Significant Australian foreign investment reforms commencing 1 January 2021

Very significant reforms to Australia's foreign investment review framework will commence on 1 January 2021. At the same time, the temporary COVID-19 measures announced on 29 March 2020 (which reduced all of the monetary thresholds to $0) will cease.

When will the changes be made?

The reforms will come into effect on 1 January 2021, and apply to all transactions entered into from that date.

What are the changes?

There are a significant number of changes to the law, including:

• mandatory notification of interests of 10% or more in "national security businesses" (which is very broadly defined) and "national security land", regardless of value;
• narrowing the exemption for foreign banks taking security over "national security businesses" or "national security land";
• an ability for the Treasurer to "call in" transactions not otherwise requiring approval or (in certain circumstances) to unwind approvals previously given, in order to protect "national security".
• broadening the circumstances in which offshore M&A transactions may require mandatory pre-approval;
• expanding the restrictions on foreign acquisition of 5% or more in Australian media businesses, to include certain online media businesses;
• loosening the rules applying to certain investment funds that have large passive foreign government investors;
• mandatory notification of the acquisition of notifiable interests "passively" acquired as a result of a failure by a foreign person to participate in a share buy-back or capital reduction;
• increased penalties and additional enforcement powers;
• tracing rules for unincorporated limited partnerships;
• a new register of foreign ownership interests – with commencement to be at a future date determined by the Treasurer;
• changes to fees;
• an ability for the government to extend the 30 day review period (by up to 90 days); and
• changes to the treatment of exploration and mining and production tenements.

What are the new pre-approval requirements for investments in "national security businesses" and "national security land"?

The reforms introduce a new mandatory pre-approval regime for "national security actions" – which covers a broad range of transactions.

The new rules require mandatory notification of:

• any proposed acquisition of a direct interest (at least 10%) by a foreign person in a "national security business" or "national security land", regardless of the value of the investment (ie. the monetary threshold is $0); or
• where a business or entity owned by a foreign person starts to carry on a "national security business".

What is a "national security business"?

A business is a "national security business" if it is publicly known, or could be known upon the making of reasonable inquiries, that the business is one of the following types of businesses:

• critical infrastructure businesses that hold critical infrastructure assets under the Security of Critical Infrastructure Act 2018 (Cth) (Critical Infrastructure Act);
• telecommunications businesses subject to the Telecommunications Act 1997 (Cth)(Telecommunications Act) as a carrier or carriage service provider;
• critical goods or technology for military or intelligence end-use businesses that develop, manufacture, or supply critical goods or technology for (or intended for) a military or intelligence use by defence and intelligence personnel or the defence force or intelligence agency of another country;
• critical defence or intelligence services businesses that provide or intend to provide critical services to defence and intelligence personnel or the defence force or intelligence agency of another country; and
• sensitive information businesses that store, collect or have access to security classified information, or personal information of defence and intelligence personnel which if accessed or disclosed could compromise Australia's national security.

Significantly for the energy, resources and infrastructure industries, the Critical Infrastructure Act regulates Australia's critical electricity assets, critical ports, critical water assets and critical gas assets (see definitions below) and the reforms could result in those industries being national security businesses and subject to a financial foreign investment threshold of $0.

What will be the effect of the proposed changes to the Critical Infrastructure Act?

Given that stricter pre-approval requirements will apply to businesses regulated under the Security of Critical Infrastructure Act 2018, the government's proposed expansion of the ambit of the Critical Infrastructure Act will potentially significantly expand the types of business which will be subject to the new stricter foreign investment regime – including (among others) financial services, food and transport sectors.

A description of these proposed changes to the Critical Infrastructure Act can be found here.

What is "national security land"?

"National security land" is defined as land owned or occupied by defence, or land in which a national intelligence agency has an interest that is publicly known, or could be known upon the making of reasonable enquiries.

How do these changes affect foreign banks and other foreign lenders?

The changes narrow the scope of the moneylending exemption to the FATA, so that the FATA applies 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.

Importantly, this change does not apply to the appointment of a receiver, or a receiver and manager, in relation to the enforcement.

Foreign lenders will need to consider the implications of this change for the terms of their loan agreements entered into after 1 January 2021.

What is the new "call-in" power?

Under the new call-in power, any investment that would not otherwise require notification under the existing national interest or new national security mandatory notification processes may be ‘called in’ for screening (requiring the investor to submit an application for screening) on "national security" grounds.

Investors will be able to voluntarily notify to receive investor certainty from ‘call in’ and will be able to apply for a time limited investor-specific exemption certificate which enables them to make eligible acquisitions without case -by-case screening.

Can the Treasurer "unwind" or amend the conditions of a prior approval?

The reforms allow the Treasurer to re-assess previously approved investments where "national security" risks emerge after approval. The Treasurer will be able to impose new conditions, vary existing conditions, or, as a last resort, require divestment where:

• the investor's activities have changed substantially, posing "national security" risks which could not be reasonably foreseen at the time of approval;
• a material change occurs to the operating environment, which alters the nature of "national security" risks posed at the time of approval; and/or
• "national security" risks have emerged in relation to the acquirer or target, which could not be reasonably foreseen at the time of approval.

How do the reforms affect offshore M&A transactions?

The new rules applying to "national security actions" will mean that certain offshore M&A transactions will be mandatorily notifiable, in circumstances which were previously only subject to a voluntary notification regime. Specifically, if a foreign person acquires a substantial interest (20% of more) in an offshore entity and the entity has a downstream interest in an Australian "national security business" (regardless of value), the transaction will require mandatory notification.

