Australia's foreign investment regime

Foreign investments in Australia are regulated by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and Foreign Acquisitions and Takeovers Regulations 2015 (Cth), and administered by the Foreign Investment Review Board (FIRB).

Changes to the FATA and FATR ('FIRB changes') will take effect on 1 January 2021. These include:

• a new national security test for foreign investment;
• tightening of the moneylending exemption;
• stronger enforcement powers; and
• unwinding of temporary measures introduced in March 2020 in response to Covid-19. 

Foreign investment regime

From 1 January 2021, all proposed investments by foreign persons into Australia which raise national security concerns will require FIRB approval, regardless of the value of the transaction or the nature of the foreign investor.

In addition, the monetary threshold for FIRB review is expected to revert to A$1192 million (US$902 million) for Australia's Free Trade Agreement (FTA) partners including the US, China, Japan, Singapore, Vietnam and South Korea. For non-FTA partners, a lower threshold of A$275 million (US$208 million) is expected to apply.

Previously, acquisitions by a 'foreign person' were subject to governmental control for reasons of national interest if they fell in one of two categories: 'significant actions' and 'notifiable actions'.

The FIRB changes introduce a 'notifiable national security action' category, for which foreign persons will need FIRB approval (i.e. a 'no objection' notice). If the Treasurer considers the 'notifiable national security action' to be contrary to Australia's national security, the Treasurer will have powers including the ability to impose conditions on a transaction and the ability to block all or part of a transaction. The powers that the Treasurer will have will be similar to the ones that he currently has for 'significant actions' under the FATA.

Notifiable national security actions

A 'notifiable national security action' will include transactions where a foreign person:

• acquires a 'direct interest' (at least 10% or in a position of control or influence) in a 'national security business' or an entity that carries on a 'national security business';
• acquires an interest in Australian land that is 'national security land' (which includes defence premises, land which an Australian national intelligence agency has or will have an interest, or land declared by the Treasurer by legislative instrument to be so); or
• starts to carry on a 'national security business'.

National security business

'National security business' is defined broadly and includes, among other things, an Australian business that:

• is a responsible entity or a direct interest holder in relation to a critical infrastructure asset under the Security of Critical Infrastructure Act 2018 (Cth) – this could include an operator of a water filtration plant or a port;
• is a carriage service provider under the Telecommunications Act 1997 (Cth) – this could include an internet service provider or telco;
• develops or supplies critical goods, technology or services to Australia's military or a foreign military; or
• stores or maintains classified information or personal information relating to Australia's defence and national intelligence, which, if disclosed, could compromise Australia's national security.

Foreign person

The term 'foreign person' is defined broadly in the FATA. A foreign person is:

• any individual who does not ordinarily reside in Australia; or
• a corporation or trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds a substantial interest (at least 20%); or two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate interest of at least 40%; or
• a foreign government.

Different, more stringent rules apply to investments by 'foreign government investors' compared to private foreign investors. For example, a foreign government investor needs FIRB approval simply to commence business in Australia. Any entity is a foreign government investor if 20% or more is owned directly or indirectly by a foreign government (which can include, for example, sovereign wealth funds).

Foreign government investor

From 1 January 2021, the definition of foreign government investor (FGI) is expected to loosen so that entities which have more than 40% foreign government ownership but less than 20% from any single foreign government will no longer be a FGI.

Additionally, entities will not be deemed an FGI where the FGI does not have management rights or where the FGI investors do not have influence or control over the investment or operational decisions of the entity or any of its underlying assets. This will enable investment funds to more quickly close deals or acquire sizeable pre-bid stakes below the threshold for private investors without the cost and delay of the FIRB process.

Managing transaction certainty

The FIRB changes allow investors to voluntarily notify FIRB and receive an exemption certificate for a transaction that may be a 'notifiable national security action'. An exemption certificate will provide that a transaction does not constitute a 'notifiable national security action' and is therefore not subject to the FIRB approval and registration requirements. 

In order to achieve transaction certainty and minimise closing risk, we expect that investors will require buyers to obtain either an exemption certificate or no objection notice where investors consider that a transaction involves or could involve a 'national security business' or 'national security land'.

Additionally, it will be important for foreign investors to conduct pre-transaction due diligence to determine whether transactions include the acquisition of all or a part of a 'national security business' or 'national security land'. Pre-transaction due diligence, and a comprehensive understanding of whether an exemption certificate or no objection notice should be applied for, will be essential in minimising post-closing review of relevant transactions by FIRB.

