Critical food and grocery asset – a national security concern?

On 9 November 2020, the Australian Government released an exposure draft of the Security Legislation Amendment (Critical Infrastructure) Bill 2020. The draft Bill proposes to substantially broaden the application of the Security of Critical Infrastructure Act 2018 (Cth) to include 11 critical infrastructure sectors in the Australian economy including the food and grocery sector, and impose new positive security obligations on owners and operators of critical food and grocery asset upon the making of certain rules or determinations by the Minister for Home Affairs. The expanded definition recognises the role that these sectors and assets play in delivering essential supplies that maintain and sustain life in Australia.

The Food and Grocery Sector

The Explanatory Document to the Bill describes the food and grocery sector as a sector that involves manufacturing, processing, packaging, distributing or supplying food or groceries on a commercial basis. The definition reflects those functions that are critical to maintaining the commercial supply and availability of food and grocery in Australia, and seeks to capture all entities that are integral to the supply chain of the food and grocery sector.

While supermarkets are often the most visible point within a supply chain, when it comes to the purchasing and acquiring of food and groceries, there are numerous suppliers and components that are required to operate successfully in order for food and groceries to make it onto the shelves of supermarkets.

The definition is not intended to capture farming and nor does the definition include an asset which is located outside Australia.

Proposed changes to Security of Critical Infrastructure Act 2018 (Cth) and Foreign Acquisition and Takeovers Act 1975 (Cth)

Under the "to be" amended Foreign Acquisition and Takeovers Act (FATA), a notifiable national security action (and therefore requiring approval from the Federal Treasurer through FIRB) includes any of the following actions taken, or proposed to be taken, by a foreign person:

• to acquire a direct interest^[1] in a national security business; or
• to start a national security business.

A business is a "national security business"^[2] if the business is carried on wholly or partly in Australia whether or not in anticipation of profit or gain; and the business is, amongst other things:

• a responsible entity^[3] for an asset; or
• an entity that is a direct interest holder in relation to a critical infrastructure asset^[4].

A responsible entity includes an entity listed in paragraph (b) of the definition of a critical food and grocery asset below or an entity prescribed by the rules.

A critical infrastructure asset includes a critical food and grocery asset. An asset is a critical food and grocery asset^[5] if it is a network that:

(a) is used for the distribution or supply of food or groceries; and

(b) is owned or operated by an entity that is declared by the rules to be:

• a critical supermarket retailer;
• a critical food wholesaler; or
• a critical grocery wholesaler.

The Bill does not currently provide any specific details as to what assets the Minister will declare under the rules as a critical food and grocery asset.

Impact on M&A in the food and grocery sector

While certain thresholds do apply before an asset is considered a "critical infrastructure asset", clients should be mindful if their business falls within the food and grocery sector, or their business is involved in the supply chain that supports the food and grocery sector, as these changes may impact them.

In particular, acquisitions in the food and grocery sector which may not have previously been a notifiable action under the FATA may require notification to the Federal Treasurer as a 'national security business' if the proposed Bill and the proposed amendments to the FATA are passed. This will also capture assets which are declared by the 'rules' of the amended Security of Critical Infrastructure Act 2018 as a critical food and grocery asset or within another sub-category of a critical infrastructure asset, based on the current exposure draft of the Foreign Investment Reform (Protecting Australia’s National Security) (National Security Business) Regulations 2020.

For example, if a network is used for the distribution of food or groceries; and the network is operated under a contract with an entity described in paragraph (b) above, the network is taken to be operated by that entity.

According to the Explanatory Document:

• the COVID-19 pandemic has placed strains on food and grocery distribution and supply, and the last 6 months has highlighted how disruptions to distribution networks and supermarkets can seriously impact the availability of critical food and grocery to the community;
• in practice, this means that if a supermarket were to subcontract out the trucking of groceries from a warehouse to a supermarket, then the trucking portion of the food and grocery network would still be considered a critical food and grocery asset, even though it would not be directly operated by a critical retailer or wholesaler as prescribed by the rules;
• this approach will capture the distribution and supply operations of critical supermarkets and wholesalers that are relevant to ensuring the availability of food and grocery;
• it is intended for critical supermarkets and wholesalers to be listed in rules to ensure amendments can be made to accommodate future changes to business names or any other more significant market change. Some companies are listed in the Explanatory Document as meeting the prescribed definition (and therefore likely to be included in the rules) and include Woolworths, Coles, Aldi, Costco Australia, Metcash, Foodland, FoodWorks, Outback Stores (in NT, SA and WA), Friendly Grocer and Lucky 7;
• parts of the sector, such as food manufacturing, are not considered critical food and grocery assets as they are disaggregated and, if disrupted, are unlikely to have a severe and widespread impact on the availability of food and grocery.

^[1]  "Defined in section 16 of the Foreign Acquisitions and Takeovers Regulation 2015 as "A direct interest in an entity or business is: (a) an interest of at least 10% in the entity or business; or (b) an interest of at least 5% in the entity or business if the person who acquires the interest has entered a legal arrangement relating to the businesses of the person and the entity or business; or (c) an interest of any percentage in the entity or business if the person who acquired the interest is in a position: (i) to influence or participate in the central management and control of the entity or business; or (ii) to influence, participate in or determine the policy of the entity or business.^{Back to article}

Related Insights

• More sectors to be critical infrastructure, increased obligations, and wider government powers in draft Bill – so comment now