On 5 June 2020, the Treasurer of Australia announced reforms to Australia's foreign investment framework. The key focus of the reforms is national security risks to deal with the current environment, including rapid technological change. The new reforms will give the Australian Government increased screening, information gathering and enforcement powers. Other amendments have also been flagged, including reforms aimed at remedying the current anomalous treatment of private equity investors as foreign government investors ("FGIs").
1. A new 'national security test' will be created for all foreign investors including:
a. Treasurer may impose conditions or block any foreign investment on national security grounds – regardless of value;
b. mandatory notification of any proposed foreign investment in a 'sensitive national security business' and similar requirements if an entity with a foreign investor commences such a business;
c. a new 'call in' power for the Treasurer to screen any investment that would not ordinarily require notification national security grounds (including during or after the investment);
d. current moneylending exemption will not apply where a foreign money lender obtains an interest in a sensitive national security business under a lending agreement;
e. powers to impose or vary conditions to approvals or, as a last resort, require divestment of previously approved investments where national security risks emerge – this power will not be retrospective; and
f. voluntary notification and investor-specific exemption certificate regimes.
2. Private equity investors will no longer be treated as FGIs purely by virtue of passive upstream investors who are foreign government entities and will instead be subject to the same monetary thresholds as other foreign investors:
a. foreign government ownership over 40% (without influence or control) but less than 20 per cent from any single foreign government, will no longer deem an investor an FGI; and
b. entities with investment of 20% or more by a single foreign government (without influence or control) will still be an FGI, but can apply for a broad exemption certificate to undertake investments subject to conditions.
3. Stronger and more flexible enforcement options will be tabled, including directions orders, infringement notices, increased monitoring and investigative powers and higher civil and criminal penalties
An exposure draft of the legislation to give effect to the reforms is due in July 2020, with the reforms to take effect from 1 January 2021.
White & Case's global perspective
These changes are not an isolated example. Across our various offices we have seen in recent years, an increasing number of countries implementing or strengthening processes for reviewing foreign investment based on national security concerns. The Committee on Foreign Investment in the United States ("CFIUS") has perhaps long led in this regard and has recently re-doubled its regulatory tool chest. Other countries have also introduced regimes modelled on the CFIUS structure, or have created their unique regimes. We are also seeing an element of reciprocity between countries with similar measures in place. The net result is twofold: (1) forum shopping for a high-risk investor is becoming increasingly difficult, and (2) awareness and compliance with the multiple regimes that could be implicated in a single global transaction is essential.
Foreign investors, Australian businesses, advisors and other interested parties will have many questions about these reforms. This article gives selected insights on items we think will be of interest to our readers.
What is a 'Sensitive National Security Business'?
A definition for this term has not yet been confirmed, and this will be the subject of consultation in the exposure draft legislation. It is anticipated the following will feature:
- businesses regulated under Australia's existing 'Critical Infrastructure' regime (i.e. critical electricity, gas, water, ports and other assets) and telecommunications legislation;
- businesses in the manufacture or supply of defence or national security-related goods, services and technologies, or business that can create vulnerabilities in the security of Defence and national security environment;
- business or land situated in or proximate to Defence or national security installations; and
- any businesses involved in sensitive data relating to Australia's national security and/or Defence.
What factors will be taken into account?
There is no definitive list of what factors will be taken into account in assessing the national security test. The definition of 'security' in the Australian Security Intelligence Organisation Act 1979 (Cth) provides that security is 'protection from espionage; sabotage; politically motivated violence; attacks on Australia's defence system; acts of foreign interference; or the protection of Australia's territorial and border integrity from serious threats'. Treasury expects the Treasurer's review will follow these lines.1
How does this interact with the current COVID-19 measures?
