Recent changes in FIRB

The Australian government has made significant changes to Australian foreign investment law, also known as the FIRB regime. This article will summarise the pivotal changes to this regime.

Key legislation:

The test of national security is of increasing importance in determining approval of foreign investment in Australia, as seen by the introduction of new FIRB laws in the form of the Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 (the 2020 Amendments), which came into effect on 1 January 2021.

The 2020 Amendments serve to implement major reforms to the FIRB regime in Australia with respect to foreign government investors and national security, with the key changes relating to the following areas:

Mandatory notification of FIRB for ‘notifiable national security action’.
Treasurer’s ‘last resort powers’ of unwinding a transaction after FIRB approval.
Treasurer’s ‘call-in’ powers and reviewing national security actions.
Treasurer’s ability to extend decision making periods.
Harsher penalties for non-compliance with FIRB regime.
Increased FIRB powers of compliance and enforcement.
Re-defining ‘foreign government investor.’
Change in ‘significant action’ control test.

Mandatory notification of FIRB for ‘notifiable national security action’

Prior to the recent reforms the foreign investment laws in Australia required foreign persons to notify any ‘notifiable action’ or ‘significant action.’ The new 2020 Amendments now also require mandatory notification of ‘notifiable national security action’. This is when a foreign person:

acquires a 'direct interest' (10%+ or in a position of control or influence) in a 'national security business' (see point 2 below regarding what is considered 'national security business')
acquires an interest in Australian land that is defence premises, or in which an Australian national intelligence agency has or will have an interest which is either publicly known or could be known upon making reasonable inquiries or which is land covered by an area of Australian land declared by the Treasurer by legislative instrument; or
starts to carry on a 'national security business'.

The exemptions from notifiable and significant actions are also applicable to the new notifiable national security actions, however there will be no money lending exemptions for notifiable national security actions and there are changes to existing exemptions.

Moreover, this reform introduces a new concept of ‘national security business’ which covers the following:

(critical infrastructure) where the business is a responsible entity or a direct interest holder (holding 10%+) in relation to a critical infrastructure asset under the Security of Critical Infrastructure Act 2018 (Cth), including the electricity, gas, water, and ports sectors.
(telecommunications) where the business is a carrier or carriage service provider under the Telecommunications Act 1997 (Cth)
(defence) where the business does any of the following:

- develops or manufactures critical goods or critical technology intended for a military end-use or military use by "relevant defence persons" (being defence and intelligence personnel in activities relating to Australia's national security, or the defence force of another country in activities that may affect Australia's national security);
- supplies critical goods or critical technology that are, or are intended to be, for a military end-use or military use by relevant defence persons; or
- provides or intends to provide critical services to relevant defence persons; or
(data and personal information) where the business:

- stores or has access to information with a security classification.
- stores or maintains personal information of Australian defence and intelligence personnel collected by Australia's Defence Force, Defence Department, or an Australian national intelligence agency, which if accessed could compromise Australia's national security; or
- collects, stores, maintains or has access to personal information of Australian defence and intelligence personnel that has been collected as part of an arrangement with the Australian Defence Force, Defence Department or an Australian national intelligence agency, which if disclosed could compromise Australia's national security.

To the extent a foreign person starts or acquires an interest in these national security businesses (as described above), it will be necessary to notify FIRB.

Treasurer’s ‘last resort powers’ of unwinding a transaction even after FIRB approval

Prior to the 2020 Amendments, if an action is a risk to ‘national interest’, the Treasurer could prohibit the transaction or make divestment orders even if the transaction had already occurred. However, the previous regime restricted these divestment powers to only when the applicant had breached a condition under an existing FIRB approval or failed to notify FIRB when it was required to do so. The Treasurer was also unable to change or make new conditions to an existing FIRB approval without the applicant’s consent or unless the Treasure was sure there would not be a disadvantage to the applicant.

Under the new regime, the Treasurer now holds wide ranging ‘last resort’ powers that can approve or reject anything on the grounds of ‘national security’. Even after FIRB has approved the investment, the Treasurer, subject to satisfying a list of newly introduced requirements, now has the authority to impose additional conditions, change existing conditions or order the divestment and sale of the investments. Foreign investors should be weary of these changes and obtain legal advice to ascertain the extent of how FIRB and the Treasurer may impact the mode of investment desired.

