INSIGHT

Expansion in scope of transactions subject to FIRB approval rules

By Wendy Rae, Jeremy Low, Andrew Wong
Data Defence Energy Financial Services Foreign Investment Review Board (FIRB) Funds Health Mergers & Acquisitions Renewables Resources Transport

Expansion of critical infrastructure asset and national security business definitions 26 min read

On 3 December 2021, amendments to the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act) came into force which have the effect of significantly expanding the scope of transactions requiring FIRB (Foreign Investment Review Board) approval under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA).

This is because the amended SOCI Act (the amending Act is available here) and accompanying Security of Critical Infrastructure (Definitions) Rules (LIN 21/039) 2021 dated 8 December 2021 (SOCI Rules) (available here) expand the definition of critical infrastructure asset, which automatically expands the definition of national security business under the FATA. Since the coming into effect of major changes to the FATA on 1 January 2021, foreign persons need FIRB approval to start, or to acquire a 10% or greater interest in, a national security business.

On 14 December 2021, the Government released an updated FIRB national security guidance note (available here) covering the changes and the transitional arrangements that will apply. Due to the transitional arrangements, as a practical matter the expanded definition of critical infrastructure asset only has application to the FATA with effect from 14 December 2021, rather than 3 December 2021.

In this Insight, we look at the changes and comment on what they mean for transactions. The changes to the SOCI Act also have operational implications for many businesses – which we will separately publish on.


Background

Since the commencement of the national security reforms to the FATA in 1 January 2021, each of the following can only occur with prior FIRB approval:

  • the starting by a foreign person of a national security business; and 
  • the acquisition by a foreign person of a direct interest (generally being a 10% or greater interest) in an entity that carries on a national security business.

The FATA regulations provide that a business is a national security business if it is carried on in Australia and it is publicly known, or could be known upon the making of reasonable inquiries, that the business is of a certain kind, including:

  • the business is a responsible entity for a critical infrastructure asset; or
  • the business is an entity that is a direct interest holder in relation to a critical infrastructure asset.

The terms critical infrastructure asset, responsible entity and direct interest holder have the meanings given in the SOCI Act.

Under both the previous and current SOCI Act, an entity is considered a direct interest holder in relation to an asset if the entity:

  • together with any associates, holds an interest of at least 10% in the asset; or
  • holds an interest in the asset that puts the entity in a position to directly or indirectly influence or control the asset.

What has changed?

Prior to the latest changes, the SOCI Act and associated rules provided that certain assets within the following four sectors could constitute critical infrastructure assets: electricity, gas, water and ports.

Following the latest changes, the SOCI Act and SOCI Rules provide that certain assets within the following 10 sectors can constitute critical infrastructure assets: communications, data storage or processing, financial services and markets, water and sewerage, energy, healthcare and medical, higher education and research, food and grocery, transport, and defence industry.1 These are set out in the next section.

Communications
Critical telecommunications asset

A critical telecommunications asset means:

  • a telecommunications network that is owned or operated by a carrier and used to supply a carriage service; or
  • a telecommunications network, or any other asset, that is owned or operated by a carriage service provider and used in connection with the supply of a carriage service.

Responsible entity: the carrier or carriage service provider (as applicable).

Critical broadcasting asset

One or more broadcasting transmission assets are a critical broadcasting asset if the assets:

  • are owned or operated by the same entity and located on a site that is a critical transmission site;
  • are owned or operated by the same entity, and located on at least 50 different sites, and not broadcasting transmission assets; or
  • the broadcasting transmission assets are owned or operated by an entity that is critical to the transmission of a broadcasting service, being for this purpose: TX Australia Pty Ltd (ABN 98 086 979 339).

The explanatory statement to the SOCI Rules states that 'TX Australia is prescribed because it owns, operates, manages, engineers, maintains and markets transmission facilities in the five major mainland metropolitan cities of Australia. TX Australia provides television transmission for broadcasters, including for commercial metropolitan television networks Seven, Nine and Ten.'

Responsible entity: the entity which is the owner or operator.

