Changes to foreign investment review in Australia under temporary COVID-19 measures

The Government has announced very significant changes to Australia's foreign investment review framework during the COVID-19 outbreak.

Effective from 29 March 2020, all proposed foreign investment in Australia that is subject to the Foreign Acquisitions and Takeovers Act 1975 will require approval, regardless of the value of the investment or the nature of the foreign investor. The Treasurer has sought to implement this policy by reducing all monetary screening thresholds to $0. However, it is highly likely that the full implications of these announced changes will require the Treasurer to provide further comment and review.

To ensure sufficient time for screening applications (given the inevitable significant increase in the volume of transactions to be scrutinised), the Foreign Investment Review Board (FIRB) will be working with existing and new applicants to extend timeframes for reviewing applications to up to six months.

The Government has stated that the changes are in order to protect the national interest, "as the coronavirus outbreak puts intense pressure on the Australian economy and Australian businesses".

Temporary reduction in all monetary screening thresholds

The previously applicable monetary screening thresholds used to determine whether a proposed foreign investment is deemed a "significant action" or a "notifiable action" have been reduced to $0. The impact of the announced changes in screening thresholds can be summarised as follows:

Impact of the changes

The changes to monetary screening thresholds do not otherwise change the requirements for any proposed foreign investment to qualify as a "significant action" or "notifiable action", which only then would permit the Treasurer to exercise powers under the Act. However, it is likely that there will be further clarification from the Treasurer on relevant thresholds and tests in the coming period.

The changes expand the Australian foreign investment regime to all transactions involving the acquisition of an interest in an Australian entity, business or land, regardless of the size of the transaction.

This has the effect of applying the same very restrictive requirements for government investment approval that apply to foreign government investors, to all foreign investors.

We expect this will significantly affect the ability of foreign investors to compete for M&A deals and real estate assets in Australia.

Examples of common transactions that parties would generally not expect to be subject to the Act (but which now will be, provided that they otherwise satisfy the requirements under the Act) include:

• offshore transactions involving a foreign acquirer, seller and target – but where there is a change of control of an Australian entity – even if the Australian entities are of immaterial value in the context of the transaction;
• leases for more than 5 years (including any options to renew), agreements for leases or acquisitions of developed commercial land by foreign owned entities; and
• internal reorganisations by multinational corporate groups involving changes in ownership of Australian entities (even if those entities are of little value).

Extension of timeframes for existing and new applications

Even prior to these measures being introduced, FIRB administrative processes have increasingly resulted in extensions of several months beyond the statutory 30 day review period.

With these changes significantly increasing the number of transactions that will need FIRB approval (and a corresponding increase in FIRB's caseload) additional significant delays seem inevitable.

In this context, FIRB is now seeking extensions of up to six months for the review of new and existing applications. According to the announcement, this is "to ensure sufficient time for screening applications" and the Government will be prioritising "urgent applications for investments that protect and support Australian business and Australian jobs".

Impact on current transactions where FIRB approval is pending

These delays are not only significant for investors contemplating new transactions but could have the effect of causing existing transactions to fail because FIRB conditions precedent are not able to be satisfied before the pre-agreed end date.

Impact on incomplete transactions that were below the pre-29 March thresholds?

It is not completely clear from the announcement how the revised thresholds will apply to transactions which were entered into before 29 March 2020 but which have not yet completed. However, given that for the purposes of the Act a person is deemed to acquire an interest when the transaction is entered into, to avoid unreasonable retrospective application we would expect that if the transaction was below the pre-29 March thresholds when entered into, it will be able to be completed after 29 March 2020 without breaching the Act.

How long will these measures stay in place?

The Government has stated that these measures will stay in place "for the duration of the current crisis".

When will we see the details of the changes?

The Government has stated that further administrative details to give effect to this announcement will be published on the FIRB website in due course.