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.
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).
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.
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.