching of the proposed changes.
Sensitive national security businesses
Generally, all inbound foreign investment into Australia is subject to FIRB approval unless it falls below the relevant monetary threshold, or a specific exemption applies. Once an application is lodged, FIRB and its consultation partners assess whether the investment is contrary to Australia's national interest. If the investment is contrary to the national interest it is rejected, otherwise it is either approved or approved with conditions. Rejections are rare and usually only occur in high profile (and somewhat political) cases. More commonly, FIRB will seek to impose restrictive conditions on an approval, and if those conditions are not acceptable to the investor, they will often withdraw their application to avoid the potentially damaging publication of a formal FIRB rejection.
The most significant proposed reform set out in the Discussion Paper is the introduction of a new category of approval requirements based around national security considerations. Currently, national security is one of the factors that will be taken into consideration when FIRB assesses an application (where the proposed investment is above the relevant monetary thresholds and no exemption applies), but the existing rules do not ensure that all investment into sensitive national security business necessarily require approval.
There are a number of industry specific rules, outside the FIRB regime, that limit foreign investment into sectors such as banking, transport (including airports, airlines and shipping) and telecommunications. FIRB has some existing rules in relation to foreign investment into the media sector, but these do not cover the full range of sectors that are nowadays considered sensitive from a national security perspective. The FIRB rules also provide that investors from countries with whom Australia has a Free Trade Agreement, who would usually have the benefit of a monetary threshold if in excess of $1 billion, are subject to the standard monetary threshold of $60 million for investments in certain sensitive sectors. Foreign investments into sensitive national security sectors are otherwise treated the same as other investments, being subject to the same thresholds and exemptions and then being assessed against the same national interest test.
The Commonwealth Government proposes to introduce a new national security test which specifically considers foreign investment into a new category defined as 'sensitive national security businesses'. While the exact definition of this term has not yet been announced, it is expected that the Commonwealth Government will cast a wide net and include businesses operating in sectors such as data, energy, infrastructure, telecommunications and defence related businesses. While this might seem to be a reasonably limited scope for these types of rules, the devil will be in the detail. For example, the question of whether the same rules will apply to businesses supplying these sectors will be a key factor in determining their scope. In addition, given the use of data in most sophisticated businesses, a broad application of that test could also see a vast range of businesses fall within the scope of the new rules.
This new national security test will form an additional approval layer. A party that is required to apply for FIRB approval in the ordinary course, will have the national interest considerations (including the national security considerations) applied as part of their standard approval process. However, in the event a proposed investment is into a 'sensitive national security business', which would otherwise not require approval under the standard rules (for example if it is below the relevant monetary threshold or an exemption applies), the new national security provisions will lower the relevant monetary threshold to $0. An applicant will then be required to seek approval which will then be assessed solely on national security grounds (rather than on the broader 'national interest' grounds). For example, the current threshold for an investment in an Australian business which does not own land is in most cases $275 million (excluding foreign government investors). If a private foreign investor wanted to acquire a significant interest in a company that provided IT support to the Australian Defence Force, under the current rules they would not require FIRB approval if that investment was below $275 million. The new proposed national security requirements will require an application to be made in such a case, regardless of value.
If an investor applies for and is granted FIRB approval under the national interest test in the ordinary course they will have been deemed to have satisfied the national security requirements as that already forms part of the assessment process. This is to prevent a duplication of the assessment requirements.
The new national security requirements will also apply where a business owned by a foreign person expands into a 'sensitive national security businesses' by organic growth. This would mean that a sale, purchase or change of control are no longer the only triggers for FIRB approval. We anticipate that this rule will cause some significant issues in practice as it may be very difficult to identify exactly when a business starts to operate in these sectors.
National security call in
The Commonwealth Government is also intending on introducing what they are referring to as the call in power. Amendments are proposed to be introduced which will allow any investment not otherwise notified under the existing national interest test or national security notification process to be 'called in' by the Treasurer for review before, during or after the investment if on a case-by-case basis the Treasurer considers the investment to raise national security concerns.
These changes effectively mean that if a company in which a foreign investor holds a significant interest becomes involved in a national security business, they could be called in and required to obtain what is essentially retrospective FIRB approval. The Federal Treasurer would have the power to issue orders in relation to the investment and impose conditions in relation to the conduct of the business.
The Government has said they intend to include voluntary notification provisions so that incoming investors can seek approval (when such approval would otherwise not be required) to give certainty that they will not have their investment at a later date called in by FIRB.
Last resort divestment
The final and most concerning aspect of the proposed reforms is the introduction of a last resort review power. This last resort review power will give the Commonwealth Government the ability to reassess approved foreign investments where a subsequent national security risk emerges. Where such risk cannot be mitigated through the imposition of conditions, through disclosure, or otherwise through other regulatory mechanisms, orders can be made to force divestment.
The Discussion Paper makes it clear that this will be a last resort of FIRB, but it does provide for an element of sovereign risk as lawful investments will potentially, be subject to divestment orders. This is not a measure that can be protected against by disclosure or voluntary notification, but will require ongoing monitoring for any growing or expanding business with foreign involvement.
What does this all mean?
It is acknowledged by FIRB that these proposed reforms are not targeted at any one country and that all foreign investors will be treated equally under the law. However, by the very nature of national security considerations, the source of the investment will clearly be relevant when FIRB is making an assessment.
The exact details of the reforms are yet to be announced and it is likely the exposure draft will be subject to numerous submissions by interested parties. The approach by FIRB in the past has been to cast a wide net and then narrow the focus through the use of guidance notes and sector interaction once the changes are enacted. As such, it will potentially be some time after the changes are law that we will have any real clarity on the application of these reforms in practice.
What the Discussion Paper does confirm, and what has been the Commonwealth Government's typical behaviour since 2015, is that the foreign investment review regime is only getting more powerful and wide reaching, and these laws are certainly no longer the rubber stamp they once were.
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.
