Major proposed changes to FIRB regime from 1 January 2021: release of exposure draft of amending legislation – national security test

In brief 12 min read

On 31 July 2020 the Federal Government released exposure drafts of legislation to amend Australia's foreign investment laws to include a new national security test and make various other changes. This follows the Treasurer's announcement on 5 June 2020 of the proposed changes.

This insight examines the new national security test, with the other changes to be covered in a separate insight.

Key dates

• 31 July 2020: Government released exposure drafts (available here) of:
  • the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 (the Bill) (to amend the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA)) which includes the new national security test; and
  • the Foreign Investment Reform (Protecting Australia's National Security) (National Security Business) Regulations 2020 (Cth) (the Tranche 1 Regulations) (to amend the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (the FATR)) which includes the definition of national security business.
• 31 August 2020: Deadline for submissions on the Bill.
• September 2020: Government to release for consultation the exposure draft of the Tranche 2 Regulations (to amend the FATR) which will include the remainder of the regulatory changes.
• 1 January 2021: Proposed commencement of changes to FIRB regime (assuming the Bill is passed by Federal Parliament).

National security changes

Below is a summary of the proposed 'national security' changes, as reflected in the Bill and Tranche 1 Regulations, along with some initial observations.

FIRB approval required for 'notifiable national security actions'

Under the current FATA, a foreign person must obtain FIRB approval before undertaking a transaction that constitutes both a 'notifiable action' and 'significant action'. From 1 January 2021, this will be supplemented by a new requirement for a foreign person to seek pre-transaction FIRB approval for a 'notifiable national security action', being where a foreign person:

• acquires a 'direct interest' (10%+ or in a position of control or influence) in a 'national security business' (see point 2 below regarding 'national security business');
• acquires an interest in Australian land that is defence premises, or in which an Australian national intelligence agency has or will have an interest if the foreign person could reasonably be expected to be aware of the agency's interest, or which is land covered by an area of Australian land declared by the Treasurer by legislative instrument; or
• starts to carry on a 'national security business'.

A 'notifiable national security action' that is not otherwise a 'notifiable action' or 'significant action' will be assessed solely against national security considerations, rather than against the broader national interest test (which includes national security).

The Treasurer can issue a no objection notification (unconditional or with conditions) to a notifiable national security action or, if the Treasurer considers the action contrary to national security, issue a prohibition order (or a disposal order if the action has already occurred). However, a prohibition or disposal order cannot be made in respect of a 'significant action' notified to FIRB before 1 January 2021.

There will not be any monetary threshold associated with a notifiable national security action.

It is not clear to what extent a person must make enquiries to satisfy the reasonable awareness requirement in the Australian land limb. For instance, where a person proposes to acquire shares in a company without the benefit of due diligence access (eg. acquisition of a minority interest or a hostile takeover bid), is it sufficient for the person to undertake public searches? Or does the person need to at least attempt to obtain the information from the target, thereby impairing deal confidentiality? One would think the former would suffice, but FIRB guidance on the topic generally would be welcomed. Furthermore, if say, an intelligence agency has an office lease in a building which is in a portfolio of properties owned by an entity, does this mean that an acquisition of shares or units in that entity is a notifiable national security action?

Also, it is not always clear when a person starts to carry on a national security business. This is because of the definition of 'national security business' (see point 2 below), and because (unlike the position in the current FATR with respect to foreign government investors starting an Australian business) there is no carve-out for undertaking an activity that is incidental to an existing business and is within the same division under the ANZSIC code. Separately, it is not clear whether a person is taken to start a national security business merely because they propose to submit a bid to acquire a direct interest in such a business, where such bid is subject to receipt of FIRB approval. FIRB guidance on the topic generally would be welcomed.

Concept of 'national security business'

A 'national security business' will be defined to mean an Australian business that:

• (critical infrastructure) is a responsible entity or a direct interest holder (holding 10%+) in relation to a critical infrastructure asset under the Security of Critical Infrastructure Act 2018 (Cth);
• (telecommunications) is a carrier or carriage service provider under the Telecommunications Act 1997 (Cth);
• (defence) does any of the following:
  • develops or manufactures critical goods or critical technology intended for a military end-use or military use by "relevant defence persons" (being defence and intelligence personnel in activities relating to Australia's national security, or the defence force of another country in activities that may affect Australia's national security);
  • supplies critical goods or critical technology that are, or are intended to be, for a military end-use or military use by relevant defence persons; or
  • provides or intends to provide critical services to relevant defence persons; or
• (data and personal information)
  • stores or has access to information with a security classification;
  • stores or maintains personal information of Australian defence and intelligence personnel collected by Australia's Defence Force, Defence Department or an Australian national intelligence agency, which if accessed could compromise Australia's national security; or
  • collects, stores, maintains or has access to personal information of Australian defence and intelligence personnel that has been collected as part of an arrangement with the Australian Defence Force, Defence Department or an Australian national intelligence agency, which if disclosed could compromise Australia's national security.

As expected, the proposed definition is narrower than the current FATR definition of "sensitive business" which is used to determine monetary screening thresholds under the current notifiable action and significant action regime. Nevertheless, without FIRB guidance or further details in the Bill, it will be challenging to determine whether or not a business is a 'national security business' if one relies solely on publicly available information. For instance, in relation to:

• critical infrastructure - the Register of Critical Infrastructure assets is not public;
• telecommunications - carriage service providers do not require a licence so it is not possible to ascertain from public searches whether a person is a carriage service provider;
• defence - there is no definition of what "critical" goods, technology or services means; and
• data and personal information - it is unlikely to be public knowledge that a business has access to information with a security classification.