Separately, the reforms expand the class of M&A transactions which are caught within the voluntary notification regime. Previously the acquisition of an interest in a foreign entity of 20% or more fell within the voluntary notification regime and, if approval was obtained, and any future increase in that interest did not require notification. The reforms apply the voluntary notification regime to any such increase, even if the initial 20% interest was approved.

What do the reforms mean for investments in online media?

The current law requires mandatory pre-approval of any acquisition by a foreign person of an interest of 5% or more in an Australian media business which includes Australian daily newspapers and commercial television and radio stations (and their associated websites).

The definition of "Australian media business" is expanded under the new Regulations to include operating a service that:

• delivers content over the internet ;
• is operated wholly or partly for the purpose of serving Australian audiences;
• is providing content which is either:
  • predominantly news or current affairs; or
  • wholly or predominantly programs of audio or video content; and
• for which it is reasonable to conclude the average daily audience exceeds 10,000 people.

This is a welcome improvement on the definition contained in the exposure draft Regulations, although its application to global internet businesses is still a significant expansion of the law.

How do the reforms affect investment funds with passive foreign government investors?

Most private equity funds and institutional investors regularly require FIRB approval under the existing "Foreign Government Investor" (FGI) screening rules (which have lower ownership thresholds and a $0 financial threshold) due to large investments by FGIs (eg. sovereign wealth funds and state pension funds) in their funds.

Investment funds which fall under the reforms described below will no longer be classified as FGIs where no FGIs have management rights and all of their FGIs have no influence or control over the investment or operational decisions of the entity or any of its underlying assets.

Under the reforms entities with more than 40% foreign government ownership in aggregate (without influence or control) but less than 20% from any single foreign government will no longer be classified as FGIs.

Investment funds that get the benefit of these new reforms 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).

How will the reforms affect share buy-backs and capital reductions?

The reforms require a foreign person to obtain approval for an interest (above the relevant percentage threshold) which is has "passively" – such as by failing to participate in share buy-back or capital reduction. Any such "passive" increases in interests which would otherwise require prior approval must be notified within 30 days of the increase. This rule does not apply to the acquisition of interests in land – with passive increases in Australian land entities expected to be the subject of future amendments.

Prohibition orders or disposal orders may be made in accordance with the Act, but only for the purpose of restoring the percentage interests that the person holds in the entity as nearly as possible to the percentage interest held immediately before the increase.

What are the stronger penalties, compliance and enforcement powers?

The reforms will provide additional enforcement powers and resources to Treasury and the ATO to enforce conditions of FIRB approvals.

The reforms introduce:

• monitoring and investigative powers (in line with those of other business regulators), including access to premises with consent or by warrant in order to gather information;
• powers to give directions to investors in order to prevent or address suspected breaches of conditions or of the foreign investment laws;
• increased civil and criminal penalties to provide a more effective deterrent (see below);
• an expanded infringement notices regime to cover all types of breaches relating to foreign investments and enable proportionate action in response to non-compliance;
• powers (including introducing a civil penalty and triggering the Treasurer's powers under Part 3 of the Foreign Acquisitions and Takeovers Act 1976 (Cth) (FATA)) to remedy situations where foreign persons are given an approval based on an application that makes an incorrect statement or omits an important piece of information and that statement or omission was material to the approval;
• powers with respect to an investment that was originally made in breach of the FATA where the interest has subsequently been transferred to another foreign person; and
• the power to accept enforceable undertakings from investors to manage non-compliance or to give weight to commitments made by investors in their application; and
• a requirement for investors who have received approval for an investment to notify the Government of certain events, including that the action has occurred or did not occur within the period of the approval.

How do the reforms affect unincorporated limited partnerships?

The reforms apply the tracing rules to unincorporated limited partnerships in the same manner as corporations and trusts (ie. so that a person who holds a substantial interest in an unincorporated limited partnership is deemed to have an interest in entities lower in the corporate structure, in which the unincorporated limited partnership has an interest, when certain conditions are met).

What is the new "register of foreign ownership" – and what new notifications must foreign investors make?

The reforms contain provisions for new Register of Foreign Ownership that will expand the existing agricultural land, water and residential land registers so that the following interest must be registered: interests in Australian land, water entitlements and contractual water rights and business acquisitions that require foreign investment approval.

Foreign investors will not only need to notify acquisitions of such interests – but also disposals.

The notification obligations and the register have not yet commenced. Commencement to be at a future date to be determined by the Treasurer.

Are the fees changing?

The reforms introduce an entirely new fee regime. While there are a number of different formulae and multiple exceptions and variations, broadly speaking the fees for an acquisition will be an additional $A13,200 for every additional $A50m of consideration.

Are the application review periods changing?

The reforms include a new mechanism to allow the Government to extend to the statutory deadline for review of applications, beyond the current 30 day review period. The Government will have the power to extend the deadline by up to another 90 days without the need to issue an interim order or for the applicant to request the extension.

How do the reforms affect investments in exploration, mining and production tenements?

To clarify a long-standing inconsistency regarding the rights to occupy land under exploration tenements in different Australian jurisdictions, the reforms exempt exploration tenements acquired by private foreign investors from the FATA. The exemption will not extend to certain investments, such as acquisitions that are subject to the new national security test, and exploration tenements acquired by Foreign Government Investors, which will continue to be subject to the FATA.

Acquisitions of revenue streams in relation to mining and production tenements will be exempted from the FATA where the revenue stream does not entail rights to occupy the land or have control or influence over the land. Following the amendment, a foreign person, who had already received approval to acquire a mining and production tenement, would not need to seek further approval if they wished to on-sell their interest and receive a revenue stream as consideration. Any revenue streams that offer occupancy, control or influence over the land will still be subject to the FATA, as will revenue streams of this kind which are in respect of national security land.

Written by Geoff Hoffman