Following announcements by the Treasurer last week, 1 January 2021 will mark the beginning of significant reforms to Australia’s foreign investment regime and a return to pre-COVID notification thresholds.

Return to thresholds

With the return to normal thresholds (indexed for 2021), we suspect that a number of foreign investors whose investments are not normally subject to Foreign Investment Review Board (FIRB) approval will seek to withdraw non-urgent applications and delay deals to take advantage of the return to thresholds. However, foreign government investors will remain subject to the $0 threshold for all investments (as has always been the case).

Reforms

1.      Heightened national security focus

When reviewing investments, FIRB will consider whether the investment is contrary to Australia’s “national interest”. One limb of the “national interest” analysis has always been “national security”. Under the reforms, a new mandatory pre-approval regime for “national security actions” is required for any proposed action by a foreign person to:

·         acquire a direct interest (at least 10%) in a “national security business” or start a “national security business” (being businesses that are publicly known, or could be known upon making reasonable inquiries, that are involved in critical infrastructure, telecommunications, supply of critical goods or technology for military use by defence and intelligence personnel, supply of critical services to defence and intelligence personnel or sensitive information storage or collection); or

·         acquire an interest in “national security land” (being certain defence premises and land in which a national intelligence agency has an interest that is publicly known or could be known upon the making of reasonable enquiries),

regardless of the value of the investment.

The Treasurer will have the power to impose conditions or block any investment by a foreign person on national security grounds regardless of the investment value as well as requiring divestment of any consummated investment which was approved under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) where national security risks emerge.

In addition, any actions that are taken or proposed to be taken after 1 January 2021 that would not ordinarily require notification may be ‘called in’ for screening on national security grounds for up to 10 years after the investment.  Investors may voluntarily notify FIRB or apply for an investor‑specific exemption certificate to ensure certainty that a particular investment will not be subject to a ‘call-in’.

2.      Passive foreign government investments in private investment funds no longer captured

Currently, the FATA deems many private equity funds and institutional funds to be a foreign government investor (FGIs) due to their investor/limited partner base (e.g. sovereign wealth funds and state pension funds) despite no foreign government having real control over them. Under the reforms, funds which have more than 40% FGI ownership in aggregate but less than 20% from any single FGI will not be considered itself an FGI provided that none of its FGIs are able to influence any investment decision, or the management of any individual investments, of the fund.

This change will result in a number of private equity funds being taken out of the “foreign government investor” basket. Note however, that investment funds will still be subject to screening at the thresholds for private foreign investors (A$275 million or A$1.192 billion for FTA-partner countries).

3.      Passive increases - share buy-backs and capital reductions

The reforms clarify that foreign persons must obtain FIRB approval for any increase in actual or proportional holdings above what FIRB has approved previously, including as a result of creep acquisitions and proportional increases acquired “passively” through failing to participate in share buy-backs and selective capital reductions. Such approval must be notified to FIRB within 30 days of the increase. Note that a similar amendment has not been made in relation to passive increases in interests in Australian land.

4.      Exploration, mining and production tenements

The reforms now exempt exploration tenements acquired by private foreign investors from the FATA (unless the acquisition falls within the national security test). However, exploration tenements acquired by FGIs will continue to be subject to the FATA.

The reforms also clarify that the FATA does not apply to acquiring an interest in revenue streams in relation to a mining or production tenement where the revenue stream does not entail rights to occupy the land or have control or influence over the land. Where prior FIRB approval has already been received to acquire a mining and production tenement, further approval will not be needed if a foreign person seeks to on-sell their interest and receive a revenue stream as consideration. The exemption does not apply if the revenue streams are in respect of an asset of a national security business or is in respect of Australian land that is national security land.

5.      Money-lending exemption

The reforms narrow the scope of the “money-lending exemption” from FIRB approval for foreign lenders. This means that FATA will apply to an interest in a “national security business” or “national security land” acquired by a foreign lender by way of enforcement of a security interest. The change does not apply to the appointment of a receiver or a receiver and manager in relation to the enforcement.

6.      Media businesses

The definition of a “media business” now includes online-only businesses but introduces a threshold test of an average daily audience exceeding 10,000 people.

7.      Stronger penalties, compliance and enforcement powers, new register of foreign ownership and increased information sharing

The Treasurer now has power to revoke or alter no objection notifications (if new information becomes available) or exemptions and issue directions to cure a contravention. Criminal and financial penalties for contravention of certain criminal and civil offences have also been increased.

In addition to a new register of foreign ownership register, the reforms also introduce new information sharing provisions permitting information sharing with international counterparts if there are national security considerations.

As set out at the beginning of this article, the reforms are significant and careful consideration will need to be given in transactions to determine that there are no downstream interests in Australian “national security businesses” or “national security land”.

Please contact us at our Perth office on +61 89321 4000 or our Melbourne office on +61 39111 9400 if you require advice.