Australia’s foreign investment regime has undergone significant review in recent months. Since 29 March 2020, a broader range of foreign investments into Australian businesses have required approval from the Foreign Investment Review Board (FIRB) following the temporary reduction of the monetary screening threshold to $0 for the duration of the COVID-19 pandemic.
More recently, on 5 June 2020, the Treasurer, Josh Frydenberg, announced proposed reforms to Australia’s foreign investment framework which will primarily affect investment into “sensitive” sectors. These changes are currently subject to consultation and, if implemented, are expected to take effect from 1 January 2021.
Key among these reforms is the proposal to implement a national security test which will allow the Treasurer to impose conditions or block investment by a foreign person on national security grounds regardless of the value of investment. The introduction of this national security test will not affect foreign persons investing in non-sensitive sectors. It will only apply to foreign investors seeking to acquire a direct interest in a business that raises national security concerns.
Although a greater number of foreign investments will need to now obtain FIRB approval following the temporary reduction of the monetary screening threshold to $0, foreign investors still have some scope to continue undertaking equity transactions without FIRB approval.
Proportionate ownership (a secondary threshold which must be met before FIRB approval is required) and a change in control test continue to apply. As such, regardless of the value of the investment, if a foreign investor does not acquire a relevant proportionate interest in an Australian entity through, among other things, participation in a capital raising or placement, the investment will not require FIRB approval. Further, existing exemptions to obtaining FIRB approval, such as participation in a pro rata issue, continue to have effect. Foreign investors should obtain appropriate advice on whether these exceptions and exemptions apply to their proposed investment under Australia’s current investment regime.
The proposed reforms to Australia’s investment framework announced on 5 June 2020 are aimed at strengthening the regime to protect against the increasing risk of foreign investments in in businesses relating to Australia’s national security, particularly in the “sensitive” sector and the critical infrastructure sector.
The proposed changes include:
- enabling the Treasurer to impose conditions or block any foreign investment on national security grounds regardless of the value of the investment;
- requiring a foreign person to notify FIRB of any proposed investment in a “sensitive national security business” (such as a defence or national security related business, real estate proximate to defence, or national security installations business);
- requiring a business or entity owned by a foreign person to notify FIRB if and when it starts to carry on the activities of a sensitive national security business;
- allowing any investment that would not ordinarily require notification under the regime to be “called in” for screening on national security grounds; and
- enabling the Treasurer to impose new conditions, vary existing conditions, or require the divestment of any investment which has previously been approved, when national security risks emerge.
The proposed reforms will also relax requirements for investments by Foreign Government Investors (FGI) where they will not attain management rights and cannot otherwise influence or control an investment fund’s decision making. This will be achieved through re-defining the relevant thresholds to constitute an FGI. In particular, investment funds where FGIs own 40% in aggregate, but with each FGI owning less than 20% individually, will not be considered an FGI. An investment fund which has a single FGI owning a 20% or more interest will still be deemed an FGI but may apply for an exemption.
Separately, the reforms have clarified that FIRB approval must be sought where a proposed share buy-back, exercise of redemption rights, or selective capital reductions would result in an investor’s interest in an Australian entity consequently increasing above the relevant thresholds.
To provide certainty for foreign investors prior to investing in an Australian business, the reforms will enable foreign investors to voluntarily notify FIRB of any proposed investment, regardless of whether it would otherwise be required to under the regime. The foreign investor will be able to seek prior clearance from FIRB, including by applying for an investor-specific exemption certificate, or otherwise be made aware of FIRB’s conditions to, or rejection of, the proposed investment.
Although the final details of the reforms are yet to be finalised, including in particular the definition of “national sensitive security businesses”, foreign investors should be well-advised in advance of any decision to invest in an Australian business. Both foreign investors, and Australian entities that have interests owned by foreign investors, need be aware of updates to Australia’s currently changing investment environment to ensure that they do not breach Australia’s investment laws and avoid the risk of being subject to the increased civil and criminal penalties of between $1.05 million and $525 million for individuals and between $10.5 million to $525 million for companies.