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Reforms to the Foreign Investment Review Framework

Reforms to the Foreign Investment Review Framework

Published: 16 Nov 2020

Reforms to the Foreign Investment Review Framework
WRITTEN BY
Kate Mansfield
Kate Mansfield
Associate

Reforms to the Foreign Investment Review Framework

Published: 16 Nov 2020

Foreign Investment Review Framework Law Reform

The year 2020 has put the Australian Government under immense pressure to address national security on unprecedented levels as a result of competing developments including rapid technological change and changes in the global security environment.   On 5 June 2020, the Treasurer announced the most comprehensive reforms to the foreign investment review framework since the introduction of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act) and since that date the Government has steadily released the following laws:

  • Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020: National Security reviews and last resort power (2020 Bill) - introduced on 31 July 2020 to amend the Act;
  • Foreign Investment Reform (Protecting Australia’s National Security) (National Security Business) Regulations 2020 (Cth) (2020 Regulations – Tranche 1) - introduced on on 31 July 2020 as the first tranche of foreign investment reform regulations; and
  • Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 (2020 Regulations – Tranche 2) - introduced on 18 September 2020 to give further effect to those reforms proposed in the 2020 Bill with the objective to strengthen the foreign investment framework and ensure the framework adequately addresses emerging risks to Australia’s national interest and keeps pace with global developments. 

The reforms are intended to maintain Australia as an attractive place for foreign investment, maintain public confidence in the integrity of the foreign investment review framework while mitigating the risks associated with sensitive sector acquisitions and emerging national security risks that are inherent to foreign investment.

Snap shot of the reforms

2020 Bill

The proposed amendments to the Act, which are due to take effect from 1 January 2021, include the introduction of:

a)  a national security test for individual investment proposals which will:

Notifiable national security actions regardless of the value of the investment, require foreign persons to notify the Foreign Investment Review Board (FIRB) in all circumstances if acquiring:
  • a direct interest in a ‘national security business’*;
  • starting a national security business (where the interest is 10% or more or where the investor will assume a position of control); or 
  • acquiring an interest in ‘national security land’; and
  • if the Treasurer considers that an action taken by a foreign person may pose a national security concern, enable the Treasurer to:
    • review that action; and
    • impose conditions or block any investment by a foreign person.
Reviewable national security actions/‘call-in’ powers give the Treasurer the ability to review any action by a foreign person that is a ‘reviewable national security action’ including, amongst others, actions to: 
  • acquire a direct interest in Australian entity or land; 
  • issue securities in an Australian entity;
  • enter or terminate a significant agreement with an Australian business;
  • start an Australian business,
as well as significant actions that are not notifiable actions or notifiable national security actions if the Treasurer considers the action may pose a national security concern.  This power is referred to as a ‘call-in’.  

‘Last resort’ powers enable the Treasurer to:

  • reassess foreign investments which have already been approved by FIRB in the event that national security risks subsequently emerge where it is found that: 
    • the foreign investor made a material misstatement or omission in its application which was directly related to national security risks relating to the acquisition; 
    • the business, structure or organisation of the foreign investor or the foreign investor’s activities have materially changed, posing national security risks which would not have reasonably been foreseen at the time of assessment and approval of the application; or
    • the circumstances or market in which the action was taken have materially changed since the foreign investor was given a no objection notification in relation to the action or an exemption certificate or other prescribed circumstances; and
  • vary existing conditions or impose new conditions or, as a last resort, require the divestment of any realised investment

b) Additional regulatory powers - additional Federal Government powers to review, oversee and prohibit foreign investment and to enforce compliance with FIRB approval conditions (including increased civil and criminal penalties) which may involve site based inspections and investigations to regulate compliance and investigate non-compliance.

c)  New foreign ownership registration obligations - a new Register of Foreign Ownership of Australian Assets in which foreign persons will be required to, within 30 days of the registrable event occurring:

  • register their interests arising in relation to certain events, including:
    • acquiring or ceasing to hold an interest in land or water or certain interests in an Australian business, agribusiness or entity; and
    • any event that relates to a no objection notification or exemption certificate; and
  • register certain changes in relation to those interests.

d) Certain integrity and technical amendments - amendments to improve the integrity of the existing foreign investment review framework, including (amongst others):

  • the requirement to notify and seek further foreign investment approval for any increase in actual or proportional holdings above what has been previously approved due to share buybacks and capital reductions; and
  • the ability of the Treasurer to unilaterally extend the approval decision period by up to 90 days without issuing an interim order.

2020 Regulations - Tranche 2

The 2020 Regulations are also intended to take effect from 1 January 2021.  The proposed draft 2020 Regulations released last month for public consultation:

a) Exemption certificates allow investors to apply for an investor-specific exemption certificate, for either:

  • actions that would otherwise be notifiable national security actions; or
  • actions that would otherwise be reviewable national security actions;
b) Voluntary notification allow investors to voluntarily notify to avoid the possibility of being called in for review on national security grounds;

c) Foreign government investors amend the definition of ‘foreign government investor’ (as defined under the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (Principal Regulations)) so some foreign government investors will no longer meet this definition and will instead be considered private foreign investors;

d) Time limit on exercising call-in power introduce a time limit on the call-in power of 10 years from when the action is taken.  If a review of an action is not commenced within this time period, the call-in cannot be used later;

e) Monetary thresholds address monetary thresholds: 

  • for all foreign investments in sensitive national security businesses – imposing a permanent $0 threshold; and
  • for all other foreign investments – reinstating pre-29 March 2020 monetary thresholds (indexed at the rates the thresholds would have otherwise been had the amendments in response to the pandemic not been made); and

f)  Other amendments make a number of further integrity, technical and amendments to the Principal Regulations.

