FIRB update: impact of the national security changes on foreign investors

After a challenging year, foreign investors into Australia have welcomed the reinstatement of the monetary thresholds below which private investors are not required to obtain FIRB approval as representing a return to business as usual. 

However, further analysis of the changes that were made to the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Regulation 2015 (together the FIRB Legislation) on 1 January 2021, reveals that many investments that fall below the thresholds will still need to be notified to FIRB as a result of the application of the new national security test.

Moreover, the combined effect of the Treasurer’s new call in power and proposed amendments to the Security of Critical Infrastructure Act 2018 (SOCI Act), mean that there is considerably less certainty as to what deals should be notified to FIRB than was the case in the pre-COVID world. 

The new national security test

The changes made to the FIRB Legislation on 1 January 2021 introduce a new national security test which imposes mandatory notification for certain investments in “national security land” (including exploration tenements over such land), a proposed direct investment in a “national security business” (including acquiring a direct interest in an entity that conducts a national security business) or starting a new “national security business” (each a Notifiable National Security Action). 

Notifiable National Security Actions are not subject to any monetary threshold, meaning that any proposal to undertake a Notifiable National Security Action must be notified to FIRB, irrespective of the value of the proposed investment or the nature of the investor. Notification is also required where a foreign person acquires an interest in a national security business as a result of the acquisition of interests in upstream offshore entities. In contrast, prior to 1 January 2021, the acquisition of interests through offshore entities generally did not require mandatory notification to FIRB unless the acquirer was considered to be a foreign government investor, the Australian target was a media business or the Australian target was a land entity. 

We have previously written about the type of businesses that will constitute a national security business in the context of technology deals. The key point for foreign investors to note is that the concept goes well beyond businesses that directly supply goods or services to defence or intelligence agencies and includes businesses which:

• are a responsible entity for or a direct interest holder in a critical infrastructure asset (within the meaning of the SOCI Act) – see further commentary below; or
  
  
• are a carrier or nominated carriage service provider to which the Telecommunications Act 1997 applies; or
  
  
• develop, manufacture or supply critical goods or technology that are, or are intended to be, for a military use, or an intelligence use; or
  
  
• provide, or intend to provide, critical services to:
  
  
• defence and intelligence personnel; or
  
  
• the defence force of another country; or
  
  
• a foreign intelligence agency; or
  
  
• store or have access to information that has a security classification; or
  
  
• collect, store or maintain personal information about defence personnel which, if disclosed, could compromise Australia’s national security.

As we have previously noted, this definition captures business which might not intuitively be considered to raise national security issues. Foreign buyers will need to be alert to this issue and seek to understand the target’s product and customer lists at the early stages of the transaction in order to determine whether the target is a national security business and, by extension, whether a FIRB filing is required. 

Impact of the Treasurer’s call in powers

In addition to mandatory notification of a Notifiable National Security Action, the changes to the FIRB Legislation now allow the Treasurer to “call in” for review any actions that are not otherwise required to be notified to FIRB if the Treasurer considers that the action may pose a national security concern (a Reviewable National Security Action). The call in power has significant reach, as it can be exercised up to 10 years after the action has been taken. 

While the Treasurer already had the power to review a “significant action” on national interest grounds at any time (including after completion) if prior approval was not required or had not been obtained voluntarily, the market was previously operating under the understanding that this power would rarely be exercised, and then, most likely only in relation to investments in certain “sensitive industries”. We are not aware of this power having been used following completion of a transaction. 

The updated FIRB guidance in relation to the call in right suggests however that the Treasurer may be willing to intervene in a much broader range of transactions on national security grounds (see below). The fact that there is no monetary threshold applied to a Reviewable National Security Action also exposes many more transactions to the risk of call in than was previously the case.

The risk of having a transaction called in will create a new source of uncertainty for foreign investors looking at transactions that could give rise to national security concerns but that are not subject to mandatory notification. While foreign investors seeking clarity can choose to extinguish the Treasurer’s call in right by voluntarily notifying FIRB about their potential transactions, investors are effectively presented with a choice to obtain certainty by voluntarily notifying FIRB (which could delay completion or place them at a competitive disadvantage), or to proceed without FIRB approval, based on their own view as to the risk of being called in. 

We expect that different risk appetites will emerge and be applied to that choice, much as is currently the case for acquirers in deciding whether transactions should be voluntary notified to ACCC. 

FIRB Guidance Note 8

In recognition of the challenges faced by foreign investors in making the decision as to whether to voluntarily notify a transaction, FIRB has issued Guidance Note 8 (GN08) setting out FIRB’s recommendations as to what investments should be voluntarily notified on national security grounds. 

These recommendations go well beyond transactions that might obviously be considered to be national security businesses and sectors that were previously considered to be sensitive. By way of example, FIRB suggests that certain investments in the banking, health and higher education sectors should be voluntarily notified. The full list of transactions referred to in GN08 can be accessed online.

Foreign investors may find it difficult to ignore FIRB’s recommendation to notify the transactions identified in GN08, as those transactions are, in practice, subject to an enhanced risk of being called in. 

It should be noted that the guidance provided in GN08 is not exhaustive, and that the Treasurer has the ability to exercise the call in power in relation to other investments where national security risks may exist. To that end, there will always be a residual call in risk for a foreign investor who chooses not to voluntarily notify FIRB of their deal.

Security Legislation Amendment (Critical Infrastructure) Bill 2020

As noted above, a target business will be a “national security business” subject to mandatory notification, if the target has a direct interest in or is the responsible entity for an asset that constitutes a “critical infrastructure asset” within the meaning of the SOCI Act.

Relevantly, the Security Legislation Amendment (Critical Infrastructure) Bill 2020 (the Bill) currently before Federal Parliament will, if passed, significantly expand the concept of a critical infrastructure asset under the SOCI Act. GN08 acknowledges that this will “result in additional investments becoming subject to mandatory notification”. 

The full list of asset classes that will become “critical infrastructure assets” and therefore subject to mandatory FIRB notification if the Bill is passed can be accessed here. Some of them go well beyond even what FIRB currently recommends should be subject to voluntary notification. For example, an investment in a critical food and grocery asset or in a critical freight services asset will become subject to mandatory notification, notwithstanding that such investments are not identified in GN08 as being recommended for voluntary notification.  

To some extent therefore there appears to be a policy disconnect between the proposed Bill and FIRB’s guidance. It remains to be seen whether there will be any attempt to harmonise the policy position. If not, the list of transactions that will be subject to a zero dollar threshold and mandatory FIRB notification on national security grounds will be substantially expanded if the Bill is passed. That is perhaps not what foreign investors were expecting of 2021.