The additional due diligence and exemption certificate or FIRB approval conditionality will increase transaction timelines and costs and expenses for affected transactions.

Tightening of moneylending exemption

Taking a security interest in Australian land and certain assets currently requires FIRB approval unless there is an applicable exemption. Under the existing FATA and FIRB regime, secured lenders and security trustees can rely on the moneylending exemption. This exempts them from needing to obtain FIRB approval for secured lending arrangements.

Following substantial industry feedback, the moneylending exemption will remain where foreign secured lenders and foreign security trustees acquire security interests in Australian land that is 'national security land', exploration tenements in respect of 'national security land' or assets of a 'national security business'. As a result, there are no new FIRB notification obligations for foreign secured lenders and foreign security trustees when the security interest is granted.

However, FIRB approval is needed if an acquisition occurs by enforcing a security interest over national security land or a national security business, unless the enforcing entity is a receiver, or a receiver and manager.

The changes to the moneylending exemption will mean that:

• all secured lenders and security trustees from 1 January 2021 will need to confirm whether they are a "foreign person" under FATA because, if assets of a "national security business" or "national security land" form part of the security interests securing a moneylending agreement, all secured lenders and security trustees will need certainty as to whether the enforcement of such security interests require FIRB approval or not;
• for secured loan transactions after 1 January 2021, secured lenders and security trustees that are foreign persons will need to conduct due diligence on the business and assets of the borrower and its subsidiaries to determine whether it owns "national security land" or any part of its business is a "national security business";
• if a security trustee or secured lender that is a foreign person enforces a security interest in assets of a "national security business" or "national security land", then such security trustee or secured lender will be required to notify FIRB and have that acquisition approved;
• following an enforcement of security interests from 1 January 2021, any foreign person who acquires a legal interest in security comprising “national security business” or “national security land” from a security trustee or secured lender will need FIRB approval.

We expect that from 1 January 2021, secured lenders and security trustees will likely seek:

• amendments to existing loan documentation to include representations, warranties and undertakings not to acquire a "national security business" or "national security land" without FIRB approval; and
• FIRB approval as a condition precedent to financial close where the security package includes assets of a "national security business" or "national security land", which will impact transaction timelines and expenses.

The expectation is that foreign syndicate lenders that are the beneficiaries of a security trust do not have a 'legal' interest but, rather, have a 'beneficial' interest and so will not require FIRB approval even if the security trust includes security interests in assets of a “national security businesses” or “national security land”.  In this scenario, only the security trustee will be required to obtain FIRB approval to the extent it is a foreign person.  While the Federal Government has indicated that this is the intention, it remains to be seen whether the final version of the regulations will reflect this.

Review procedure

Foreign investment notifications are filed with the Treasurer through the online FIRB applications portal. The role of FIRB is to review and advise the Treasurer as to the national interest implications of the notified proposed foreign investment.
Once an application has been made, FIRB generally reviews the application and provides the applicant with requests for further information where required, however the final decision to grant or refuse FIRB approval for reasons of national interest rests with the Treasurer.
Where the applicant has complied with the provisions of FATA, the Treasurer has 30 days from the date that the application fee is paid to review and make a decision on whether to grant FIRB approval. That timeframe can be extended by up to 90 days with written notice to the applicant. FIRB approval will generally be granted unless the foreign investment is considered a threat to Australia's national interests or contrary to Australia's national security.

The term 'national interest' is not defined in the FATA. However, Australia’s Foreign Investment Policy (19-page / 404KB PDF), as updated in April 2020, provides a non-exhaustive list of factors that are typically considered:

• type of investment – whether or not the investment is in a sensitive business and its effects;
• national security – the extent to which the investment will affect Australia’s ability to protect its strategic and security interests;
• competition – whether it would promote healthy competition;
• impact on the economy and community – the extent to which the investment will develop and provide fair return for the Australian people (e.g. creation of jobs).
• character of the investor – corporate governance practice of the investor and the basis of operations and regulations.

The fee payable to FIRB for giving notice of a 'notifiable national security action' will be proportionate to the transaction value, and can amount up to A$500,000 (US$380,000). 

Legal consequences

Upon review, it is within the Treasurer's power in relation to significant, notifiable and national security notifiable actions to permit a foreign investment with or without additional conditions, prohibit the foreign investment or, as a last resort, have the investment unwound.

New 'call-in' power

The FIRB changes include a new 'call-in' power which enables the Treasurer to review and make orders in relation to transactions or proposed transactions that are 'reviewable national security actions' under the FIRB changes or 'significant actions' under the current FATA that occur after 1 January 2021 and were not otherwise notified to the Treasurer.