Increased Penalties and Fees

Penalties

The increased penalties proposed (see table below) by the Government for breach of the Act aim to safeguard Australia’s national interest, align the FIRB’s powers with those of other regulators, and maintain the integrity of the foreign investment review framework.

Criminal charges

  Until 31 December 2020 From 1 January 2021
Individual investor criminally charged Fine of up to 750 penalty units ($157,500**) with 3 years’ imprisonment Fine of up to 15,000 penalty units ($3.33 million***) and 10 years’ imprisonment
Corporation Fine of up to 3,750 penalty units ($787,500**) Fine of up to 150,000 penalty units ($33.3 million***)


Civil penalties 

  Until 31 December 2020 From 1 January 2021
Individual Fine of up to 250 penalty units ($52,500**)

Up to the greater of 5,000 penalty units ($1.11 million***) or 75% of the value of the consideration or market value of the interest or benefit obtained capped at 2.5m penalty units (AU$555 million***).

Corporation Fine of up to 1,250 penalty units ($262,500**) Up to the greater of 50,000 penalty units ($11.1 million***) or 75% of the value of the consideration or market value of the interest or benefit obtained capped at 2.5m penalty units (AU$555 million***).

Maximum penalties for failing to make and keep records and failing to comply with notices to provide information necessary for the Treasurer to exercise their powers will go up to 250 penalty units (AU$55,500)*** for an individual and 2,500 penalty units (AU$555,000)*** for a corporation.

Impact of the Reforms on Foreign Investment

While Australia’s foreign investment framework will continue to encourage foreign investments on a non-discriminatory basis, these reforms flag a new and tougher FIRB with increased visibility and control over foreign investment proposals, the ability to scrutinise foreign investors and their investment activities in Australia, increased compliance obligations and significantly higher penalties for non-compliance.  However, the proposed legislation includes unclear, subjective and complex laws.

The ‘call in’ powers will give the Treasurer broad powers to compel certain investors to submit applications for mandatory screening as and when it deems it appropriate to do so.  This may result in reluctance on the part of foreign investors to invest in Australia or delay follow-up investments. Similarly, whilst the new penalties are intended to deter non-compliance with the Act, they have the potential to cause investors with genuine investments to think twice about their potential investments in Australia.

The Law Council of Australia (in its submission addressing the 2020 Bill and 2020 Regulations – Tranche 1 dated 31 August 2020) recommends, amongst other things, that:

  1. The definition of ‘national security’ as defined in the 2020 Regulations - Tranche 1 be moved to the Act so that it applies to all references of national security;
  2. The mere starting of a business should not be subject to the call-in power and that the benefits of certain greenfield investments and positive national interest benefit should outweigh any hypothetical national security concerns; 
  3. The ‘last resort’ power under the new section 73A(1)(b)(iii) of the 2020 Bill (which gives the Treasurer the power to review an action if the circumstances or market in which the action was taken have materially changed since the time a person was given a no objection notification or exemption certificate) should be deleted as it gives the Government overbroad powers that are highly likely to stifle investment; and
  4. If the Government has the power to force an investor to divest through no fault of the investor, the Government should be required to compensate the investor for its losses.

Key Take Aways

If the 2020 Bill and 2020 Regulations (Tranches 1 and 2) are passed by the federal parliament, from 1 January 2021:

  • a new security test will be introduced giving the Treasurer significantly wider powers to review foreign investment proposals on national security grounds;
  • a permanent AU$0 threshold for all foreign investments in sensitive national security businesses will be imposed;
  • for all other investments, the pre-29 March 2020 thresholds will be reinstated (subject to indexation);
  • where new national security concerns arise the Treasurer will have powers to impose new conditions, vary existing conditions, or to force the divestment of any realized investment;
  • the Treasurer will be given additional powers to enforce compliance with FIRB approval conditions;
  • there will be significant increases to penalties for breaches of the Act.

However, there is much ambiguity to be found in the draft 2020 Bill and Regulations.   What exactly ‘starting a national security business’ means is unclear and certain terms including ‘national security concern’ and ‘national security risk’ as used in the context of the Treasurer’s call-in and last resort powers have not been defined.  The scope of the last resort power needs further paving to ensure that it may not be used arbitrarily.

As such, it is quite possible that these amendments may not be passed as soon as the Government has envisaged.  To navigate one’s way through the new legislation, further FIRB guidance and clarification would be welcomed.

Please contact ABLA on info@ablawyers.com.au if you would like to discuss any of the proposed amendments and how they could impact on foreign investment in Australia. 

* A ‘national security business’ means businesses concerned with critical Australian infrastructure assets, carrier or carriage service providers, businesses which develop, manufacture or supply goods and services or critical technology intended for military use, or store or have access to information that has a security classification or store or maintain personal information collected by certain defence/intelligence agencies which could, if accessed or disclosed, compromise Australia’s national security.
** Based on a penalty unit value of A$210 (applicable up to 30 June 2020)
*** Based on a penalty unit value of A$222 (applicable from 1 July 2020).

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