National security reviews 2018: A global perspective
What's inside
A guide to navigating the rules for investing in countries that require national security approval
Navigating national security reviews worldwide
As governments in various countries tighten their grip on national security reviews of foreign direct investment, the need for better assessment and calibration of the associated regulatory risk in cross-border transactions is greater than ever before
Nowhere is this trend more evident than in the United States, with the August passage of the Foreign Investment Risk Review Modernization Act (FIRRMA), which expanded the range of transactions that are subject to review by the Committee on Foreign Investment in the United States (CFIUS), and the more recent release of a pilot program under FIRRMA that instituted mandatory declarations for a broad range of transactions and put in place penalties—up to the full value of the transaction—for failure to comply. With CFIUS set to clamp down still further in coming months, CFIUS compliance is rapidly moving to the very top of the due diligence list for cross-border transactions involving US businesses.
The US is far from alone. As you will read in the pages that follow, the European Union, United Kingdom, Germany, France, China and other nations are also incrementally ratcheting up their reviews. In the UK, for instance, the government is proposing radical new legislation to allow it to intervene in cases that raise potential national security concerns. The UK government itself estimates that, under the new law, approximately 50 cases a year may end up with some form of remedy to address such concerns. In France, the new PACTE law is likely to strengthen the sanctions mechanism, extend the list of sectors subject to review and introduce some transparency into the process through annual reporting on a no-name basis of reviewed cases.
The pages that follow offer a common-sense guide to investing in major jurisdictions, a snapshot of recent regulatory changes in each, and guidance on making sound investment decisions in a time fraught with regulatory uncertainty.
United States
Deals are generally approved, but a new law increases the number and types of deals reviewed.
New legislation has been proposed to expand the scope of French national security reviews, especially in the technology sector, and to strengthen the powers of French authorities to impose sanctions
Deals are generally not blocked by the Italian government. However, in connection with the clearance process, conditions may be imposed that can have a significant impact on the investment
New amendments potentially require foreign investors to disclose information about beneficiaries, beneficial owners and controlling persons as part of pre-clearance
China is attempting to implement a more structured and comprehensive system to keep a closer eye on economic deals that might have security implications
FIRB is more closely scrutinizing investments in sensitive sectors (especially power) and is more likely to impose conditions on such investments to increase government oversight.
The decision to approve or deny a foreign investment application is ultimately made by the Treasurer of Australia, based on an assessment of whether the investment would be contrary to the national interest. When making its decision, the Treasurer is advised by the Foreign Investment Review Board (FIRB), which examines foreign investment proposals and advises on the national interest implications. Australia's foreign investment policy framework comprises the Foreign Acquisitions and Takeovers Act 1975 ("the Act"), the Act's related regulations, Australia's Foreign Investment Policy ("the Policy") and a number of guidance notes.
WHO FILES
A foreign person or entity making an acquisition that requires approval under the Act must apply to FIRB for a notification that the Treasurer has no objection to the acquisition ("FIRB approval") before completion of the acquisition, and any agreement to make the acquisition must be subject to receiving FIRB approval.
An application includes a filing fee that varies according to the type of deal and the deal value.
TYPES OF DEALS REVIEWED
FIRB approval is required for a range of acquisitions by foreign persons, including:
A "substantial interest" in an Australian entity: An acquisition of an interest of 20 percent or more in an Australian entity valued at more than AUD 261 million (approximately US$189.5 million)
Australian land and land-rich entities: Various acquisitions of interests in Australian land are regulated with varying monetary thresholds, including in respect of residential land, vacant commercial land, developed commercial land and an entity where the value of its interests in Australian land exceeds 50 percent of the value of its total assets
Agricultural land and agribusinesses: Acquisitions of interests in agricultural land and agribusinesses are regulated separately in the Act. In addition, a register of foreign ownership of agricultural land is maintained by the Australian taxation authority
Certain types of investors receive differing treatment for their deals:
Free trade agreement investors: Consistent with Australia's free trade agreement (FTA) commitments, higher monetary thresholds apply to certain acquisitions made by investors from Chile, Japan, Korea, China, Singapore, New Zealand and the United States. For example, an acquisition of an Australian entity by an FTA country investor will only require FIRB approval if the entity is valued at more than AUD 1.134 billion (approximately US$823 million), unless the investment relates to a "sensitive business" such as media, telecommunications, transport, defense and military-related industries (to which a lower threshold applies) or the investor is a foreign government investor
