After nine months of $0 thresholds for all foreign persons, the long-awaited changes to Australia’s foreign investment rules as set out in the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Regulation 2015 (together, the FIRB Legislation), are set to come into effect on 1 January 2021. Stay tuned for our updated publication “Foreign Investment in Australia” in the coming days, but in the meantime, this alert sets out a few of the key takeaways.
1. Notifiable national security actions
Under Australia's foreign investment rules, the Treasurer has the power to make orders in relation to certain transactions (to block them, order divestments or impose conditions) if he considers them to be contrary to the national interest. The universe of transactions over which the Treasurer has this power are called significant actions. Notifiable actions are, generally, a subset of these and must be notified and approval sought - failure to do so is an offence. Other significant actions do not strictly speaking have to be notified, but doing so and obtaining a notice of no objection cuts off this power.
The effect of the amendments is to introduce another head of approval, called a notifiable national security action. Broadly speaking, a notifiable national security action means an action by a foreign person:
- to acquire a direct interest in a national security business or to start a national security business; or
- to acquire an interest in national security land (being certain defence premises, land in which a national intelligence community has an interest that is publicly known or could be known upon the making of reasonable inquiries).
A “national security business” is a business, carried on wholly or partly in Australia, for profit or not, and which it is publicly known or could be known upon the making of reasonable inquiries that the business is:
- a responsible entity or direct interest holder of a critical infrastructure asset within the meaning of the Security of Critical Infrastructure Act 2018 (there is an ongoing legislative review of this Act and the definition of what constitutes a critical infrastructure asset is expected to expand significantly, but these amendments won’t be effective on 1 January);
- a carrier or carriage service provider subject to the Telecommunications Act 1997;
- a business that develops, manufactures or supplies critical goods or technology that are or are intended to be for military end-use by, or that provides critical services to:
- defence and intelligence personnel;
- the defence force of another country; or
- a foreign intelligence agency.
- a business that: (i) stores or has access to personal information that has security classification; (ii) stores or maintains personal information collected by the Australian Defence Force, the Defence Department or an agency in the national intelligence community of defence and intelligence personnel, or that collects, as part of an arrangement with the foregoing agencies, personal information of defence and intelligence personnel and, in each case, the access or disclosure of such information could compromise national security; or (iii) stores, maintains or has access to information of the kind mentioned in item (iv) which if disclosed could compromise Australia’s national security.
When notified (and when they don’t also constitute significant / notifiable actions), these notifiable national security actions will be assessed against a narrower national security test i.e. whether they would be contrary to Australian national security.
2. Call in and last resort review
The Treasurer will have new “call-in” powers which will give him the ability, unilaterally, to review:
- a significant action that is not a notifiable action and that wasn’t notified, or notifiable national security action; and
- a new category of actions called “reviewable national security actions” (not to be confused with “notifiable national security actions” described above), which is a category of transactions that are not otherwise caught by the legislation. A “reviewable national security action” includes, among others, the acquisition of any interest in an entity that will put the foreign person in a position to influence or participate in the central management and control of the entity, or to influence its policy.
The Treasurer may review these if he considers that the action may pose a national security concern. If the action is determined to be contrary to national security, the Treasurer can make the usual array of orders in relation to the action. Obviously, a party can choose to notify a significant action, and a party can also choose to notify these new “reviewable national security actions”, if they have some doubt about whether their transaction would have a national security impact, in order to cut off this power (but see the new last resort power described below). The time limit on the availability of the Treasurer’s call-in power is 10 years from when the action is taken.
The Treasurer will also have a new “last resort” power, which will allow the Treasurer to review an action that was previously approved where:
- the person in notifying the action made a statement (including verbally) that was false or misleading in a material particular, or that omitted a matter or thing without which the statement was misleading in a material particular;
- the business, structure or organisation of the person has, or the person’s activities have, materially changed since the time the approval was given; or
- the circumstances or market in which the action was, or is proposed to be, taken have materially changed since the time the approval was given.
If the Treasurer reviews the action and decides it does pose a national security risk, then he or she can make the usual array of orders if certain conditions are met. There are also other procedural safeguards to the Treasurer exercising the relevant powers.
