National security central to new foreign investment reforms

New Treasury Powers

Arising largely from the pandemic, Australia has seen the most significant reform to the Foreign Acquisitions and Takeovers Act 1975 in nearly 50 years. These reforms were officially passed by Parliament on 9 December 2020, and commenced on 1 January 2021. Changes are intended to ensure that Australia’s foreign investment framework adequately addresses emerging risks and global developments. They closely resemble similar changes to the foreign investment regime in the United Kingdom.

The reforms are guided by underlying national security concerns, forming part of the broader global narrative involving rapid digitalisation across industries, naturally tightening Foreign Direct Investment (FDI) regimes, and changes in the international security environment. These thematics will no doubt continue to transform Australia’s regulatory landscape in areas beyond its foreign investment framework.

Key measures in the bill include increased regulation of investments in sensitive national security business, land or critical infrastructure, accompanied by the introduction of a national security test.

The Treasurer enjoys substantial additions to his set of powers, primarily a new call-in power and last resort power. Under the new call in power, investments where a national security risk may exist may be called in by the Treasurer for a review by the Foreign Investment Review Board (FIRB) in the absence of voluntary notification. The last resort power, however, appears far more discretionary in nature. The Treasurer may make divestment orders (unwind a completed transaction) and unilaterally impose a new condition or vary existing conditions after a FIRB approval for a transaction has already been granted.

Finally, compliance and enforcement has been strengthened through increased penalties, directions powers and new monitoring and investigative powers, more closely resembling those of other regulators.

It should also be noted that FIRB’s temporary $0 monetary screening thresholds (effectively requiring all foreign investments to apply for FIRB approval) introduced in response to the coronavirus pandemic, will be removed.

This temporary change widened the scope of application of the $0 threshold beyond existing rules which apply specifically to foreign government investors, private acquisitions in Australian media businesses, residential land proposals, mining and production tenements, and vacant commercial land proposals. They were introduced by the Government to protect affected businesses from opportunistic acquisition by foreign buyers. However, a mandatory screening process will continue at the current $0 monetary threshold for investments in sensitive national security businesses.

National Security Test

Under the new foreign investment regime, foreign investors are subject to the new national security test, which determines whether a mandatory notification to FIRB is required, or a voluntary notification is recommended. Transactions involving national security business, or national security land constitute a ‘notifiable national security action’, whereby the acquirer must notify FIRB, and must not complete the proposed transaction until FIRB approval is granted.

In the spirit of the reforms, the scope of ‘national security business’ has been broadened significantly. It includes all critical infrastructure, telecommunications businesses, defence related business or land, business involved in national supply chains, and data storage and processing. The Australian Government’s Critical Infrastructure Centre defines critical infrastructure as those that provide essential services such as energy, communications, water, transport, health, food and grocery, banking and finance, and the Australian Government. 

In contrast, the proposed acquisition of securities in any Australian business constitutes a ‘reviewable national security action’. Falling under this classification does not require notification to FIRB. Voluntary notification is recommended, however, in order to gain FIRB approval so as to avoid the transaction being ‘called-in’ for review. If the Treasurer is satisfied that the called-in transaction is contrary to national security, disposal orders may be made, effectively unwinding the transaction.

Reviewable national security actions

If a proposed acquisition is labelled a ‘reviewable national security action’, the Treasurer may ‘call in’ the transaction for review. This power can be exercised up to 10 years after the action has taken place. Although guidance notes provide some sectoral guidance, it is not perfectly clear which transactions are notifiable national security actions and which are reviewable national security actions. Since this likely indicates a case-by-case approach, it is expected that the call in power will be used more frequently. 

Practical guidance by FIRB provides that the transacting parties should pre-empt a call in.

Divestment orders: practical concerns

Under the reformed regime, the Treasurer is also granted a ‘last resort power’ to make divestment orders or unilaterally impose a new condition or vary existing conditions after FIRB approval for a transaction has already been granted. The Treasurer may exercise this power if, with the regard to national intelligence agency advice, the Treasurer is satisfied that a fresh national security risk has arisen, and cannot be adequately mitigated or eliminated with existing regulatory systems.