Critical domain name system

An asset is a critical domain name system if it:

  • is managed by an entity that is critical to the administration of an Australian domain name system, being each of:
    • .au Domain Administration Ltd (ABN 38 079 009 340); and
    • any entity that administers the ‘.au’ country code Top Level Domain; and
  • is used in connection with the administration of an Australian domain name system.

Responsible entity: the relevant entity mentioned above.

Data storage or processing
Critical data storage or processing asset

An asset is a critical data storage or processing asset if:

  • it is owned or operated by an entity that is a data storage or processing provider;
  • it is used wholly or primarily to provide a data storage or processing service that is provided by the entity on a commercial basis to an end user that is:
    • a Commonwealth, State or Territory body; or
    • the responsible entity for a critical infrastructure asset and the service relates to business critical data; and
  • the entity knows that the asset is used as described immediately above.

Responsible entity: the relevant entity mentioned above.

The term business critical data means: personal information (within the meaning of the Privacy Act 1988 (Cth)) that relates to at least 20,000 individuals, or information relating to any research and development in relation to a critical infrastructure asset, or information relating to any systems needed to operate a critical infrastructure asset, or information needed to operate a critical infrastructure asset, or information relating to risk management and business continuity (however described) in relation to a critical infrastructure asset.

The concept of 'critical data storage or processing asset' therefore captures data centres. FIRB's updated national security guidance note states that 'A foreign person must seek foreign investment approval prior to starting a business or acquiring a direct interest in a data centre or cloud provider that stores or processes data for the Commonwealth, a state or territory government, or an entity responsible for a critical infrastructure asset (as defined by the Security of Critical Infrastructure Act 2018).'

Financial services and markets
Critical banking asset

An asset is a critical banking asset if it is an asset where the following conditions are satisfied:

  • the asset is owned or operated by an authorised deposit taking institution or related body corporate;
  • such authorised deposit taking institution or related body corporate is critical to the security and reliability of the financial services and markets sector, being an institution or related body corporate which has assets over $50 billion; and
  • the asset is used in connection with the carrying on of banking business.

The explanatory statement to the SOCI Rules states that the $50 billion threshold is 'intended to capture banking assets of large authorised deposit taking institutions and related body corporates that are critical to the security and reliability of the financial services and markets sector due to their size'.

Responsible entity: the authorised deposit taking institution or related body corporate (as applicable).

Critical superannuation asset

An asset is a critical superannuation asset if:

  • it is owned or operated by a registrable superannuation entity that is critical to the security and reliability of the financial services and markets sector, being an entity that holds assets over $20 billion; and
  • it is used in connection with the operation of a superannuation fund.

The explanatory statement to the SOCI Rules states that this $20 billion threshold 'is intended to capture those registrable superannuation entity (RSE) licensees that are critical to the security and reliability of the financial services and markets sector on a national level. A security incident that impacts the critical financial market infrastructure assets of a RSE licensee with total assets above $20 billion could have cascading effect across the Australian population and economy'.

Responsible entity: the registrable superannuation entity.

Critical insurance asset

An asset is a critical insurance asset if it is an asset where the following conditions are satisfied:

  • the asset is owned or operated by an entity that carries on insurance business, life insurance business or health insurance business, or a related body corporate of any such entity, being an entity or related body corporate which has assets over $2 billion (in the case of an insurance business), or over $5 billion (in the case of a life insurance business) or over $500 million (in the case of a health insurance business);
  • such entity or related body corporate is critical to the security and reliability of the financial services and markets sector; and
  • the asset is used in connection with the carrying on of insurance business, life insurance business or health insurance business.

