In brief - on Friday 5 June 2020, the Treasurer announced a number of proposed reforms to the Australian foreign investment review framework. The reforms are said by the Treasurer to be the most significant since the introduction of the Foreign Acquisitions and Takeovers Act in 1975
These changes are separate to the recent COVID -19 pandemic temporary foreign investment measures and are intended to come into effect, once legislated, when the temporary measures related to the pandemic cease on 1 January 2021: see our earlier article dated 30 March 2020 regarding those temporary pandemic measures.
The proposed reforms introduce enhanced national security review of sensitive foreign investments, measures to streamline less sensitive investments, stronger penalties, compliance and enforcement powers and various measures to improve the integrity of the framework. The proposed reforms also address foreign investment approval application fees and the investor experience of the investment approval process.
We comment on a number of the key changes below.
NIL monetary thresholds for a broader range of 'sensitive national security businesses'
Currently, foreign persons must seek government approval for investments above certain thresholds that are dependent on the sector and also the country and the nature of the investor.
While foreign government investors already face a zero-dollar screening threshold, most private investments under A$275 million (or A$1,192 million for Free Trade Agreement partners) are not screened.
Even for sensitive businesses, there is still a relatively high monetary screening threshold of A$55 million for private investors.
Under the proposed changes, a concept of a "sensitive national security business" will be introduced which will broaden the existing concept of what constitutes a sensitive business for foreign investment approval purposes.
It is expected that this definition (yet to be legislated) will include businesses operating in sectors such as critical infrastructure (including importantly electricity, gas, water and ports infrastructure), telecommunications, defence or national security-related goods, services and technologies, business or land situated in or proximate to defence or national security installations, and sensitive data relating to Australia's national security and/or defence.
A NIL monetary screening threshold will apply for such investments.
It is expected given the broader definition, the broad application to all investors (government and private) and the NIL monetary screening threshold that an extended range of investments will now be subject to foreign investment approval, particularly in areas such as water infrastructure and technology / data storage services where previously this was not always the case.
Foreign investors will need to ensure the correct characterisation of their proposed investments in Australia and, if applicable, allow for foreign investment approval in their investment timetables and budgets.
New national security test regime
Broadly, a new national security test regime will be introduced that will:-
- give powers to the Treasurer to impose conditions or block investments on national security grounds regardless of the value of investment;
- require mandatory notification for investments of a direct interest in sensitive national security businesses;
- require mandatory notification where a business or entity owned by a foreign person starts to carry on activities of a sensitive national security business;
- allow investments to be "called in" for screening on national security grounds;
- allow voluntary notification by foreign investors to avoid such "call ins";
- give powers to the Treasurer to impose conditions, vary existing conditions or make divestment orders on national security grounds on any investment even if such investment was previously approved.
The ability for the government to "call in" an investment for assessment not otherwise required to be notified is new.
To give some certainty, it is said that the use of the "call in" power will be time-limited and public guidance will be issued on the type of investment where the "call in" power may be used.
Importantly, an investor will have an opportunity to voluntarily notify to avoid the possibility of an investment being called in for review on national security grounds. It is possible that financiers may require such voluntary notifications.
It is also proposed that an investor will also be able to apply for a time-limited investor-specific exemption certificate which enables it to make eligible acquisitions without case-by-case screening. Exemption certificates will range in term and value of exempt investments and will be subject to conditions.
Another substantive new concept is a proposed last resort review power which allows the Government to reassess approved foreign investments where subsequent national security risks emerge with the power to impose additional conditions or even to order divestments.
It is said that this last resort review power will only be exercised by the Treasurer where it can be substantiated that there was a material misstatement or omission by the applicant, the activities of the target business have changed substantially, a material change occurs to the operating environment or national security risks have emerged which could not be reasonably foreseen at the time of approval.
This is obviously a broad power and the post investment nature of any further conditions or divestment orders might have significant implications for investors and also perhaps their financiers.
Streamlining less sensitive investments
Certain entities will no longer be caught by the definition of "foreign investment investor" under the reforms. This will include investment funds whose foreign government investors (in the fund) have no influence or control over the investment or operational decisions of the investment fund.
The government notes that receiving funding from foreign government sources is common for large institutional investors and that it is also common for there to be barriers against foreign government influence to make them lower-risk or otherwise unlikely to raise national interest concerns.
Stronger penalties, compliance and enforcement powers
The proposed reforms aim to achieve a dual purpose in building confidence in Australia's foreign investment framework whilst also ensuring penalties are applied to investors who do not comply with the framework.
This will be achieved primarily through the strengthening of the government's ability to monitor and enforce compliance with the framework and any investment conditions.
Examples of proposed powers include standard monitoring and investigative powers (e.g. access to premises with consent or by warrant to gather information), the issuing of a mandatory direction which must be complied with by the relevant investor and the ability of the government to accept enforceable undertakings by foreign investors.
The reforms also contemplate significant increases in maximum penalties for contraventions.
The reforms will increase maximum criminal and civil penalties across all investment types.
To give an indication of the magnitude of the increases, the maximum civil penalty for a non-residential investment by a corporation is proposed to be increased from the current $262,500 to a maximum dollar amount of A$525 million for large investments.
An expanded three tier infringement notice regime is also being contemplated by the government.
A number of integrity measures are being considered including amongst others:
- the government intends to clarify that foreign persons are required to seek further foreign investment approval for any increase in actual or proportional holdings above what has been previously approved, including as a result of creep acquisitions and proportional increases through share buybacks and selective capital reductions;
- the government intends to narrow the scope of the moneylending exemption so that it does not apply where foreign money lenders are obtaining interests in a sensitive national security business under a moneylending agreement. This may have consequences upon the availability, source, cost and timing of investment financing;
- a foreign person, who is a parent or spouse of an Australian resident, will now need to seek foreign investment approval prior to the purchase of Australian land where they provide money to their Australian family member for the purpose, other than by way of a gift.
A new Register of Foreign Ownership is also being considered that will merge the existing agricultural land, water and residential registers in order to increase government visibility of foreign investments made in Australia.
Further domestic (including with tax authorities) and international (on national security grounds) information sharing provisions are also being contemplated by the government.
Draft legislation and further guidance is expected to be released by the government shortly.
The effect of the proposed new rules on proposed investments including the need for foreign investment approval, the impact of the approval process on investment timing and budgets and the potential for additional or expanded investment conditions (and transaction and finance conditions precedent), will need to be closely considered by applicants, counterparties, financiers and other stakeholders.