New Treasurer 'call-in power' to review and unwind transactions not previously reviewed

Under the current FATA, the Federal Treasurer can only review transactions that are submitted to FIRB for approval and can only make orders (such as prohibition or disposal orders) in respect of transactions that are 'significant actions'.

It is proposed that the Treasurer be given a new 'call-in power' to undertake the following in respect of any transaction or proposed transaction that occurs (or is proposed to occur) on or after 1 January 2021 and that was not previously notified to FIRB (but only where the transaction is either a 'significant action' or a 'reviewable national security action'):

• initiate a review of the transaction or proposed transaction where the Treasurer considers that it may pose a national security concern;
• make orders (such as a prohibition or disposal order) in respect of the transaction or proposed transaction where the Treasurer is satisfied that it would be, or that the result of it is, contrary to national security. However, no such order can be made in respect of a 'significant action' that is notified to FIRB before 1 January 2021.

A 'reviewable national security action' includes certain types of transactions that are not significant actions because the monetary or interest percentage threshold is not met, such as the acquisition of any 'direct interest' (10%+ or in a position of control or influence) in an Australian entity, the acquisition of any interest in Australian land and the starting of an Australian business.

The Treasurer can only initiate a review within a certain time-frame (to be specified in the Tranche 2 Regulations). After undertaking a review, the Treasurer can issue a no objection notification (unconditional or subject to conditions) or make a prohibition or disposal order. If a review is initiated, the Treasurer is subject to a statutory assessment period as though the relevant foreign person had applied for FIRB approval, ie. if the Treasurer does not make orders by the end of the period the Treasurer ceases to have power to make orders (other than pursuant to the last resort review power).

The Government will provide guidance on the type of investment where the call-in power could be used. However, it is expected that many acquirers will voluntarily notify FIRB of a proposed 'significant action' or 'reviewable national security action', and include the receipt of FIRB approval as a condition precedent to transaction completion, to remove the risk that the call-in power is exercised post-completion. This will result in many more transactions being conditional on FIRB approval.

New Treasurer 'last resort power' to unwind transactions and impose new conditions after they have been approved

Under the current FATA, the Treasurer cannot unwind a transaction that has previously been granted FIRB approval except in the very limited circumstances where the court has found the applicant breached a condition to the FIRB approval.

In respect of transactions that already have been granted FIRB approval, it is proposed that the Treasurer be given a new 'last resort power' to require disposals of assets that a foreign person acquired pursuant to the FIRB approval, or to impose new FIRB approval conditions or to vary existing conditions where the Treasurer is satisfied that the result of the transaction was contrary to national security.

The last resort review power can only be exercised in respect of FIRB approvals given on or after 1 January 2021. But it cannot be exercised in respect of a significant action that is notified to FIRB before, or that is undertaken before, 1 January 2021.

Further, the last resort review power can only be exercised if certain conditions have been met, including:

• the Treasurer has undertaken a review of the relevant transaction that had previously been granted FIRB approval;
• prior to undertaking that review the Treasurer was satisfied that:
  • the relevant foreign person made a statement, whether orally or in its application for FIRB approval, that was materially false or misleading, or that omitted something that was material;
  • the business, structure, organisation or activities of the relevant foreign person have materially changed since the FIRB approval was granted; or
  • the circumstances or market in which the transaction was undertaken have materially changed since the FIRB approval was granted;
• the Treasurer has notified the relevant foreign person of the review, unless it would prejudice Australia's national interest to do so;
• after having regard to any advice provided by any Australian national intelligence agency, the Treasurer has decided that a national security risk exists in relation to the relevant transaction;
• the Treasurer has notified the relevant foreign person of that decision along with reasons, though the notice can redact information on national security grounds;
• the Treasurer must be satisfied that:
  • reasonable steps have been taken to negotiate in good faith with the relevant foreign person to achieve an outcome of eliminating or reducing the national security risk so as to avoid the making of an order or imposition of a new or varied condition;
  • requiring the person to comply with an order or imposing a new or varied condition is reasonably necessary for purposes relating to eliminating or reducing the national security risk; and
  • the use of existing regulatory systems of the Commonwealth, a State or a Territory would not adequately eliminate or reduce the national security risk.

The relevant foreign person can apply to the Administrative Appeals Tribunal (AAT) for a view of a decision by the Treasurer that a national security risk exists.

Some observations regarding the proposed last resort power:

• By giving the Treasurer power to re-examine a previously approved transaction, the power goes further than other countries' foreign investment regimes. In particular, the trigger of circumstances or market in which the transaction was undertaken having materially changed since the FIRB approval was granted may lead to investment uncertainty for acquirers and their financiers as these triggers can relate to matters that may not be within their control.
• There are, as yet, no guidelines on what an asset disposal order would require in terms of process and timing.
• The ability to seek AAT review is welcome but it is restricted to reviewing the Treasurer's decision on whether a national security risk exists rather than on the appropriateness or merits of any orders made or new or varied conditions imposed by the Treasurer.

'National security' concept not defined in all places

While the definition of  'national security' is substantially similar to that given in the National Security Information (Criminal and Civil Proceedings) Act 2004 (Cth), the terms 'national security concern' and 'national security risk' as used in the context of the Treasurer's call-in and last resort powers are not defined. The issue here is the level of concern or risk to national security that will trigger these powers. We believe that a remote risk should not be sufficient but would like to see that clarified. For example, section 17 of the National Security Information (Criminal and Civil Proceedings) Act 2004 (Cth) provides that "Something is likely to prejudice national security if there is a real, and not merely a remote, possibility that it will prejudice national security."