Australia's use of sovereign shareholding in strategic defence: the Austal framework

The proposed issue of a "Sovereign Share" by ASX-listed shipbuilding company Austal Limited to the Commonwealth of Australia represents a phenomenon rarely, if ever, seen in Australian corporate governance. This issuances forms part of a strategic framework recently agreed upon between Austal and the Commonwealth, under which the Commonwealth will receive unique governance rights over an Austal subsidiary tasked with the construction and delivery of critical defence infrastructure.

Interestingly, this development follows the recent issuance of a "Golden Share" by U.S. Steel to the President of the United States as part of the package for approval for the acquisition of U.S. Steel by Nippon Steel Corporation.

Given the unique nature of the 'Sovereign Share' and its departure from more conventional mechanisms used to manage national security risks associated with corporate ownership, such as Foreign Investment Review Board (“FIRB”) approval processes and contractual protections embedded in government contracts, it is important to understand the rationale for its issuance and its implications for corporate control and governance, as explored below.

Overview of Austal’s Strategic Shipbuilding Agreement and the Sovereign Share

In August 2025, Austal finalised a landmark Strategic Shipbuilding Agreement ("SSA") with the Commonwealth. Under the SSA, a newly established special purpose vehicle and Austal subsidiary, Austal Defence Shipbuilding Australia ("Austal Defence Australia") will be appointed as the Commonwealth’s strategic shipbuilder for Tier-2 naval vessels, operating out of Austal’s Henderson shipyard in Western Australia. Austal Defence Australia will serve as the prime contractor, coordinating and integrating a network of subcontractors and suppliers across the state. A key objective of the SSA is to develop and embed a sovereign naval shipbuilding supply chain within Western Australia, enabling Australia to sustain a continuous shipbuilding capability while reducing dependence on foreign suppliers.

To safeguard its interest in maintaining continuous shipbuilding and to preserve its ability to ensure that Austal Defence Australia continues delivering on Commonwealth programs, the Commonwealth will be issued a single "Sovereign Share" in Austal Defence Australia. In parallel, it will enter into a Shareholders Deed with Austal to govern the affairs of the subsidiary. Under this arrangement, Austal, holding all ordinary shares, will retain day-to-day management control of Austal Defence Australia and will receive all associated economic benefits and bear all commercial risks of ownership. The Commonwealth, through the Sovereign Share, will be granted specific information and veto rights, as well as limited rights to direct the actions of Austal Defence Australia in certain circumstances. These rights are designed to protect the Commonwealth’s strategic objectives, particularly the development and retention of sovereign shipbuilding capability in Australia. In effect, if Austal were to pursue any action that could compromise Australia’s sovereign defence interests, such as selling the entity or repurposing the Henderson facility in a manner detrimental to national defence capability, the Commonwealth would have the authority, via the Sovereign Share, to intervene and prevent such actions.

Notably, the Shareholders’ Deed also grants the Commonwealth a call option to acquire 100% of the shares in Austal Defence Australia, effectively removing the subsidiary from Austal’s ownership, under certain defined circumstances. One such trigger is the termination of the SSA. Another, and of particular interest to the market, is the occurrence of a "Relevant Event" in relation to Austal. A "Relevant Event" is defined to include any third party gaining control of Austal; acquiring all or a substantial part of Austal's business or assets; or obtaining a relevant interest or other interest (including synthetic interests) in more than 20% of Austal’s shares, subject to specific exceptions and pre-agreed higher thresholds for existing major shareholders. If the call option is validly exercised, Austal would be required to sell Austal Defence Australia to the Commonwealth at fair market value, as determined by an independent accountant in accordance with agreed valuation principles and methodologies consistent with Australian accounting standards. Importantly, Austal has also committed to transferring its Henderson shipyard, associated assets, and the full production workforce to Austal Defence Australia as part of any such share transfer. This ensures that, should a change of control of Austal occur, the Commonwealth it able to retain full sovereign control over the Henderson operations and ongoing naval programs safeguarding Australia’s sovereign shipbuilding capability.

As an alternative to, or precursor for, exercising its call option in the event of a potential change of control transaction, the Commonwealth may require Austal Defence Australia to implement additional governance or security measures to address any national security concerns.