If the Treasurer uses call-in powers with respect to a transaction and determines that such transaction poses a national security concern, the Treasurer may:

• require information from the parties, i.e. functionally requiring a FIRB application for no objection;
• make orders prohibiting the transaction or requiring the disposal of an interest acquired (if the transaction has closed); or
• impose conditions on the transaction.

The FIRB changes impose a 10 year time limit on the ability of the Treasurer to exercise the call-in powers with respect to a transaction.

A 'reviewable national security action' is defined broadly under the FIRB changes and includes the acquisition by a foreign person of an interest in an Australian business, land or securities. The expectation is that the term is intended to capture transactions that do not constitute significant actions, notifiable actions or notifiable national security actions because they do not meet the relevant thresholds but otherwise give rise to national security concerns.

As with notifiable national security actions, the FIRB changes allow investors to voluntarily notify FIRB and apply for an exemption certificate with respect to a transaction that may constitute a reviewable national security action. Obtaining an exemption certificate will prohibit the Treasurer from exercising call-in powers and reviewing the transaction after signing an acquisition agreement or closing.

In order to achieve transaction certainty and minimise closing risk, we expect that the majority of transactions after 1 January 2021 will require buyers to obtain an exemption certificate if there is any risk a transaction may be assessed to be a reviewable national security action. As with notifiable national security actions, pre-transaction due diligence will be key in determining whether an exemption certificate should be sought to remove the risk that conditionality will be imposed, or divestment will be required, after the execution of an acquisition agreement or acquisition closing.

New 'last resort' power

Obtaining a no objection notice or an exemption certificate for a notifiable national security action or a reviewable national security action will not prevent the Treasurer exercising the 'last resort' power also granted under the FIRB changes. The last resort power will allow the Treasurer to review transactions where, since the initial no objection notice or exemption certificate was issued, the nature or circumstances of the foreign person has changed, or there was a material omission or misstatement in the original FIRB application. There is no time period associated with the last resort power, and it is expected that the Treasurer will be able to exercise it at any time.

The explanatory memorandum for the FIRB changes indicates that the last resort power will only be exercised in exceptional circumstances and after good faith negotiations with the foreign person to minimise the national security risk. It will be important for foreign investors that applications for no objection notices or exemption certificates contain accurate and complete information to minimise the risk that last resort powers will be exercised and also that legal advice is obtained before substantial restructurings of the foreign investor.

Imposition of conditions

In the event that an application raises national interest concerns, the Treasurer will impose conditions on the FIRB approval in order to mitigate those risks and concerns. Generally, we are seeing more conditions being imposed on FIRB approvals, consistent with the tightening of the foreign investment regime.

To date, the majority of the conditions imposed on non-residential applications relate to potential tax risks. However, there have been increasing numbers of bespoke conditions drafted and imposed on FIRB approvals which are considered to be sensitive to national interest, such as applications in relation to Australian energy assets.

The increased imposition of conditions together with the 2018 decision by the Treasurer to reject a A$13 billion (US$10bn) proposed takeover bid for Australian gas pipeline company, APA, by Hong Kong's CKI, indicates an increase in the scrutiny of FIRB applications made by foreign investors in relation to Australian infrastructure and energy assets.

Increased penalties

From 1 January 2021, the maximum penalty for a contravention of the FATA will increase ten thousand fold to A$555m (US$420m), and individuals can face up to 10 years' imprisonment.

Criminal and civil penalties may apply if a foreign person:

• fails to give a notice before taking a notifiable action or notifiable national security action;
• takes a significant action before the end of the determination period;
• contravenes a condition imposed on the FIRB approval; or
• contravenes an order made by the Treasurer in relation to the significant action or notifiable national security action, which includes imposing conditions, prohibiting the action or requiring the action to be undone.

We note that an officer of a corporation who authorises or permits the corporation to commit an offence or contravene a civil penalty, or fails to prevent a contravention of a civil penalty provision, may also be found to commit an offence or contravene a civil penalty provision. This means that the directors and officers of a corporation may be personally liable if the corporation is found to have breached the provisions of the FATA.

Register of Foreign Ownership

As part of the FIRB changes, the Australian government will introduce a 'register of foreign ownership' that will merge the existing agricultural land, water and residential registers. Foreign persons will be required to register, among other things, legal interests acquired in certain Australian land and notifiable national security actions that occur from 1 January 2021 and within 30 days of the relevant registrable event occurring.

With contributions from Jesse Chen of Pinsent Masons, the law firm behind Out-Law.