The explanatory statement to the SOCI Rules provides that the above-mentioned thresholds are intended to include insurance entities, life insurance entities and health insurance entities 'that, if rendered unavailable, would have a significant impact on the security and reliability of the financial services and markets sector'. In relation to insurance businesses the explanatory statement notes that 'These large insurers act as an important buffer for the Australian economy, softening the financial impact of events on public funds by drawing on private sector funding'. In relation to life insurance businesses, the explanatory statement notes that 'Life insurance acts as a saving mechanism for Australians and allows for significant volumes of long-term funding for financial markets and other sectors in need of investment, contributing to Australia’s overall economic growth and stability'. In relation to health insurance businesses, the explanatory statement states that 'This is intended to capture the large health insurers that provide health insurance to a large number of Australians'. 

Responsible entity: the relevant entity or related body corporate (as applicable) mentioned above.

Critical financial market infrastructure asset

An asset is a critical financial market infrastructure asset if it is any of the following assets:

  • the asset:
    • is owned or operated by an Australian company that holds an Australian market licence, or an associated entity of such a company; and
    • is used in connection with the operation of a financial market that is critical to the security and reliability of the financial services and markets sector, being a financial market that is operated by an entity that holds a Tier 1 market licence under subsection 795B(1) of the Corporations Act 2001 (Cth) and has, for at least two consecutive quarters, a turnover that meets any of the following: 35% market share of traded cash market products; $4 billion average daily value of traded cash market products; $15 billion average daily notional value of futures market contract transactions; or $30 billion average daily notional value of transactions that are not cash market products or futures market contracts;
  • the asset:
    • is owned or operated by an Australian company that holds an Australian CS facility licence, or an associated entity of such a company; and
    • is used in connection with the operation of a clearing and settlement facility that is critical to the security and reliability of the financial services and markets sector, being a clearing and settlement facility owned or operated by an Australian body corporate or an associated entity of an Australian body corporate that is required to comply with the financial stability standards determined by the Reserve Bank of Australia under section 827D of the Corporations Act 2001 (Cth);
  • the asset:
    • is owned or operated by an Australian company that holds a benchmark administrator licence, or an associated entity of such a company; and
    • is used in connection with the administration of a significant financial benchmark that is critical to the security and reliability of the financial services and markets sector, being a significant financial benchmark declared under section 908AC(2) of the Corporations Act 2001 (Cth);
  • the asset:
    • is owned or operated by an Australian company that holds an Australian derivative trade depository licence, or an associated entity of such a company; and
    • is used in connection with the operation of a derivative trade repository that is critical to the security and reliability of the financial services and markets sector, being a derivative trade repository that has at least $20 trillion average daily notional value of outstanding transactions for all asset classes for at least two consecutive quarters;
  • the asset is used in connection with the operation of a payment system that is critical to the security and reliability of the financial services and markets sector, being each of the following payment systems:

Item

Payment system

Responsible entity

1

Mastercard debit and credit card system

Mastercard Asia/Pacific Australia Pty Ltd (ABN 95 108 603 345)

2

Visa debit and credit card system

Visa AP (Australia) Pty Ltd (ABN: 20 134 885 564)

3

EFTPOS card system

eftpos Payments Australia Limited (ABN: 37 136 180 366)

4

New Payments Platform

NPP Australia Limited (ABN: 68 601 428 737)

The explanatory statement to the SOCI Rules states that 'Derivative trade repositories are a core component of the infrastructure supporting derivatives markets. An Australian derivative trade repository may be part of a network linking various entities, such as clearing and settlement facilities, dealers or financial custodians. Therefore, a disruption in a sufficiently sized Australian derivative trade repository could risk spreading to linked entities and have cascading impacts across the economy'.

Responsible entity: the relevant company or associated entity or 'responsible entity' (as applicable) mentioned above.

Water and sewerage
Critical water asset

An asset is a critical water asset if it is one or more water or sewerage systems or networks that:

  • are managed by a single water utility; and
  • ultimately deliver services to at least 100,000 water connections or 100,000 sewerage connections.

This is the same definition as the one in the SOCI Act prior to the latest changes.

Responsible entity: the water utility that holds the licence, approval or authorisation (however described), under a Commonwealth, State or Territory law, to provide the service to be delivered by the asset.