Interestingly, Austal has attracted takeover interest from South Korea's Hanwha, which first approached the company in late 2023. Hanwha returned in March, acquiring a direct 9.9% stake in Austal, along with an economic interest equivalent to another 9.9% of Austal shares through a cash-settled total return swap, though this arrangement does not grant Hanwha the right to physically acquire those shares. At the time of the acquisition, Hanwha stated it had “no intention of submitting a control proposal or making a takeover bid for the company, at this time.” More recently, Hanwha appears to have sought approval from FIRB to increase its stake in Austal to 19.9%.

Should Hanwha later decide to pursue a takeover of Austal, it would face additional regulatory hurdles under the new SSA and sovereign shareholding framework. In addition to obtaining approval from the FIRB, Hanwha would also require consent from the Commonwealth. Furthermore, due to Austal’s significant operations in the United States, any takeover would likely require regulatory clearance from U.S. authorities, including the Committee on Foreign Investment in the United States ("CFIUS").

Sovereign frameworks used in the United States and the United Kingdom

Similar to Australia, the United States has traditionally relied on regulatory and contractual mechanisms, rather than government shareholdings, to address national-security concerns in corporate ownership. Foreign investments that may affect national security are reviewed by CFIUS. For defence contractors that hold security clearances, the Defense Counterintelligence and Security Agency imposes “foreign ownership, control, or influence” mitigation arrangements. These arrangements include special security agreements, proxy agreements, and voting trusts. Each structure limits a foreign owner’s ability to direct sensitive business operations, often by requiring certain decisions to be made by U.S. citizen directors with the necessary security clearances. These measures do not involve the U.S. Government taking an equity interest in the company.

The 2025 Nippon Steel Corporation and U.S. Steel transaction is a recent rare exception. Nippon Steel Corporation successfully completed its long-sought takeover of U.S. Steel and entered into a National Security Agreement ("NSA") with the U.S Government in June 2025. As part of the NSA, the U.S Government received a single preferred share, referred to as a "Golden Share", which provides it with specific consent and veto rights over designated matters. These include, among others, the ability to block any attempt to redomicile U.S. Steel outside of the United States, as well as material acquisitions of competing businesses within the U.S. The Golden Share also grants the U.S. Government the right to appoint an independent director to the board. The Golden Share does not carry any rights to receive dividends and is non-transferable.

In contrast, the United Kingdom has long utilised "Special Shares" in strategic defence companies such as Rolls-Royce and BAE Systems as a mechanism to restrict foreign ownership and reserve certain decision-making powers for the UK Government. The Special Share in Rolls-Royce for example may only be issued to, and held by, the UK Government or a nominee acting on its behalf. Their consent is required for a defined list of actions, which are deemed to be variations of the rights attached to the Special Share. These include:

• amending or removing certain key provisions of the articles, such as those relating to British citizenship requirements for directors, restrictions on shareholdings by foreign persons, and other governance protections; and

• approving a voluntary winding up or dissolution of the company.

Additionally, the UK Government also has specific powers to block disposals of the whole or a material part of the assets of the “Nuclear Business” (defined as the design, development, manufacture, and sale of nuclear propulsion units/cores for submarines, and related support services) or of the group as a whole. In practice, this structure ensures that strategic assets, particularly the nuclear submarine propulsion business cannot be sold, restructured, or otherwise disposed of without UK Government consent.

Similarly, the Special Share in BAE Systems can only be issued to, and held by, the UK Government or a nominee and their consent is required before amending or removing certain provisions of the constitution of BAE Systems, including those:

• imposing UK citizenship requirements for directors and alternates, and for certain board and committee quorums/majorities; and

• relating to limitations on foreign shareholdings and voting power (minimum of 15% of votes reserved for UK holders).

The Special Share ranks ahead of ordinary shares for repayment of capital in a winding-up and uniquely includes a right to require redemption of the share at par or to convert it into an ordinary voting share in the company. This conversion mechanism appears to be a legacy provision carried over from the British Aerospace Act 1980. Substantively, the Special Share in BAE Systems functions as a structural safeguard, preserving UK control over board composition, governance processes, and voting power within a strategic defence contractor. It ensures that critical decision-making authority remains firmly in UK hands.