Out-Law Guide | 18 Dec 2020 | 7:10 pm | 12 min. read
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:
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.
A 'notifiable national security action' will include transactions where a foreign person:
'National security business' is defined broadly and includes, among other things, an Australian business that:
The term 'foreign person' is defined broadly in the FATA. A foreign person is:
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).
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.
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.
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.
The recent changes to the foreign investment regime have certainly had the effect of making foreign investment more scrutinised in Australia but aside from taking a little longer there has been little change to the approval process except in certain areas such as renewable energy. However the proposed national security test in the forthcoming legislation could be significant depending on how it is ultimately framed.
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:
We expect that from 1 January 2021, secured lenders and security trustees will likely seek:
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:
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.
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:
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.
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.
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:
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.
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.