Energy
Critical electricity asset

An asset is a critical electricity asset if it is:

  • a network, system, or interconnector, for the transmission or distribution of electricity to ultimately service at least 100,000 customers; or
  • an electricity generation station that is critical to ensuring the security and reliability of electricity networks or electricity systems in a State or Territory if:
    • either:
      • the entity that owns or operates the electricity generation station is contracted to provide a system restart ancillary service in the State or Territory; or
      • the electricity generation station is an electricity generator, in the State or Territory, that has an installed capacity of at least 30 MW; and
    • it is connected to a wholesale electricity market.

An electricity generation station is taken to provide a system restart ancillary service if it can: start without an external power supply, and can connect, and provide energy, to an electricity network or an electricity system for the transmission or distribution of electricity. 

The new 30MW threshold for installed capacity is significantly lower than the previous thresholds. The explanatory statements to the SOCI Rules states that 'The intent of lowering the threshold to 30MW nationally is not to capture all electricity generation stations but to drive a broad uplift in sector resilience given the interconnected nature of the electricity network. 30MW captures the majority of generators connected to the wholesale electricity markets'.

Responsible entity: the entity that holds the licence, approval or authorisation (however described) to operate the asset to provide the service to be delivered by the asset.

Critical gas asset

An asset is a critical gas asset if it is any of the following:

  • a gas processing facility that has a capacity of at least 300 terajoules per day;
  • a gas storage facility that has a maximum daily quantity of at least 75 terajoules per day;
  • a network or system for the distribution of gas to ultimately service at least 100,000 customers; or
  • a gas transmission pipeline that is critical to ensuring the security and reliability of a gas market, being each of:
    • Tasmanian Gas Pipeline;
    • Carpentaria Gas Pipeline; and
    • any gas transmission pipeline in a gas market mentioned in an item in the following table:

Item

Gas market

Nameplate rating

1

Eastern

200 terajoules per day

2

Northern

80 terajoules per day

3

Western

150 terajoules per day

The explanatory statements to the SOCI Rules states that 'The Tasmanian Gas Pipeline is critical as it provides the only link between Victoria and Tasmania', 'The Carpentaria Gas Pipeline is critical as it provides the only link between the Northern Territory gas fields and the east coast gas market' and 'The thresholds for each gas market capture those pipelines that are critical to ensuring the varying industrial, residential and export demands in each market are met. As a result, the thresholds ensure the Act only applies to gas transmission pipelines that are critical for transporting gas from processing plants to major demand centres for distribution networks or large gas users such as electricity generators and industrial users, and to certain facilities and hubs for export purposes'.

Apart from the addition of the Carpentaria Gas Pipeline, the definition of 'critical gas asset' is the same as the definition prior to the latest SOCI Act changes.

Responsible entity: the entity that holds the licence, approval or authorisation (however described) to operate the asset to provide the service to be delivered by the asset.

Critical energy market operator asset

An asset is a critical energy market operator asset if it:

  • is owned or operated by Australian Energy Market Operator Limited, Power and Water Corporation, Regional Power Corporation, or Electricity Networks Corporation;
  • is used in connection with the operation of an energy market or system; and
  • is critical to ensuring the security and reliability of an energy market;

but does not include a critical electricity asset, critical gas asset or a critical liquid fuel asset.

FIRB's updated national security guidance note states that 'The focus is on assets that are essential to a market operator undertaking its statutory functions, for example managing market trading and ensuring the security and reliability of the physical infrastructure. Although Western Power’s [ie. Electricity Network Corporation's] primary function is as a transmission and distribution network operator, it has been included as it undertakes market operator functions within this meaning'.

Responsible entity: the relevant owner or operator mentioned above.

