Effective 5 June, the Australian Government released a Foreign Investment Reform paper, deemed to be the most comprehensive reforms to Australia’s foreign investment review framework in more than 20 years.
Peter Shaw, Director for Corporate and M&A weighs in on this Paper, highlighting his key concerns on the future of foreign investment in Australia.
The Australian Government has announced an intention to introduce significant changes to the foreign investment review framework effective 1 January 2021.
Ostensibly the reforms are intended to strengthen the existing framework by providing – as FIRB summarises:
- enhanced national security review of sensitive acquisitions;
- extra powers and resources to ensure foreign investors comply with the terms of their approval; and
- amendments to streamline investment in non-sensitive areas.
Draft legislation time frames
Draft legislation will be released in July – hopefully with sufficient time for consultation and review given how important foreign investment is in Australia – although it has been noted that governments of all levels have in recent times provided less consultation opportunity.
The key focus will seemingly be on empowering the Treasurer to block an acquisition on “national security grounds” and on imposing a zero dollar threshold for approvals required for investments in “sensitive national security businesses”.
Sensibly the wording around “national security” interest, is focussed on things such as espionage, sabotage, politically motivated violence, attacks on Australia’s defence system; acts of foreign interference; or the protection of Australia’s territorial and border integrity from serious threats.
However what constitutes a “sensitive national security business” is going to be of critical importance. So far there are referees in the press releases and government working papers to defence and critical infrastructure, and sensitive data and a recognition that the current definition of “sensitive businesses” is too broad. The Government paper suggests a discussion around the following concepts (but makes the point this is not an exclusive list):
- a businesses regulated under the Security of Critical Infrastructure Act 2018 or the Telecommunications Act 1997;
- any business involved in the manufacture or supply of defence or national security-related goods, services and technologies, or any business that can create vulnerabilities in the security of Defence and national security supply chain, the Defence estate and/or other core Defence interests;
- any business or land situated in or proximate to Defence or national security installations; and
- any business that owns, stores, collects or maintains sensitive data relating to Australia’s national security and/or defence.
It is to be hoped the net is cast appropriately widely but sensibly as even form the above list it is not difficult to extrapolate to a very wide group of potential businesses. Note also that foreign lenders to these businesses will fall outside the “moneylenders” exception.
A third level of concern is the “call in” power which will allow the Treasurer to review an investment against the national security test even though it doesn’t meet the criteria for such review and whether or not the investment is still in progress or has already completed. The Government paper acknowledges this expressly. Whilst understandable on one level, it also flags increased sovereign risk for foreign investors looking at the Australian market. As an example – today an investor buys into an early stage oil exploration company or a rare metals miner. Tomorrow the government imposes new rules on energy security in Australia or on the need to maintain Australian ownership of metals used in touchscreens and battery technologies. Are they now sensitive assets per se? the answer may be yes and rightly so. However that won’t dispel the reality of increased sovereign risk which investors will now need to consider when choosing whether to invest in Australia or elsewhere.
There are some indications that an exemption certificate regime may be enabled and that self-reporting ahead of investment could add certainty. Much will depend on the detail of the legislation and the regulations proposed.
There is also an indication of a few things being slipped into the mix:
- reading the language of the temporary reforms slipping seamlessly into the new regime (which starts on 1 January 2021) and one should assume that the temporary measures are here to stay until year end. This would be disappointing as we are already seeing the temporary measures delaying and possibly preventing transactions taking place, let alone increasing the cost and uncertainty of deals that are quite evidently not sensitive (for example corporate restructures) and it is evident there is a bottleneck on the ground at FIRB:
- the new package of reforms looks like it will now require an entity to seek a fresh FIRB approval where its shareholding increases as a result of a capital reduction or share buy-back. That is of some concern given that in a widely held company where the foreign investor is a substantial but not controlling shareholder, the decision to undertake a buy back or capital reduction is not within the control of that investor and the timeframes for those corporate events are dictated by the Corporations At and ASX Listing Rules;
- the application fees will be reformed to make it fairer and simpler. Based on our experience, fees are typically increased;
- the statutory deadline looks to be shifted from 30 to 90 days – albeit this simply reflects the reality of dealing with FIRB pre COVID19 in any event; and
- a register of foreign investments may also be on the cards.
Peter and his Team will continue to monitor the situation and provide further updates as new information becomes available.
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