Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 (Cth)

The Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 (Cth) amended the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) to (among other things) give the Treasurer powers to address new and emerging national security risks.

These powers enable the Treasurer to protect the national interest, including national security, wherever risks arise from individual investment proposals.

In essence, the amendments introduce three new review processes for the Treasurer:

  • Notifiable national security action
  • Call-in power
  • Last resort power

Notifiable National Security Action

The reforms introduce a new type of action called the “Notifiable national security action” that is defined in section 55B of the FATA to mean an action or proposed action by a foreign person that is to:

  • start a national security business;
  • acquire a direct interest in a national security business;
  • acquire a direct interest in an entity that carries on a national security business;
  • acquire an interest in national security land; or
  • acquire a legal or equitable interest in an exploration tenement in respect of national security land.

In essence, a “notifiable national security action” is an action that is by its nature so likely to give rise to a national security concern that, regardless of its size or value, requires review by the Treasurer. They are actions that must be notified to the Treasurer for review regardless of the value of the investment or whether they are otherwise significant or notifiable actions.

The definitions of “national security land” and “national security business” are prescribed in the Financial Acquisitions and Takeovers Regulations 2015 (Regulations).

The concept of “national security land” is defined by reference to whether the land is defence premises or a national intelligence agency has an interest in the land (Regulation 5).

A “national security business” is a business that if disrupted or carried out in a particular way, could create national security risks. Generally, national security businesses will be involved in, or connected with, critical infrastructure, defence, the national intelligence community or their supply chains (Regulation 8AA).  

A person proposing to take a “notifiable national security action”, regardless of the size or value of the action, must:

  • give notice of the action to the Treasurer; and
  • not take the action before: 
    • receiving a no objection notification or an exemption certificate covering the action; or
    • before the decision period lapses (Sections 80, 81 and 82, FATA).

A person who does not notify the Treasurer of, or who takes, a “notifiable national security action” before:

  • receiving a no objection notification or an exemption certificate covering the action; or
  •  before the decision period lapses,

may commit an offence or contravene a civil penalty provision (or both) (Sections 83 and 84, FATA).

If an action is both a “notifiable national security action” and a “significant action”, it will be reviewed on national interest grounds (using the existing test) so as not to limit the scope of the existing “national interest test”. Only if an action would not otherwise need to be screened (i.e. does not meet the definition of “significant interest”) will the action be reviewed on national security grounds (sections 66 and 67, FATA).

The Treasurer can issue:

  • a prohibition order;
  • an interim order; 
  • a disposal order; or
  • a no objection notification,

with or without conditions (sections 67, 68, 74 and 75, FATA) and has 30 days from notification to make a decision or order (section 77, FATA).

The requirement to notify of a “notifiable national security action” applies to actions taken on or after 1 January 2021.

the national security reform provisions are not intended to apply in a way that would disrupt actions that have occurred or agreements that have been entered into before 1 January 2021.

Call-in power

The reforms give the Treasurer a new power to review actions that have been taken, or are proposed to be taken, if the Treasurer considers that the action may pose a national security risk.

The actions which may be subject to the Treasurer’s new power is called a “reviewable national security action”. These are actions that would otherwise not be captured by the FATA as ‘significant actions’ because certain conditions were not met (i.e. monetary threshold or level of interest). Broadly, they are actions which are expected to give foreign persons potential influence and rights, such as the ability to influence or participate in the central management or policy of an entity or business, or the right to occupy Australian land.

A “reviewable national security action” includes an action taken, or proposed to be taken, to:

  • acquire an interest of any percentage in an entity (essentially a corporation carrying on an Australian business or the holding entity of such a corporation) or issue securities in an entity, and as a result a foreign person:
    • acquires or will acquire a direct interest in the entity, and that is not a significant action, notifiable action or notifiable national security action;
    • will be in a position to influence, or participate in, the central management and control of the entity; or
    • will be in a position to influence, participate in or determine the policy of the entity;
  • enter an agreement about the affairs of an entity under which, or alter a constituent document of an entity with the result that, one or more senior officers will be under an obligation to act in accordance with the directions, instructions or wishes of a foreign person;
  • to acquire an interest of any percentage in an Australian business;, to acquire an interest in the assets of an Australian business, or to enter or terminate a significant agreement with an Australian business; and as a result a foreign person:
    • acquires, or will acquire, a direct interest in the Australian business, and that is not a significant action, notifiable action or notifiable national security action;
    • will be in a position to influence or participate in the central management and control of the Australian business; or
    • will be in a position to influence, participate in or determine the policy of the Australian business;
  • to acquire an interest in Australian land; or
  • to start an Australian business.

(sections 55D, 55E and 55F, FATA).

The meaning of direct interest is prescribed by the Regulations.

A direct interest means an interest of:

  • at least 10% in an entity or business;
  • at least 5% in an entity or business if the person who acquires the interest has entered into a legal arrangement relating to the business;  or
  • any percentage in the entity or business if the person who acquired the interest is in a position to influence or participate in the central management and control or determine the policy of the entity or business

(Regulation 16).

The Treasurer is able to review a reviewable national security action or significant action that has not been notified if the Treasurer considers that the action may pose a national security concern (section 66A, FATA).

If the Treasurer reviews an action using the “call-in power”:

  • the Treasurer must give a written notice to the person who proposes to take an action or who has taken an action; and
  • the person must not take the action

(section 66A, FATA).

The Treasurer then has 30 days (Decision Period) to issue:

  • a no objection notification (with or without conditions);
  • with respect to an existing condition, vary or revoke the condition or impose new conditions;
  • make an order requiring disposal or prohibiting investment.

