Foreign investors wary of new security laws

How will the new law apply to foreign investors looking to bid for ‘sensitive assets’?

Deborah Johns, expert on foreign takeover legislation with law firm Gilbert and Tobin, photographed at their offices in Sydney. Picture: Britta Campion / The Australian

Foreign investors are concerned at the implications of stricter new foreign investment laws surrounding assets deemed to be critical for national security, ­according to Gilbert + Tobin partner Deborah Johns.

While the federal government has dropped the requirement announced in March last year that all proposed investments by foreigners to be scrutinised by the Foreign Investment Review Board, new legislation, which came into force on January 1, means any proposed investments in land and businesses deemed relevant to “national security” will still need to be scrutinised by FIRB.

In an interview with The Australian, Ms Johns, a corporate advisory and foreign investment specialist at law firm Gilbert +Tobin, said foreign investors were pleased to see the end of laws introduced last March that meant every investment in Australia by foreign companies had to be approved by FIRB.

But she said there was concern about how the new law would apply to foreign investors looking to bid for what were deemed to be sensitive assets.

“The big concern for people is the definition of sensitive assets,” Ms Johns said.

She said this would be tied to a review of the Critical Infrastructure Act that is expected to significantly expand the definition of what assets were defined as critical infrastructure.

Ms Johns said she expected the “national security” test would initially apply to a narrow definition of assets but could be expanded significantly during the year in the light of an expansion of assets listed under the Critical Infrastructure Act expected in separate legislation to come into force next year.

At the moment, critical infrastructure assets are deemed to include electricity, ports, water and telecommunications. But Ms Johns said the definition could be expanded to include broader industries such as banking, food and groceries, the food supply chain, data centres and other businesses that stored critical data.

“The proposal is to greatly expand, or give the minister the ­capacity to expand, the definition of critical infrastructure, to cover a broader range of things,” Ms Johns said.

“The government has always had two concepts of critical infrastructure.

“There is the technical definition under the sections of the Critical Infrastructure legislation and a broader concept of critical infrastructure when foreign investors come into it, which includes sectors that are ‘critical to the Australian economy’.

“This is what we are all concerned about.”

Ms Johns said foreign investment advisers were looking out for more guidance on the impact of the new legislation from FIRB.

She said the return to the normal thresholds for foreign investment applications was “very, very welcome” by foreign investors.

Proposals for deals below $275m by private investors now do not need to get FIRB approval unless they involve assets deemed to involve national security.

Theoretically, private investors from countries that have free trade agreements with Australia including the US and China do not have to get FIRB approval for transactions below $1bn.

But bids by state-owned companies and for assets deemed to be critical infrastructure or assets with national security implications will have to get FIRB approval regardless of size.

Continue to change

Law firm King & Wood Mallesons has also warned its clients to be careful of the new foreign investment laws.

“Investors should not get too comfortable or become overly complacent as the foreign investment landscape will continue to change,” the law firm said in a note to clients by Canberra-based partner Malcolm Brennan.

“Investors seeking to invest in sensitive and national security sectors should brace themselves for heightened scrutiny,” he said.

Mr Brennan said that it was “currently understood” that critical infrastructure assets in Australia included water, electricity, gas and ports.

But he warned that proposed amendments to the Security of Critical Infrastructure Assets expected to be passed in the first half of this year could expand the definition to include assets as broad as banking and finance, health, food, data, education and transport.

“The scope of national security land and businesses remain unclear,” he said.

“This uncertainty is further exacerbated by critical infrastructure reforms currently being undertaken by the Department of Home Affairs.”

National ­security concern

The new legislation gives the Treasurer the power to “call in” foreign investments, which it is believed could pose a national ­security concern for review.

“This will likely prove to be problematic for investors considering investing in sectors that are included in or incidental to the new scope of ‘critical infrastructure’, particularly in the early months of the reforms where precedent will be lacking,” Mr Brennan said.

Ms Johns said dropping the requirement for all foreign investment proposals to be reviewed by FIRB would put an end to problems that had occurred last year with global takeovers involving companies with small offices in Australia.

She said the need to get FIRB approval for what were small ­assets as part of a global deal had prompted some companies to close their Australian offices or sell their Australian arms to domestic companies last year.

“Going back to the normal threshold is a huge benefit for foreign investors,” she said.

“The ones that were impacted the most were big global transactions where there happened to be a tiny Australian sales office and they had to get FIRB approval for a massive transaction where the Australian business was completely insignificant.

“They have been warehousing their Australian businesses or getting rid of them so they can complete their global deals.

“This has been very painful over the past several months.”

She said the COVID-era requirement for FIRB approval for all offers by foreign companies had also put foreign companies at a disadvantage last year if they were bidding against Australian companies for an asset as they had to get FIRB approval.

Assessing the implications

But she said foreign investment advisers were now assessing the implications of the national security aspects of the new law.

Ms Johns said governments around the world had been moving to tighten up their foreign investment regimes on the grounds of national security.

“The UK has just passed a new foreign investment law which is similar in many respects to the regulation in Australia,” she said.

“Foreign investors are having to get used to this in a number of jurisdictions, not just Australia.”

But she said some foreign investors were frustrated at the degree of regulation in Australia on foreign investment given the relatively small size of the market.

Ms Johns said there had been concerns by start-up companies that the stricter foreign investment laws in Australia could ­affect their ability to raise funding from overseas.

She said she had seen some Australian start-ups that had moved to the US to make it easier to attract US investors and not have to go through the FIRB ­approval process.

She said this could continue this year if there was a risk that the businesses they were working on could be deemed to have national security implications, which could raise questions about ­potential foreign investment.

“There are a lot of start-ups developing sophisticated technology that might have dual uses, which would be looking at this definition of national security,” she said.

“They may choose to go to the US rather than develop their business in Australia where there may be restrictions on the foreign investment they can attract to their businesses.”

Ms Johns said she had also ­noticed that bids from Chinese investors were being subject to more scrutiny recently.

“The changes in the law do not target China,” she said.

“But we have seen Chinese ­investors having a lot more difficult time with FIRB in recent months.

“I don’t see that changing.

“I don’t think the rules are specifically aimed at China, but there are definitely more headwinds in terms of approving ­Chinese investment as opposed to a US private equity fund, for ­example.”

Ms Johns said there had been a lot of interest in recent times by Chinese investors in renewable energy assets in Australia.

She said while these deals were being approved a year ago, things changed as the year went on.

“We have definitely seen a few Chinese investors quietly told they were not going to be allowed to acquire a particular asset, or not to bother lodging an application or to withdraw the application they have lodged,” she said.

“There do seem to be some headwinds in relation to Chinese investment looking at it from the outside.”