Given the highly discretionary nature and commercial implications, a fairly stringent standard must be met before the last resort power is enabled. The applicant must have either made a false or misleading statement relating to the fresh national security risk, or the business, structure or organisation must have materially changed since FIRB approval was granted, which has given rise to a reasonably unforeseeable national security risk.

Aggrieved parties may, however, apply to the Administrative Appeals Tribunal for a review of the decision that a national security risk exists, providing some relief. Although it will not be possible to seek a review of the specific orders of the Treasurer (unwinding of the transaction or imposed or varied conditions).

Practical guidance by FIRB is minimal as there is no way to future proof against material global changes in national security risks. The only guidance provided regarding the divestment process is that the Treasurer must take reasonable steps to negotiate in good faith. From a commercial perspective, it is unclear which transacting party should bear the risk of additional conditions or the varying of existing conditions. It may be that neither party necessarily bears fault or is in breach of contractual obligations or any collateral contract. Compounding the difficulties, public guidance will remain sparse given the Government’s commitment to a ‘commercial in confidence’ policy, whereby any information it receives from an applicant is not disclosed to the public.

Herbert Smith Freehills Partner, Matthew FitzGerald, in his submission to the Treasury during consultation, noted that “The proposed last resort power […] is a dramatic change to Australia’s foreign direct investment regime. Put simply, the last resort power significantly erodes the benefits of receiving FIRB approval if such an approval can be subsequently revisited following completion of the relevant transaction. Whilst the last resort power may only be exercised in exceptional circumstances, its mere existence creates a sovereign risk issue – […] which may deter foreign investment into Australia. This is particularly problematic for long-term capital intensive projects which often require a 30-40 year investment horizon underpinned by certainty as to the likely return on capital.”

Rigorous compliance

Supplementing the key changes, FIRB has introduced a more formal compliance framework. Growing size of the compliance team and fresh budget allocations of $86.3M in 2021 allows for more dynamic IT systems as FIRB prepares for a new Register/portal and the expected increase in applications. 

Under the old regime, only breaches in foreign investment rules in relation to residential real estate could earn an infringement notice as punishment. Under the new regime, infringement notices and accompanying penalties for breaches in regulatory requirements can be issued in regards to all types of acquisitions. 

The Treasurer will follow in the footsteps of other regulatory bodies, and seek to incorporate artificial intelligence into the process of recognising non-compliance, in order to improve efficiency and accuracy.

The consequences of failing to deal with such an infringement notice has been severely increased. Prior to commencement of 1 January 2021, failure to lodge a FIRB penalty attracted a maximum penalty of 3 years imprisonment for an individual, and a $832,500 fine for a corporation. Now, these guideposts have increased to 10 years, and $33.3M, respectively. A sharp increase.


The new foreign investment regulatory framework will prove challenging for some. It will require the highest standards of corporate behaviour and responsibility to ensure national security risks are mitigated. The reforms also raise larger concerns.

The new reforms have the potential to detract prospective investors that offer quality foreign investment which is important for Australia’s long term economic success, stability and prosperity. It creates jobs, improves productivity and connects Australian businesses to global markets. Despite this, foreign entities and governments seeking to make genuine investments into Australia’s sensitive national security businesses are now tasked with navigating a complex investment regime.

This added complexity to cross-border transacting is said to be necessary to future proof against foreign ownership of the sensitive areas targeted by these protectionist provisions. The risks associated with proposed acquisitions covered by the new regime should be factored into deal planning and costs. It is expected that they will form an important part of the regulatory jigsaw, and the interplay with other regulatory approvals should be considered. Different risk appetites may emerge and be applied to voluntarily notifying FIRB, as is currently the case for acquirers in deciding whether to voluntarily notify ACCC of a planned transaction. The extent of the disruption to future foreign investment is yet to be seen.

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