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Major reforms to Australia’s foreign investment framework coming in 2021
Foreign investors will face greater scrutiny when bidding for sensitive assets, including an overhaul of the foreign investment regime designed to safeguard national security.
Tony Zhang
Under the new plan, the Foreign Investment Review Board (FIRB) would have to approve all investments in a “sensitive national security business”, regardless of the value of the deal.
In addition, foreign investors who are given conditional permission to buy an asset will face a beefed-up compliance regime regulated by the Treasury and stiffer penalties for failure to comply with imposed conditions.
The Morrison government will unveil a suite of proposed new rules on Friday that it says are necessary to close national security gaps in Australia’s foreign investment regime.
King & Wood Mallesons lawyers say that the impact that the reforms will have on foreign investment in Australia is impossible to predict.
“There is a mixed bag of welcome reforms, clarification, greater reach of the Treasurer’s power and new rules to deal with,” partner Malcolm Brennan said.
“The changes are said to be necessary for safeguarding Australia’s national interest and in these challenging times of increased state interference will be broadly supported.
“Yet the reforms will also be welcomed by those resistant to the growing foreign presence in Australia’s economy.
“The changes nevertheless raise a number of concerns.”
Partner Intan Eow said that the increased compliance and harsh penalties have the very real risk of scaring away good investment into Australia.
Along with the new reforms comes even more red tape which will be highly visible to foreigners before making investment decisions,” she said.
Both Mr Brennan and Ms Eow noted that whilst the national security reforms do provide a clearer view of the government’s position, it is perhaps unfortunate that the sensitive sector changes may be read as having an overtly deterrent nature to foreign investment in general.
“Importantly, the reforms continue the Australian practice of not being discriminatory and are applied to all foreign investors,” Mr Brennan said.
“Investors proposing to make genuine investments in Australian sensitive sectors will have to navigate the highly complex and legalistic investment regime.”
In light of these proposed reforms, businesses can expect that foreign investment in Australia will look very different from how it does currently.
Assessing proposed acquisitions against the two separate tests and lower threshold for sensitive sectors will be challenging for investors and advisers alike.
Both foreign investors currently investing in Australia and those who intend to do so in the future will need to understand the nature of the changes and how they will be impacted.
Mr Brennan and Ms Eow said the proposed changes would see the threshold changed from monetary value to the nature of the business, reflecting the importance of some smaller firms, particularly in the technology sector.
The Treasurer would also have “call-in” powers to assess an investment before, during, or after an acquisition, as well as the power to order a divestment if national security risks emerge after an investment is approved.
G+T partner Deborah Jones said that the new national security regime is a complement to the existing regime, rather than a replacement.
“It applies to certain investments that would not be caught as a significant or notifiable action under the existing regime, because the transaction is valued below the relevant monetary thresholds,” she said.
This can include the taking and enforcement of security, which in these instances will no longer be subject to the money lending exemption.
The amended FATA will grant the Treasurer a “national security last resort review power” to reassess approved foreign investments that were previously reviewed (including under the call-in power) but where subsequent national security risks emerge.
"We anticipate that there will be difficulties in assessing whether a target entity would meet some of these tests,” Ms Jones said.
“As a result, for transactions caught within this regime, the review will be a targeted national security review, rather than the broader national interest test under the current foreign investment regime.”