Critical liquid fuel asset

An asset is a critical liquid fuel asset if it is any of the following:

  • a liquid fuel refinery that is critical to ensuring the security and reliability of a liquid fuel market, being the liquid fuel refineries at Corio (Victoria) and Lytton (Queensland);
  • a liquid fuel pipeline that is critical to ensuring the security and reliability of a liquid fuel market, being each of the following liquid fuel pipelines: Sydney Metropolitan Pipeline, Gore Bay Pipeline, Westernport Altona Geelong Pipeline, Longford (Dutson) to Hastings Pipeline, Melbourne Airport Jet Fuel Pipelines, Jet Fuel Pipeline (Kurnell to Sydney Airport), Brisbane Airport Jet Fuel Pipeline, Perth Airport Jet Fuel Pipeline; or
  • a liquid fuel storage facility that is critical to ensuring the security and reliability of a liquid fuel market, being a liquid fuel storage facility with a storage capacity of more than 50 megalitres of liquid fuel.

The explanatory statement to the SOCI Rules states that the above-named liquid fuel pipelines 'are critical to ensuring liquid fuel security across the country. Any disruption to these major pipelines would have significant flow on effects to other sectors reliant on liquid fuels whose protection is essential to Australia’s security'.

The explanatory statement also states that, in relation to a liquid fuel storage facility, 'The threshold of 50 megalitres is intended to capture the most significant and regionally important liquid fuel terminals, including liquid fuel import terminals, to build resilience to liquid fuel supply disruptions, thereby protecting consumers and the economy from fuel shortages'.

Responsible entity: the entity that operates the relevant refinery, pipeline or storage facility.

Health care and medical
Critical hospital

A critical hospital is one that has a general intensive care unit.

Responsible entity:

  • If the critical hospital is a public hospital – the local hospital network that operates the hospital.
  • If the critical hospital is a private hospital – the entity that holds the licence, approval or authorisation (however described), under a State or Territory law to operate the hospital.
Higher education and research
Critical education asset

A critical education asset means a university that is owned or operated by an entity that is registered in the Australian university category of the National Register of Higher Education Providers.

Responsible entity: the relevant entity mentioned above.

Food and grocery
Critical food and grocery asset

An asset is a critical food and grocery asset if it is a network that:

  • is used for the distribution or supply of food or groceries; and
  • is owned or operated by an entity that is a:
    • critical supermarket retailer, being each of Aldi Pty Limited (ABN 68 086 493 950), Coles Group Limited (ABN 11 004 089 936) and Woolworths Group Limited (ABN 88 000 014 675);
    • critical food wholesaler (none are currently specified by the SOCI Rules); or
    • critical grocery wholesaler, being MetCash Trading Limited (ABN 61 000 031 569).

FIRB's updated national security guidance note states that 'The COVID-19 pandemic has placed food and grocery distribution and supply under significant pressure, revealing both the criticality and vulnerability of these networks', and that the above-named retailers and wholesalers 'collectively account for over 80 per cent market share, and if disrupted, could have a severe and widespread impact on the availability of food and grocery'.

Responsible entity: the relevant entity mentioned above.

Transport
Critical port

An asset is a critical port if it is land that forms part of any of the following security regulated ports: Broome Port, Port Adelaide, Port of Brisbane, Port of Cairns, Port of Christmas Island, Port of Dampier, Port of Darwin, Port of Eden, Port of Fremantle, Port of Geelong, Port of Gladstone, Port of Hay Point, Port of Hobart, Port of Melbourne, Port of Newcastle, Port of Port Botany, Port of Port Hedland, Port of Rockhampton, Port of Sydney Harbour, Port of Townsville.

This is the same definition as the one in the SOCI Act prior to the latest changes.

Responsible entity: the port operator of the critical port.

Critical freight infrastructure asset

An asset is a critical freight infrastructure asset if it is a road network, rail network or intermodal transfer facility that is critical to the transportation of goods between two States, a State and a Territory, two Territories, or two regional centres (being a city or a town with a population of 10,000 or more people).

Each of the following intermodal transfer facilities is considered to be 'critical'.