Ordinarily, while FGIs have always been subject to a $0 threshold for requiring Foreign Investment Review Board ("FIRB") approval for direct (usually 10% or more) investments in Australian businesses, most foreign investors do not have to apply for government approval if the investment is under $275 million. For Australia's Free Trade Agreement partners, this increases to $1,192 million. On 29 March 2020, these thresholds were lowered to $0, as part of the Federal Government's response to the COVID-19 crisis.
These measures will remain in place for the duration of the COVID-19 crisis and the reforms discussed in this note will be transitioned in from the current temporary arrangements once legislated.
What are the new mandatory notification requirements?
Foreign persons acquiring a direct interest of any value in a 'sensitive national security business' will need FIRB approval. Also, if a foreign owned business begins to carry on such activities, FIRB approval will be required. It has not yet been articulated how the second limb of this requirement will be administered. For example, we assume that any business that is 20% or more owned by a foreign person (or 10% for an FGI) will be caught by this requirement, however this has not been explicitly stated as yet. We also expect that there will be issues to work through as to how an already operational business goes about this notification as it navigates developing and evolving its business in the absence of a new investor or transaction as a 'bright line' requiring approval.
What are the 'call in' and 'last resort' powers?
These are new powers to review investments that raise national security risks, including during or after the investment.
- 'Call in' power: investments that would not otherwise trigger FIRB approval can be 'called in' for review before, during or after an investment is made if the Treasurer considers the investment raises national security concerns. Investors will be able to voluntarily notify to increase certainty and avoid a subsequent 'call in' for a particular investment or apply for an investor specific exemption certificates.
- 'Last resort' power: the Treasurer will be able to:
- reassess previously approved transactions where subsequent national security risks emerge
- impose and vary conditions
- in extreme cases, require the divestment of the foreign-owned business, entity or land.
Importantly, the 'last resort' power will not be retrospective and will apply to future investments.
How will private equity investors be treated?
It appears that the widely acknowledged anomalous treatment of private equity funds as FGIs purely by reason of upstream passive investment by foreign governments will be addressed:
- Entities with foreign government ownership over 40% (without influence or control), but less than 20% from any single foreign government, will no longer be deemed an FGI.
- Entities with investment of 20% or more by a single foreign government (without influence or control), will still be an FGI, but can apply for a broad exemption certificate to undertake investments subject to conditions.
In these circumstances, the fund will be treated like any other foreign investor (i.e. subject to the same thresholds, rather than a $0 threshold).
The fund will need to satisfy FIRB that the upstream investors are truly passive, including:
- no management rights in the investment;
- investor typically does not know which and when particular investments will be made (but may know the broad nature of the investment strategy); and
- no direct, indirect, real or perceived influence or control over the entity or strategy.
Investor-specific exemption certificates?
Foreign investors will be able to apply for a time-limited, investor-specific 'exemption certificate' – we expect this will incorporate elements of the existing exemption certificate regime where foreign investors can make eligible acquisitions within the set time period without the need for case-by-case screening by FIRB. Hopefully the scope is expanded such that that larger business transactions can be caught by the exemption and lower level 'programs of investment' in, for example, land.
Exemption certificates will only be granted where there are no national security concerns.
In addition to the national security reforms, a range of other changes to the overall foreign investment framework will be implemented, including:
- Increases in actual / proportional holdings as a result of creep acquisitions, share buybacks / capital reductions, will require FIRB approval.
- The 30-day statutory decision-making period can be extended by the Treasurer in complex and sensitive cases to up to 90 days.
- Tracing rules under the FATA will be extended so that unincorporated limited partnerships are treated the same as corporations and trusts.
- New coordinated information gathering and sharing abilities across government agencies and with international counterparts.
- Amended foreign ownership register to capture foreign interests in land, water entitlements, contractual water rights, and business acquisitions that require FIRB approval, as well as divestments, disposal of assets and any changes in their foreign entity status.
- Introduction of a range of increased monitoring and investigative powers, including an ability to issue directions and issue infringements, accept enforceable undertakings and impose higher civil and criminal penalties.
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