20 February 2019
Recent changes to the way the United States regulates foreign investment in its technology assets have highlighted an interesting contrast to Australia’s approach.
Late last year, President Trump signed into law the Foreign Investment Risk Review Modernisation Act (FIRRMA). FIRRMA significantly expands the type of transactions that are subject to review by the Committee on Foreign Investment in the United States (CFIUS), to include ‘other investments’ involving critical infrastructure, critical technologies or personal data.
Previously, CFIUS only had jurisdiction over those deals where the foreign investor acquired a controlling stake in the relevant technology owning company. The new approach gives CFIUS power to review deals that are structured in a different way, but which still have implications in terms of national security.
By way of an example, CFIUS can now review transactions which give a foreign party any form of access to non-public technologies, representation on the board of the target or enhanced influence over decisions that go to the development of the technology, irrespective of whether the foreign investor acquires a controlling shareholding. It therefore picks up non-equity deals such as development funding agreements or licensing deals which may give rise to technology transfer risks.
This approach makes absolute sense in the context of technology assets, which are highly portable and difficult to protect once access has been obtained.
In contrast, Australia continues to regulate the acquisition of technology assets by foreign buyers through FIRB oversight under the Foreign Acquisitions and Takeovers Act (FATA). The FATA gives the Treasurer broad powers to intervene in a proposed acquisition of technology assets by a foreign buyer (or to impose conditions on the acquisition) where the proposed transaction would be contrary to the national interest.
FIRB has shown that it is willing to take a ‘fit for purpose’ approach to reviewing technology and data deals. By way of an example, we have seen FIRB negotiate bespoke access restrictions, operational conditions and governance controls as a condition to approving the acquisition of data centres or health service providers. In taking that bespoke approach, FIRB has generally been able to strike a sensible balance between dealing with any national security concerns that arise from a particular proposal, and ensuring that foreign capital continues to be welcomed into the Australian technology sector.
However, FIRB can only apply that approach to those technology deals it actually has power to review. Many technology deals will fall below the monetary thresholds at which compulsory FIRB notification is required (generally $266 million for privately owned acquirers). This is particularly true in the case of emerging technologies which have not yet realised their full value.
Moreover, FIRB’s powers of intervention typically only arise where the foreign investor wishes to acquire more than 20% of the target’s shares or will otherwise obtain enhanced influence over its corporate policies. This means that alternate investment structures, such as development agreements and licensing arrangements, will often not be reviewed.
The newly created Critical Infrastructure Centre (CIC) also plays a role. The CIC brings together various Government departments and intelligence agencies to manage national security risks arising from foreign involvement in Australia’s critical infrastructure assets, including ports, electricity, water and gas utilities. The CIC also oversees security issues relating to Australia’s telecommunications sector.
While the CIC doesn’t have a specific role in regulating technology deals, it does advise FIRB on acquisitions involving technology companies which service critical infrastructure owners and operators. It also advises the Minister for Home Affairs on the use of the Minster’s power under the Security of Critical Infrastructure Act 2018 to direct owners or operators of critical infrastructure assets to take or refrain from taking certain action. These powers are intended to be used as a last resort and only where significant issues of national security are at play. The fact that they exist, however, does give the Minister (and by extension the CIC) a platform from which to influence deal formation in the technology sector – at least where it touches critical infrastructure or telecommunications.
The issue up for debate is whether FIRB and CIC have sufficient review powers to ensure that Australia’s national interests are fully reflected in the way that technology deals are reviewed.
If Australia is to enjoy an end-to-end technology industry capable of monetising and commercialising innovation, FIRB will need to regulate the development of emerging technologies that drive economic prosperity. This suggests that broader considerations beyond national security should be brought to account.
It is perhaps worth considering whether the FATA should adopt a sector-specific approach to technology and data deals, as is the case with foreign investment in the traditional media sector and agribusiness. Doing so would allow FIRB to review acquisitions of early stage technologies and take a ‘longer lens’ view of the industry.
While any changes would need to be carefully structured so as to not dissuade foreign investment, there may be a case for a FIRRMA approach.
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