Location

Owner or operator

Chullora, NSW

Pacific National (ABN 48 052 134 362)

Parkes, NSW

Pacific National (ABN 50 105 300 767) and SCT Logistics (ABN 83 139 383 761)

Altona, VIC

SCT Logistics (ABN 37 757 194 158)

Barnawartha, VIC

SCT Logistics (ABN 37 757 194 158)

Dynon – North, VIC

Victrack (ABN 55 047 316 805)

Dynon – South, VIC

Pacific National (ABN 48 052 134 362)

Acacia Ridge, QLD

Pacific National (ABN 26 615 302 111)

Bromelton, QLD

SCT Logistics (ABN 37 757 194 158)

Townsville, QLD

Linfox (ABN 87 648 327 413)

Forrestfield, WA

SCT Logistics (ABN 37 757 194 158)

Kewdale-Welshpool, WA

Pacific National (ABN 48 052 134 362)

Islington, SA

Pacific National (ABN 48 052 134 362)

Penfield, SA

SCT Logistics (ABN 37 757 194 158)

Brighton Transport Hub, TAS

TasRail / IPEC Pty Ltd (ABN 15 084 157 666)

The explanatory statement to the SOCI Rules states that 'An intermodal facility is any site or facility along the supply chain that contributes to an intermodal movement by providing efficient transfer of goods from one mode of transport to another. Intermodal terminals play a significant role in facilitating the consolidation, storage and transfer of freight between rail and road at the beginning and end of each rail journey. Intermodal terminals provide connectivity to ports, regional networks and other capital cities and regional centres and are central to the stability and security of road and rail infrastructure'.

The SOCI Rules do not currently specify which road networks and rail networks are considered 'critical'.

Responsible entity: the Commonwealth, State or Territory government, or other body, that is responsible for the management of the relevant asset.

Critical freight services asset

An asset is a critical freight services asset if it is a network that is used by an entity carrying on a business that is critical to the transportation of goods by any or all of the following: road, rail, inland waters and sea, being a business in respect of which all of the following criteria are satisfied:

  • the business has an annual revenue of at least $150 million;
  • the business provides a service (a freight service) that is a road freight transport service, freight forwarding service, rail freight transport service or a water freight service;
  • the freight service provided by the business involves the transport or storage of any of the following:
    • food and groceries, where transported to or from a critical supermarket retailer or a critical grocery wholesaler;
    • therapeutic goods registered on the Australian Register of Therapeutic Goods moved to or from premises storing such goods;
    • the supply of medicines listed under Schedules 2, 3, 4 or 8 of Part 4 of the current Poisons Standard, where transported to or from a premises at which the manufacture of the medicine is permitted under a law of a State or Territory;
    • liquid fuel, where transported to or from a critical liquid fuel asset;
    • essential goods and supplies required for water treatment facilities; or
    • any other good that is critical for the operation, maintenance or management of a critical infrastructure asset.

The explanatory statement to the SOCI Rules provides that the networks which satisfy all of the above criteria 'are critical to Australia’s trade and commerce and social stability as they are responsible for logistics and movement of valuable goods and products across the country. These assets assist businesses to transport products to consumers, and ensuring communities can access critical supplies, including food and groceries and essential medical goods'.

Responsible entity: the relevant entity mentioned above.

Critical public transport asset

A critical public transport asset means a public transport network or system that is managed by a single entity and is capable of handling at least five million passenger journeys per month, but does not include a critical aviation asset.

Responsible entity: the relevant entity mentioned above.

Critical aviation asset

A critical aviation asset means each of the following:

  • an asset that is used in connection with the provision of an air service and is owned or operated by an aircraft operator; 
  • an asset that is used in connection with the provision of an air service and is owned or operated by a regulated air cargo agent; or
  • an asset that is used by an airport operator in connection with the operation of an airport.

Responsible entity: the relevant aircraft operator or regulated air cargo agent mentioned above.

Defence industry
Critical defence industry asset

A critical defence industry asset means an asset that is being, or will be, supplied by an entity to the Defence Department, or the Australian Defence Force, under a contract and consists of, or enables, a critical defence capability (which includes materiel, technology, a platform, a network, a system or a service that is required in connection with the defence of Australia or national security).

Responsible entity: the relevant entity mentioned above.

