The Federal Government has today announced new changes to Australia’s foreign investment regime. The changes are designed to promote Australia’s national interest, particularly national security, while maintaining a sustainable level of foreign investment.
In this article we discuss how the proposal comes after the Government’s recent clamp-down on foreign investment due to the economic implications of COVID-19, whereby the threshold amount for Foreign Investment Review Board (FIRB) approval was reduced to zero.
National security test
The proposed changes revolve around a new ‘national security test’ for foreign investment in ‘sensitive national security businesses’. The definition of a ‘sensitive national security business’ remains subject to consultation, however, will likely include businesses within the data, defence supply chain, water, energy, telecommunications and ports sectors.
For proposed transactions that undertake investments in non-sensitive areas, the new national security test will not affect their interaction with FIRB.
First, it’s necessary to consider the recent policy changes to Australia’s foreign investment regime. We have provided a more detailed summary of these changes in our previous alert.
Prior to COVID-19, a bid by a private foreign company was only subject to FIRB review if the asset being purchased was worth more than $1.2 billion and Australia had entered into a free trade agreement (FTA) with the country in which the purchaser was domiciled. If the private foreign company was domiciled in a country with which Australia did not have FTA, that threshold was reduced to $275 million. Investments by state-owned foreign companies (defined as foreign government investors under the relevant FIRB legislation) have always faced FIRB scrutiny, irrespective of the nature of the investment.
State-owned | Privately owned (with FTA in place) | Privately owned (with no FTA in place) | |
Threshold asset value for FIRB review | $0 | $1.2 billion | $275 million |
(Table 1 – Pre-COVID-19 FIRB Regime)
As discussed in our previous alert, these thresholds were reduced to zero to protect Australian assets and businesses from foreign investors exploiting the economic downturn caused by COVID-19.
State-owned | Privately owned (with FTA in place) | Privately owned (with no FTA in place) | |
Threshold asset value for FIRB review | $0 | $0 | $0 |
(Table 2 – COVID-19 FIRB Regime)
However, the thresholds described in Table 2 are only anticipated to remain in place during the course of the COVID-19 crisis. Under the new regime, which the Government aims to implement on 1 January 2021, any foreign investment in sensitive national security businesses (SNSB) will be subject to FIRB review, irrespective of whether the investor is state or privately owned.
State-owned | Privately owned (with FTA in place) | Privately owned (with no FTA in place) | |
Threshold asset value for FIRB review – Non-SNSB | $0 | $1.2 billion | $275 million |
Threshold asset value for FIRB review – SNSB | $0 | $0 | $0 |
(Table 3 – National Security FIRB Regime (with COVID-19 temporary measures lifted))
In short, all foreign investment in sensitive national security businesses will be reviewed by FIRB under the new regime. This is a significant change when, previously, investments such as an acquisition of commercial land that is used for an identified sensitive purpose (e.g. sensitive business, regulated production, storage, airports, banking) had a threshold of $60 million. The amendments proposed by the Treasurer broaden the scope of transactions that need FIRB approval whilst also lowering the monetary threshold.
Other changes
As part of the proposed changes, the Treasurer will be empowered to scrutinise investments before, during or after their occurrence. This includes the power to “call in” investments for review under the national security test for the purpose of determining whether the relevant investment raises any national security concerns.
The Australian government will be given a ‘last resort power’ to enable the Treasurer to impose conditions, vary existing conditions or as a last resort, require the divestment of foreign interests in an Australian business, entity or land. This power is not retrospective and is only applicable to future foreign investment.
The Australian Government will also be granted stronger enforcement powers to ensure continual compliance by foreign investors.
By the same token however, in a bid to continually promote foreign investment, the definition of a foreign government investor will be narrowed so as to exclude passive investment where the investor exercises no control or influence over the entity in which it is investing. This change is designed to streamline foreign investment in circumstances where national security is not at risk.
While the new rules are restrictive, the Government has insisted the changes are necessary to protect the country’s national security interest. While the changes immediately follow heightened economic tensions between China and Australia, the Government has also insisted the new rules will be ‘country agnostic’.
If you have any questions regarding the Government’s proposed changes to the foreign investment regime or how those changes might affect your business, please contact our Mergers and Acquisitions team.