14 August 2020
The Federal Treasurer has released an exposure draft of the legislation that will implement his previously announced reforms to Australia’s foreign investment framework.
Among other changes, the legislation will introduce a zero dollar screening threshold on foreign investments into any ‘national security business’. This will mean that any direct investment by a foreigner into a national security business will require FIRB approval.
In our June 2020 article, we suggested that this new national security test is likely to have broad application to transactions in the communications, technology and data sectors. The draft legislation has provided further line of sight on the likely implications of the changes for technology transactions undertaken by foreign parties in Australia.
The exposure draft provides further clarity on the types of communications, technology and data assets that will constitute a ‘national security business’ and will therefore be subject to the zero dollar screening threshold. They are:
Foreign buyers of technology assets will need to determine at an early stage whether the target is a ‘national security business’. If so, foreign buyers should endeavour to define the national security concerns presented by the proposed transaction and consider how they might be addressed in the FIRB filing or mitigated by way of undertakings. In this regard, buyers should be mindful of FIRB’s growing preference to deal with data security issues by way of access undertakings (see our earlier article here).
Unfortunately, based on the definition on the exposure draft, it will be difficult for a foreign buyer to confidently assess whether or not the target is a ‘national security business’ without the seller’s help, as it assumes a relatively detailed level of knowledge about the target’s client base and the use of its technologies.
The exposure draft gives the Treasurer new powers to call-in for review any investment which is not otherwise notifiable or already subject to FIRB oversight on national security grounds. Where an action is called in, it will be subject to FIRB review in much the same way as if it had been required to be notified to FIRB in the first place. Transactions can be called in any time, including after completion. In these circumstances, the Treasurer will have the power to either require a divestment of the interest by a foreign person or terminate the relevant agreement.
The call-in powers apply to ‘reviewable national security actions’. Interestingly, this concept goes well beyond acquisitions and investments that would traditionally have been subject to FIRB review. For example, it captures any significant agreement which gives a foreign person the right to use the assets of an Australian business. This could conceivably capture a licensing deal for a technology product or data sharing arrangement.
This extension of the Treasurer’s review powers brings Australia closer to the position in the US where the Committee on Foreign Investment in the United States (CFIUS) has the power to review broad categories of transactions which give a foreign party access to non-public technologies. It will be important for FIRB and the Treasurer to provide guidance to the market on the circumstances in which the call-in power will be used. Without that guidance, foreign parties may feel the need to voluntarily notify FIRB of relatively benign actions, which could clog the approval process.
The exposure draft also gives the Treasurer the right to reassess and impose conditions on or to unwind previously approved foreign investments. Known as the ‘last resort powers’, this right will apply where there is a change in circumstances after the initial assessment which gives rise to new national security risks. This includes a material change in the activities of a business or where the circumstances of the market become materially different. This is particularly relevant to technology companies which tend to be focused on the development of new products and are more likely to experience rapid growth in their customer base.
The last resort powers will only be available for actions that were notified to the Treasurer on or after 1 January 2021.
Public submissions on the draft legislation close on 31 August 2020 and the Government intends for the new regime to commence from the start of 2021.
In the meantime, foreign investors will need to comply with the temporary COVID-19 measures and should remain mindful of the changing regulatory landscape when planning foreign investments in Australian communication, data and technology businesses.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.