Some significant investment proposals have been rejected on national interest grounds since 2020
The decision to approve or deny a foreign direct investment (FDI) application is ultimately made by the Treasurer of Australia, based on an assessment of whether the investment would be contrary to the national interest and national security.
When making its decision, the Treasurer is advised by the Foreign Investment Review Board (FIRB), which examines foreign investment proposals, consults with other relevant Australian government agencies as required, and advises on the national interest and national security implications.
Australia's foreign investment policy framework comprises the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the "Act") and its related regulations, the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 ("Cth") and its related regulations ("Fees Regime"), Australia's Foreign Investment Policy (the "Policy") and a number of guidance notes.
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 before completion of the acquisition, and any agreement to make the acquisition must be conditional upon, and subject to, receipt of FIRB approval by the acquirer.
An application includes a filing fee that varies according to the type of deal and the deal value. As of January 1, 2021, amendments to the Fees Regime changed the way that fees are calculated for applications.
An application for FIRB can be mandatory or voluntary, subject to the type of the transaction and the sectors involved. A voluntary filing may preclude post-acquisition orders being made by the Treasurer on the basis of national security concerns.
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 281 million (approximately US$209 million)
- A "direct interest" in a national security business: An acquisition of an interest of 10 percent or more in an Australian national security business (for example, a business that holds critical gas, water or port assets, a telecommunications carrier, or is involved in the supply chain for military and defense goods and services). There is a US$0 threshold for these acquisitions
- An interest in national security land (for example, a defense premises or land in which the Australian intelligence community has an interest). There is a US$0 threshold for these acquisitions
- 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, South Korea, China, Singapore, New Zealand, the US and countries for which the Comprehensive and Progressive Agreement for Trans-Pacific Partnership is in force. 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 1.2 billion (approximately US$899 million), unless the investment relates to a "national security business" or a "sensitive business," such as media, telecommunications, transport, defense and military-related industries (to which a lower or US$0 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, unless an exemption applies (for example, the de minimus exemption for offshore acquisitions), a foreign government investor 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; starting a new business; or acquiring mining, production or exploration interests
The Treasurer has wide divestiture powers, and criminal prosecution and civil penalties can apply for serious breaches
SCOPE OF THE REVIEW
The Treasurer may prohibit an investment if he or she believes it would be contrary to the national interest or national security. In making this decision, while the concept of "national interest" is not defined in the legislation, the Treasurer will broadly consider:
- The impact on national security (being the extent to which investments affect Australia's ability to protect its strategic and security interests)
- The impact on competition (being whether a proposed investment may result in an investor gaining control over market pricing and production of a good or service in Australia)
- The effects of other Australian government laws and policies (including tax and revenue laws and the impact of the investment on Australian tax revenues)
- The impact of the investment on the Australian economy and the community
- The character of the investor (including the extent to which the investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision, as well as the corporate governance practices of the investor)
The "national security test" requires the Treasurer to assess a given investment from a national security perspective, and whether such investment will affect Australia's ability to protect its strategic and security interests. In making this assessment, the Treasurer relies on advice from the relevant national security agencies for assessments as to whether an investment raises national security issues (e.g,. through foreign intrusion or espionage).
This test is generally applied in circumstances where an investment involves a "national security business," "national security land" or falls within one of the sectors of interest for the Treasurer, as set out in Guidance Note 8 on National Security.
TRENDS IN THE REVIEW PROCESS
Historically, there have been few rejections by the Treasurer on the grounds of national interest. From 2018 through 2019, only one non-residential land application was formally rejected, and in 2019 – 2020, there were three rejections among 8,224 applications. In 2018 – 2019, 670 applications (approximately 85 percent of which related to residential land acquisitions) were withdrawn before a decision was made. The reasons for withdrawal are not publicized.
If the Treasurer intends to make a rejection, he or she will usually notify the applicant in advance and the applicant may withdraw their application. These figures are not determinative of the true number of applications that receive negative outcomes.
However, some significant investment proposals have been rejected on national interest grounds since 2020, including:
- A US$20 million investment by Chinese state-owned steel producer Baogang Group Investment (Australia) Pty Ltd. (BGIA) into Northern Minerals Ltd.
- A US$14.1 million investment by Chinese lithium chemical producer Yibin Tianyi Lithium Industry (Yibin Tianyi) into AVZ Minerals
- A US$600 million sale of Lion Diary by Japanese beverage company Kirin to China Mengniu Dairy Company Ltd.
- A US$300 million sale of Australia-based and South Africa–owned Probuild to China State Construction Engineering Corporation
The publicized grounds upon which these acquisitions were rejected included the importance of the relevant sector to the Australian economy and society, antitrust concerns, potential access to construction of sensitive buildings or critical infrastructure, and an investor's connections to the Chinese defense industry.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Foreign persons should file an application in advance of any transaction, and any transaction requiring mandatory FIRB approval must be conditional on FIRB approval. Such a transaction should not proceed to completion until the Treasurer advises on the outcome of his or her review.
For applications involving a sensitive or national security business or sector (for example, a transaction involving businesses engaged with the Australian defense force, public infrastructure, power, ports, water, telecommunications, banking or media sectors), foreign investors should consider the government's invitation in the Policy to engage with FIRB before filing an application for a significant investment.
Leading into the holiday period in December and January, and into an Australian Federal election (the next Federal election is anticipated in the first quarter of 2022), decision timeframes for FIRB applications are likely to be protracted. Foreign investors should be particularly cognizant of the need to engage with FIRB and Australian legal advisers early in a deal timeline.