3. Monetary thresholds
The monetary thresholds will return to normal. The relevant monetary threshold differs depending on the type of transaction, the nature of the acquirer and the country of origin of the acquirer, but the standard monetary threshold is A$275m which applies to most business acquisitions and acquisitions of interests in Australian developed commercial land by private foreign investors.
4. FGI de minimis exemption for offshore transactions
Foreign government investors continue to be subject to A$0 thresholds, but the de minimis exemption will start to operate as normal. A foreign government investor that is acquiring securities in an offshore entity that has an Australian subsidiary will be exempt if the relevant Australian assets are worth less than A$60 million, subject to indexation, constitute less than 5% of the global gross assets of the target and are not used in a sensitive business (telecommunications; transport; media; supply of military goods; development, manufacture or supply of, or the provision of services relating to, encryption and security technologies and communications systems; uranium or plutonium extraction; operation of a nuclear facility) or a national security business (see above).
5. Foreign government investors
A foreign government investor includes investment funds where foreign government investors (eg, foreign governments, agencies, sovereign wealth funds, state-owned enterprises, public pension funds and public university endowments) from one country hold a 20% or more interest, or foreign government investors from multiple countries hold a 40% or more interest. In the initial draft regulations, the Government had originally proposed that investment funds which are deemed to be foreign government investors because of the “40% from multiple countries” test would cease to be deemed to be foreign government investors if those investors were truly passive, but then the draft explanatory statement set an impossibly high bar for passivity that few private equity funds were ever going to be able to meet – effectively prohibiting a number of provisions that the principles set out by the Institutional Limited Partner Association (ILPA) consider to be “best practice” for purposes of protecting institutional investors’ financial interests and which virtually all PE funds have in one form or another. After industry feedback (to which Gilbert + Tobin contributed heavily), the final form of the explanatory statement has made it clear that the key question on passivity is the extent to which an individual investor is able to influence individual investment decisions or management decisions about individual investments and notes that having influence over the broad investment strategy or participating in collective decision-making about the fund (but not over individual investments) are not disqualifying. This has the potential to take a number of private equity funds out of the “foreign government investor” basket.
Thankfully for the Australian debt markets, the existing moneylending exemption under the FIRB Legislation remains more or less intact – which means that lenders (and their security trustees) entering into new moneylending transactions and taking security will generally not need to concern themselves with the FIRB Legislation for any lending transaction to which the FIRB Legislation did not previously apply (though secured lending transactions involving residential land and foreign government investors will continue to be subject to the FIRB Legislation on the same basis as applied previously).
Note however, that an additional exception has been introduced which will mean that FIRB approval will need to be obtained in respect of (i) an interest in Australian land that, at the time of the acquisition, is national security land; (ii) a legal or equitable interest in an exploration tenement in respect of Australian land that, at the time of the acquisition, is national security land; (iii) an interest in an asset of a national security business; or (iv) an interest in securities in an entity that carries on a national security business, that, in each case, is acquired by way of enforcement of a security, unless (in each case) the entity that acquires the interest is a receiver, or a receiver and manager.
What this means for secured lenders (and their security trustees) is that:
- There are no new requirements for lenders or their security trustees under the FIRB Legislation in connection with new secured moneylending transactions (i.e., there is no requirement for lenders and their security trustees to notify FIRB and obtain FIRB approval at the time security is granted).
- Subject to the below, if a secured moneylender acquires an interest in national security land (or a tenement on it), an asset of a national security business, or shares / units in a national security business by way of enforcement of a security held solely for the purposes of a moneylending agreement – then the acquisition of such interest will be subject to the FIRB Legislation (including all the new requirements around interests in certain securities, assets, land or tenements with national security significance).
- However, if the enforcement is only through the appointment of a receiver, or a receiver and manager to the relevant land / asset, then that will not (of itself) mean that the acquisition of such interest will be subject to the FIRB Legislation. This avoids the nightmare scenario for Lenders of having to obtain FIRB approval in order to appoint a receiver within the 13 day decision period for a company which has gone into voluntary administration.
- The changes do mean that lenders which are foreign persons will need to take into account the requirements of the FIRB Legislation at the time of enforcement to the extent they wish to pursue an enforcement remedy which will result in them becoming the owner of a secured asset which is national security land or an asset of (or shares in) a national security business (eg, through the exercise of a foreclosure remedy or loan-to-own strategy).
See our previous FIRB articles: