All stick, no carrot: how the Treasurer’s new enforcement powers will impact foreign investors

On 1 January 2021, the Commonwealth Government introduced significant reforms to Australia’s Foreign Investment Review Board (FIRB) regime.  One significant aspect of the reforms was the introduction of the Treasurer’s new review and enforcement powers, being the ‘call-in’ power and the ‘last resort’ power.  This insight focuses on how these reforms may impact an investment long after it is undertaken, and how this risk can be managed.

The new national security actions

The reforms to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) introduced two new FIRB actions: ‘notifiable national security action’ and ‘reviewable national security action’.  These are in addition to the existing categories of investment under the FATA, being ‘notifiable actions’ and ‘significant actions’.

A ‘notifiable national security action’ occurs when a foreign person acquires an interest in national security land, starts a national security business, or acquires a direct interest in a national security business. Where a foreign investor proposes to carry out a notifiable national security action, they must first obtain FIRB approval.    

A ‘reviewable national security action’ is an action (i.e. an investment into Australia) which is neither a notifiable action, significant action, nor notifiable national security action.  This category is effectively a ‘catch all’ and ensures that the national security screening process can be applied to almost all proposed investments into Australia, regardless of the type or size of the investment.  It is not compulsory to seek prior FIRB approval for a reviewable national security action, but an investor can elect to seek FIRB approval to manage the ‘call-in’ risk referred to below.  To assist in determining if an investor should elect to seek FIRB approval for a reviewable national security action, FIRB has identified a range of sectors (currently set out in Guidance Note 8) that will be considered sensitive from a national security perspective.     

Treasurer’s ‘call-in’ power

Reviewable national security actions or significant actions that are not notified to FIRB, are subject to be ‘called-in’ by the Treasurer if the Treasurer considers that the investment may pose a national security concern.  If an investment is called-in, a standard FIRB application fee is payable and the Treasurer will go through the standard review process to determine if the investment is contrary to Australia’s national security. Upon review, the Treasurer may issue a no objection notification (with or without conditions), prohibit the action or otherwise order divestment of the relevant asset if it is considered to be contrary to Australia’s national security.  An investment may be ‘called in’ for review at any time in the ten years following the relevant transaction.

If an investor elects to voluntarily notify under the ‘reviewable national security action’ provisions, the Treasurer’s power to ‘call-in’ an investment is extinguished.  Accordingly, the Treasurer is unable to review the action under the ‘call-in’ power once the Treasurer has been notified.  As an incentive for foreign investors to voluntarily notify the Treasurer of reviewable national security actions or significant actions, a lower application fee (25% of the standard fee) is payable.

Treasurer’s ‘last resort’ power

Even in circumstances where the Treasurer’s ‘call-in’ power is extinguished via voluntary notification or otherwise after the passage of ten years from the action being taken, the Treasurer maintains the right to use its ‘last resort’ power where national security concerns arise.  Notwithstanding the grant of a no objection notification, an exemption certificate or a deemed approval, the Treasurer may exercise this ‘last resort’ power where:

• the Treasurer becomes aware of a material false or misleading statement or omission by the foreign investor;
• the business, structure or organisation of the foreign investor (or the foreign investor’s activities) has materially changed; or
• the circumstances or market have materially changed,

and a national security risk is identified in relation to the investment.     

If the Treasurer reviews an existing investment under the ‘last resort’ power and the investment is found to be contrary to Australia’s national security, the foreign investor may be required to take specific action to reduce the national security risk, comply with specified conditions imposed in relation to the investment or, as a last resort, dispose of the investment. 

If the Treasurer reviews an action that has not yet been taken under the ‘last resort’ power, the foreign investor is prohibited from taking the action until the review is finalised.  Unlike the ‘call-in’ power, there is no time limit within which the Treasurer must exercise this review power.

While the ‘last resort’ power is extremely broad we are yet to see the ‘last resort’ power in action, and the Treasurer has emphasised that this power will only be used in the most exceptional of circumstances.  The issue however is that under these new rules, there is no way for a foreign investor to achieve certainty that the Australian government will not step in to impose conditions on the ownership of its Australian assets or potentially even force it to dispose of those assets.  This introduces an element of sovereign risk that has previously been absent from Australia’s foreign investment regime.  

What can you do?

There is no escaping the Treasurer’s ‘last resort’ power for investments notified after 1 January 2021, but in practice we expect this power will only be used in the most extreme circumstances, and only after all other regulatory mechanisms to manage the national security risk have been exhausted. 

The real decision to be made is whether to voluntarily notify, and seek prior FIRB approval for, reviewable national security actions.  The issue here is that if you do so, the transaction cannot proceed until FIRB approval is obtained and there are currently some significant delays in the processing of applications.  In addition, the incentive for voluntary notification is low, as the fees are generally reasonably low for applications relating to reviewable national security actions which means that the fee reduction for electing to lodge rather than being called-in is not a determinative factor.  In practice, we are not seeing many voluntary notifications under these new provisions, although this may change once we start to see the call-in power in action.

In any event, foreign investors should refer to the FIRB guidance notes available on FIRB’s website and consider notifying FIRB under the ‘reviewable national security action’ where the sectoral guidance identifies that type of investment as a national security concern as the results of a call-in could be significant.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.