(section 77, FATA).

The review process under the “call-in power” is similar to the review process where a person gives a notification for a ‘notifiable action’. The information requirements are also similar.

If the Treasurer does not make an order or issue a no objection notification before the end of the Decision Period, the Treasurers powers are extinguished (except that the Treasurer may still have access to the Last Resort Power). The 30 day Decision Period time frame may however be extended at the request of the foreign person, or at the Treasurers discretion, for up to 90 days.

When given a notice that the Treasurer is reviewing a decision under the “call-in power”, the foreign person must not take the action before the earliest to occur of:

  • 10 days after the end of the Decision Period; 
  • the end of the period mentioned in the interim order; or
  • the day a no objection notification is given

(section 82, FATA).

A person may commit an offence or contravene a civil penalty provision (or both) if they take an action while prohibited from doing so following the exercise of the “call-in power”.

An order made by the Treasurer upon exercising the “call-in power” is made as a notifiable instrument published on the Federal Register of Legislation (section 79M, FATA).

A foreign person may voluntarily notify an action to be reviewed. If a person has voluntarily notified an action and been given a no objection notification, the Treasurer is unable to review an action under the “call-in power”. This can provide certainty to persons wanting to take actions and who want to make sure that the action cannot later be reviewed by the Treasurer (with the exception of the Last Resort Power).

The “call-in power” can only be used by the Treasurer on actions taken or proposed to be taken on or after 1 January 2021 so as not to disrupt actions that have already occurred.

Last Resort Power

A new division is introduced by the reforms which gives the Treasurer powers to impose conditions, vary conditions and force divestment as a last resort. (Part 3, Division 3, FATA).

The Treasurer is required to review an action before the “Last Resort Power” is available to the Treasurer and a foreign person will be able to seek merits review of the outcome of such a review.

To limit circumstances in which the Last Resort Power may be used, the Treasurer must be satisfied that the following conditions are met:

  • the Treasurer must have given a no objection notification, a notice imposing conditions (under an earlier exercise of the Last Resort Power), an exemption certificate, or an interim order with no further orders made; and
  • at least one of the following 3 factors must be present:
    • a statement or omission misleading in a material particular was made orally or in the notification of the action or application for exemption certificate;
    • the business, structure or organisation of the person has, or the person’s activities have, materially changed;
    • the circumstances or the market relevant to the action have materially changed.

(section 79A(1), FATA).

In summary, the use of the Last Resort Power by the Treasurer is restricted to situations where a new national security concern has arisen – where additional information has become available or circumstances have changed. It cannot be used to revisit concerns that should have been addressed at the initial notification/application stage.

If the above conditions are met the Treasurer can review the action. The treasurer must consider whether a national security risk exists and may have regard to advice provided by agencies in the national intelligence community (section 79A(2), FATA).

The Treasurer must notify the person of in writing of a review of an action, unless that notification would prejudice Australia’s national security interests (section 79A(3), FATA).

A person who is notified and who has not yet taken an action, must not take the action until the review is completed. If the person takes an action that may constitute an offence or a contravention of a civil penalty provision.

If a person is notified and has already taken an action, the Treasurer may effectively pause a particular action or activities following an action by:

  • giving a direction that it considers necessary; and
  • giving further orders in writing (until the review is completed).

However, the Treasurer may not require divestment until the review process is completed and the full process for giving of orders under the Last Resort Power is followed.

If, after review, the Treasurer considers a national security risk exists, the Treasurer must notify the person and give reasons. However, the notice may be redacted (in part or in full) on national security grounds (section 79B, FATA).

A merits review of the Treasurer’s decision is available to the person in the Administrative Appeals Tribunal (AAT). The Security Division of the AAT will consider the application as the processes for operation of the Security Division are already tailored to decisions made on national security grounds and to dealing with matters of a sensitive national security nature (see sections 130A – 130L, FATA). 

No objection notifications and exemption certificates given after 1 January 2021 will inform persons that the Last Resort Power will be available for actions covered by the notice (section 76(1), FATA).

To exercise the Last Resort Power, the Treasurer must be satisfied that:

  • a review has been conducted and found that a national security risk exists about the action;
  • the exercise of the last resort power is reasonably necessary to reduce or eliminate the national security risk;
  • reasonable steps have been taken to negotiate in good faith to eliminate or reduce the national security risk to avoid giving the order; and
  • the use of all other regulatory systems of the Commonwealth, States and Territories would not adequately eliminate or reduce the national security risk.

The Last Resort Power may be exercised by the Treasurer in Any of the following ways:

  • making an order prohibiting the proposed action (see section 73D, FATA);
  • making a disposal order (if action taken contrary to national security) (see section 73E, FATA);
  • varying a no objection notification to revoke, vary or impose new conditions (see section 73G, FATA);
  • giving a notice imposing conditions (see section 79H, FATA); and
  • varying a notice imposing conditions (see section 79J, FATA).

Once satisfied, the Treasurer may, by notifiable instrument, make an order which would prohibit all or part of the proposed action (section 79D, FATA).

Orders prohibiting actions, additional orders, interim orders and disposal orders must be registered on the Federal Register of Legislation within 10 days of being made (section 79M(1)(b), FATA).

Disposal orders and additional orders commence on the day specified in the order, but not earlier than 30 days after they are registered (section 79M(2)(b), FATA).

Orders prohibiting actions and interim orders commence on the day they are registered (section 79M(2)(a), FATA).