Foreign government investors: Stricter rules apply to foreign government investors which can include domestic or offshore entities where a foreign government and its associates hold a direct or upstream interest of 20 percent or more, or foreign governments of more than one foreign country and their associates hold an aggregate interest of 40 percent or more. In general, foreign government investors must obtain FIRB approval before acquiring a direct interest (generally, at least a 10 percent holding or the ability to influence, participate in or control) in any Australian asset or entity regardless of the monetary thresholds for FIRB approval, starting a new business or acquiring mining, production or exploration interests
SCOPE OF THE REVIEW
The Treasurer may prohibit an investment if he or she believes it would be contrary to the national interest. In making this decision, the Treasurer will broadly consider:
The impact on national security (with advice from the Critical Infrastructure Centre on national security risks to critical infrastructure)
The impact on competition
The effects of other Australian government laws and policies (including tax and revenue laws)
The impact on the economy and the community
The character of the investor
TRENDS IN THE REVIEW PROCESS
Historically, there have been few rejections by the Treasurer on the grounds of national interest. However, there have been some significant investment proposals that have been rejected on national security grounds, including the blocking of the New South Wales government's proposed sale of its electricity network Ausgrid to Chinese and Hong Kong investors in 2016. In 2016 – 2017, only two non-residential land applications were formally rejected (out of a total of 1,159 applications). These rejections both related to the Ausgrid acquisition.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Foreign persons should file an application in advance of any transaction or make the transaction conditional on FIRB approval, and a transaction should not proceed to completion until the Treasurer advises on the outcome of its review. For a more sensitive application (e.g., a transaction involving the power, ports, water, telecommunications banking or media sectors), foreign investors should consider taking up the government's invitation in the Policy to engage with FIRB before filing an application for a significant investment.
These discussions may help foreign investors understand national interest concerns the government may hold about a particular proposal and the conditions the Treasurer may be considering imposing on the proposal should it be approved.
These discussions can also help with structuring a transaction in order to reduce the likelihood of rejection. Such discussions should be held at an early stage in order to provide enough time to satisfy all FIRB queries. Where there is a competitive bid process for the acquisition, a foreign investor that does not actively engage with FIRB early in the bidding process may be placed at a competitive disadvantage to other bidders who do. Foreign investors should be prepared to discuss in detail any conditions and undertakings that may be requested by FIRB, especially for acquisitions that are likely to attract greater political or media scrutiny.
REVIEW PROCESS TIMELINE
Under the Act, the Treasurer has 30 days to consider an application and make a decision. The time frame for making a decision will not start until the correct application fee has been paid in full. If the Treasurer requests further information from the investor, the 30-day time period will be on hold until the request has been satisfied. The Treasurer may also extend this period by up to 90 days by publishing an interim order. An interim order may be made to allow further time to consider the exercise of the Treasurer's powers. Investors can also voluntarily extend the period by providing written consent.
2018 UPDATE HIGHLIGHTS
Open and transparent sale process for agricultural land: From early 2018, it has been a requirement that acquisitions of agricultural land have been offered for sale publicly and marketed widely for a minimum of 30 days (so as to ensure Australians have sufficient opportunity to invest). Various exceptions apply, including to leasehold interests for wind and solar farms, internal reorganizations and acquirers with a substantial Australian ownership.
Major electricity assets: The Treasurer has flagged that acquisitions of major electricity assets would require conditions or ownership restrictions to address national security risks.
National security review of Australian critical infrastructure assets: In January 2017, the Attorney General's Department established the Critical Infrastructure Centre (CIC) to support the Australian government's capacity to manage the national security risks of espionage, sabotage and coercion. The CIC administers the Security of Critical Infrastructure Act 2018 and the Telecommunications and Other Legislation Amendment Act 2017 to gather information from owners and operators of critical infrastructure in the sensitive sectors of electricity, water, ports and gas (and from carriers and carriage services providers in the telecommunications sector). The CIC then uses this information, together with expertise from across the Australian government, to provide coordinated advice to FIRB on national security risks to critical infrastructure as part of the foreign investment review process.
OUTCOMES
- Generally, the Treasurer approves the vast majority of applications
- However, FIRB has been increasingly willing to use conditions and undertakings as a mechanism to increase the government's oversight of more complex or sensitive investments. Undertakings required from FIRB may include matters relating to governance, location of senior management, listing requirements, market competition and pricing of goods and services (e.g., that all off-take arrangements must be on arm's-length terms) and other industry-specific matters. FIRB has also issued a set of standard tax conditions that apply to those foreign investments that pose a risk to Australia's revenue and make clear the requirements and expectations for investors
- The Treasurer has wide divestiture powers and criminal and civil penalties can apply for serious breaches of Australia's foreign investment laws
