The chairman of the Foreign Investment Review Board, David Irvine, stated that new rules designed to protect Australia’s national security interests in takeovers will affect only a small number of transactions, despite growing concern among foreign investors about the increasing hurdles they face.

Baker McKenzie banking partner Alastair Gourlay said there are concerns raised about the proposed changes during a time of fragility in the Australian economy.

“There is a legitimate concern from market participants that the proposed changes to the money-lending exemption under the exposure drafts of the Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 and the Takeovers Fees Imposition Regulations 2020 will reduce the availability of credit in the Australian market, at precisely the time when this credit is needed more than ever to help the Australian economy recover from the global pandemic,” he said.

“The proposed changes have wide reaching implications for foreign lenders, and may lead to some of them looking beyond Australia and deploying their capital in other offshore financial centres.”

Mr Irvine, who spoke at the third annual M&A conference organised by Allens, Herbert Smith Freehills and King & Wood Mallesons, said the new rules proposed by Treasurer Josh Frydenberg were in line with moves by a number of other countries including the US, Japan and Canada, and would be focused on deals in areas such as critical infrastructure, defence and telecommunications.

Under the changes, any proposed direct investment in a local company deemed to be a “national security business” will be subject to a new national security test. The Treasurer will also be handed the power to block or divest an investment deemed to put Australia’s national security at risk.

Mr Gourlay said that borrowers will need to factor the impact of proposed changes into their transaction, particularly in terms of extra cost and approval times.

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“We are hopeful that the Government will listen to the concerns raised by market participants, and either retain the moneylending exemption in its current form or adopt an approach which protects Australian national security, while maintaining a deep and diverse Australian debt market,” he said.

It is understood both the investment and tech sectors are worried that provisions restricting the involvement of foreign debt providers in a deal, and the vagueness of definitions in the draft legislation could mean it applies to a much larger group of assets.

In the changes, national security businesses are defined as “endeavours that if disrupted or carried out in a particular way may create national security risks” and will likely include telcos, critical infrastructure operators, companies manufacturing defence technology for another country or those storing or with access to classified or personal data relating to defence and intelligence personnel.

There will also be “increased penalties, directions powers and new monitoring and investigative powers”, while a register of foreign-owned assets will be launched.

The government said the legislation strikes the right balance of ensuring Australia remains an attractive destination for foreign investment and that national security is protected.

“Risks to Australia’s national interest, particularly national security, have increased as a result of a confluence of developments – including rapid technological change and changes in the international security environment,” the memorandum said.

“The challenge remains balancing the settings to attract foreign capital that supports the economy, while protecting national security.”

The Victorian government is also against the draft legislation, saying it would damage Australia’s ability to attract innovation, research and development and investment, and lead to more companies being subject to costly reviews than previously.

Previously King & Wood Mallesons’ lawyers told Lawyers Weekly that the impact that the reforms will have on foreign investment in Australia is impossible to predict.

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