A recent example of the Treasurer exercising such power was in the rejection of China State Construction Company’s proposed $300 million acquisition deal for the major Australian building contractor Probuild over concerns of national security.

Treasurer’s ‘call-in’ powers and reviewing national security actions

The Treasurer’s new ‘call-in power’ allows them to review any action which was not previously notified to FIRB, is a significant action or reviewable national security action, or may pose a national security concern. After the review, the Treasurer can make prohibition or divestment orders if satisfied the action would result in a risk to national security.

The Treasurer can initiate a review any time within 10 years after the action occurs.

Treasurer’s ability to extend decision making periods

Previously, the Treasurer’s ability to extend the FIRB assessment decision making period was limited to a public interim order, which could prevent the applicant from proceeding with a transaction by up to 90 days. The previous regime also allowed for applicants to request for an extension of decision time, so as to avoid a public interim order. However, the 2020 Amendments now allows the Treasurer to extend the decision period up to 90 days unilaterally and the applicant cannot complete the investment until the Treasurer has delivered its decision.

Harsher penalties for non-compliance with FIRB regime

The 2020 Amendments increase and include a wider range of criminal and civil penalties for non-compliance with the FIRB regime, e.g.:

failure to give notice of notifiable action or notifiable national security action;
taking an action notified to FIRB prior getting FIRB approval;
breaching a FIRB approval condition.

Depending on the extent of the non-compliance or misrepresentations to FIRB, as at the date of this article, the Treasurer has the powers to impose penalties that include up to 10 years imprisonment for individuals or civil penalties of up to $1.11 million for individuals or up to $555 million for corporations.

Increased FIRB powers of compliance and enforcement

The 2020 Amendments provide the Treasurer with increased powers, beyond giving infringement notices and fines. The Treasurer will have monitoring and investigation powers with other government agencies and will have access to premises with consent or with a warrant to gather more information. The Treasurer will also have the power to accept enforceable undertakings from foreign persons and the power to give directions to persons to prevent or address suspected breaches of the FIRB regime. For example, a direction may be issued to a foreign person to comply with provisions of relevant legislation or existing FIRB approval conditions. Finally, the Treasurer will also revoke FIRB approval upon proof that the grant of approval was based on false or misleading information.

Foreign persons who undertake actions pursuant to a no-objection notice must notify the government within 30 days after taking the actions.

Re-defining ‘foreign government investor’

Previously, foreign government investors were defined as a corporation, trustee of a unit trust or general partner of a limited partnership, in which a foreign government investor from more than one foreign country collectively have at least 40% interest.

Certain types of foreign persons may no longer be considered a foreign government investor under the new 40% rule.

Even if 40% or more of its interests are held collectively by more than one foreign government investors, a fund vehicle may still not be considered a foreign government investor under the 40% test if:

No investor from one country holds 20% or more interest in the fund vehicle
No foreign government investor in the fund vehicle has access to non-public information about the fund’s investments that affect the financial metrics of the underlying investment.
The foreign government investors are truly passive and exert no control.

This is an important change for foreign fund vehicles that invest into Australia.

Change in ‘significant action’ control test

The previous regime ensured any foreign person with the acquisition of interests in an Australian entity constituted a ‘significant action’ only if there is a change in control. However, this caused a drafting anomaly where a person who already had substantial interest in an Australian entity could increase that interest without such increase constituting a significant action.

The 2020 Amendments change this control test so that it would no longer need to be satisfied where the acquirer already has a pre-existing substantial interest in the relevant Australian entity by itself or with one or more associates.

Moneylending activities require FIRB approval in relation to National Security Assets

In relation to moneylending activities by foreign persons, there is a general exemption for the requirement to obtain FIRB approval for moneylending activities. However, with these new regulatory reforms, the exemption no longer applies for moneylending activities that involves the acquisition of security interests in a national security business or national security land.

[Disclaimer] The contents posted are general legal information, not legal advice, and the author and publisher have no legal responsibility for the contents. Each post is based on the law that was in force at the time of writing. Please consult a lawyer directly for accurate legal advice.

Kenneth Hong