These discussions may help foreign investors understand the complexity of their application, any national interest concerns the government may hold about a particular proposal, and the conditions the Treasurer may impose upon approvals.
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.
Investors should be aware of the sensitivity in relation to the investment structures used by foreign investors, profit shifting and payment of Australian tax. Early on, foreign investors should work with their tax advisors to ensure their investment structures do not fall outside the spectrum of what is acceptable to the Australian Tax Office (ATO), as the ATO is consulted in all approval processes. Investors should also work with their advisors to determine a level of transparency of upstream ownership, to avoid further enquiry from FIRB and possible delays later.
REVIEW PROCESS TIMELINE
Under the Act, the Treasurer has 30 days to consider an application and make a decision. However, in practice, the assessment process is in many cases extended and takes longer than this, more typically eight to 12 weeks from the time of application to the receipt of a no objections notification. As mentioned above, the holiday period and the impending Australian Federal election in 2022 will likely impact these timeframes for decisions.
The timeframe 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 review period will be on hold until the request has been satisfied.
2021 UPDATE HIGHLIGHTS AND REFORMS
- Compliance: The Australian government has increased its focus on compliance activities, enforcement and audits, particularly with respect to tax and data conditions imposed on FIRB approvals
- Reforms: As part of the Australian government's reforms to Australia's foreign investment regime (effective from January 1, 2021), the government's focus is firmly on national security and compliance. The reform package included:
- A new "national security test" created for foreign investors proposing to acquire a direct interest in a "national security business" or "national security land." The Treasurer now also has the power to impose conditions or block any investment on national security grounds, regardless of value
- A new voluntary notification regime in respect of "reviewable national security actions," i.e., acquisitions involving a foreign person proposing to acquire a direct interest in any entity or Australian business, or any interest in Australian land
- A new "call in" power that allows the Treasurer to screen any investment that would not ordinarily require mandatory notification (i.e., a voluntary "reviewable national security action" noted above, which was not voluntarily filed at the time of acquisition), on national security grounds for a period of ten years following completion of the acquisition. In cases where the Treasurer determines the acquisition was contrary to national security, the Treasurer may make a number of orders including, in extreme cases, disposal orders
- Updated sectoral guidance in FIRB Guidance Note 8 on national security, to include additional commentary for sectors such as health, critical minerals and technology, public infrastructure, energy, gas, electricity, transport and data
- Removal of the 40 percent threshold for foreign government investor test: Private equity investors are no longer treated as foreign government investors purely by virtue of passive upstream investors who are foreign government entities holding, in aggregate, >40 percent of the interests in that private equity investor (e.g., fund)
- Expansion of the exemption certificate regime with ability for the Treasurer to grant investor-specific exemption certificates
- Stronger and more flexible enforcement options, including powers to impose or vary conditions to approvals or, as a last resort, require divestment of previously approved investments where national security risks emerge (compliance with approval conditions is receiving more attention as the government has received criticism for failing to allocate sufficient resources to this area)
- Increased monitoring and investigative powers and materially higher civil and criminal penalties
- Introduction of the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020 (Cth) and new way of calculating submission fees for FIRB applications
- Data: FIRB has increasingly emphasized that, as part of its national interest assessment, it will have particular regard to the protection of sensitive Australian data and foreign access/interference to such data. For example, this has been a particular focus with respect to proposed investments in Australian healthcare groups in the context of "patient data" and data centers
- Generally, the Treasurer approves the vast majority of applications
- 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 (for example, 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 prosecution and civil penalties (including the issuance of infringement notices) can apply for serious breaches of Australia's foreign investment laws and for those facilitating such breaches, such as professional advisors. The standard practice is to seek approval where there is any doubt as to whether approval is required.
Typically, if FIRB requires further time, it will request the applicant to voluntarily extend the approval deadline. As the Treasurer is also entitled to unilaterally impose a 90-day extension under statute, applicants are generally incentivized to "voluntarily" request the proposed deadline extensions. This makes it difficult to specify with certainty how long a review process will take.
- Exemptions under the Act now include an additional limb that carves out acquisitions in sensitive sectors and/or of national security concern. Exemptions that previously applied to certain transactions (for example, the de minimus exemption for offshore transactions) will now also need to be assessed against the new national security framework under the Act
- An assessment as to whether an entity is a "national security business" or holds an interest in "national security land" will require extensive due diligence, which generally extends beyond searching publicly available information. Given national security actions attract mandatory filings and are now carved out from most exemptions under the Act, it is important to fully diligence the target and its business from this perspective
- FIRB will require the identities of any upstream investor (and their upstream investors) that will hold more than 5 percent interest in the target (on a look-through basis) following the acquisition. We recommend including this information upfront in the application to avoid a protracted consultation process with FIRB
- While the "statutory deadline" for FIRB applications is 30 days under the Act, this is generally not the decision period for a given application. Whether mandatory or voluntary, the decision period for an application will depend on a number of factors:
- The identity of the investors, their country of origin and whether there is any upstream foreign government ownership
- Whether the transaction involves a national security action
- The number of consult partners FIRB engages with while assessing the application—these can include the Australian tax authority, competition regulator and Department of Defence
- The complexity of the application
- Australia's political landscape, its relations with the investor's country of origin and whether there is an impending election/holiday period in Australia
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