FIRB guidance and transitional arrangements

There are no legislative transitional arrangements governing how the expanded SOCI Act definition of critical infrastructure asset affects the operation of the FATA in terms of the consequential expansion on the definition of 'national security business'.

However, on 14 December 2021 the Government issued an updated FIRB national security guidance note setting out the approach it will take, in terms of transitional arrangements, to 'facilitate the efficient implementation of the change for the purposes of administering the FATA'.

In summary, the transitional arrangements are as follows.

  • The expanded 'national security business' definition does not apply to any action taken under an agreement entered into before 14 December 2021, regardless of whether there are unmet conditions or not.
  • The same will also apply to interests acquired upon exercise of an option that was in existence prior to 14 December 2021, on the basis that for FATA purposes the acquirer is already taken to have acquired the interest upon being granted the option.
  • Where a foreign person, prior to 14 December 2021, has received a no-objection notification (in relation to an action that prior to 14 December 2021 did not constitute a notifiable national security action, but on or after 14 December 2021 constitutes a notifiable national security action because of the SOCI Act changes), the foreign person does not have to apply for another no objection notification before taking the proposed action or executing the agreement with respect to that action, provided the action is taken within the timeframe specified in the no-objection notification.
  • Exemption certificates granted prior to 14 December 2021 in relation to national security actions continue to operate according to the terms of the certificate, provided the conditions (if any) specified in the certificate are met. (However, it is unclear what the position is in relation to exemption certificates covering actions that did not constitute notifiable national security actions prior to 14 December 2021, but that do on or after that date because of the SOCI Act changes).

It is helpful that the Government has set 14 December 2021 (the date of publication of the updated guidance note) as the transitional arrangements cut-off date, rather than the 3 December 2021 commencement of the SOCI Act changes.

Observations

  • The expanded definition of 'national security business' will undoubtedly result in more transactions – involving direct or indirect acquisitions of Australian assets – being subject to a mandatory FIRB approval requirement. This will have an impact on transaction timetables given the current lengthy FIRB assessment periods.

    Example: The acquisition by a foreign person of a 20% or greater interest in a company (whether Australian or non-Australian) which has a 10% or greater interest in an entity that carries on a national security business will constitute a notifiable national security action and, therefore, is subject to a mandatory FIRB approval requirement.
  • There will effectively be a narrowing of the de minimis exemption for foreign government investors in relation to offshore acquisitions of entities that have interests in Australian entities. Without the exemption, a foreign government investor will generally need FIRB approval to acquire a 20% or greater interest in any foreign entity which has a 10% or greater interest in any Australian entity. One of the prerequisites for the availability of the exemption is that the target and its downstream entities do not carry on a national security business.
  • Potential foreign acquirers of Australian assets and their advisers will need to conduct more extensive analysis on the nature of target businesses, to ascertain whether the target carries on a 'national security business'. In many cases, only the target will be in possession of the information needed to form a view.
  • This does not preclude a foreign person from making a hostile takeover bid for a target, nor a foreign person acquiring a direct interest (generally being a 10% or greater interest) in a target without the target's cooperation, where it is not certain if the target operates a national security business. This is because the FATA regulations already provide that a business is only a 'national security business' if it is publicly known, or could be known upon the making of reasonable inquiries, that the business is a national security business. But the onus remains on a potential acquirer to satisfy itself, after reviewing all public information and making reasonable inquiries, that a target does not operate a national security business – a task which will become more onerous with the expansion of the national security business definition.
  • The expanded national security business definition will also result in more foreign persons needing to seek FIRB approval to start new businesses. This is because the starting by a foreign person of a national security business can only occur with prior FIRB approval. Given the current lengthy FIRB assessment periods, this will undoubtedly impact business growth strategies.
  • It is also likely that more FIRB approvals will be granted subject to conditions, given the Government's tendency to impose conditions (such as governance, operational and data conditions) on approvals involving acquisitions of national security businesses.

Footnotes

  1. Certain terms in this section below have the meanings given in the SOCI Act or in specific industry legislation as specified in the SOCI Act.

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