03 Feb 2022

Foreign investment threshold reduced to 10% for expanded list of Australian businesses deemed to be "critical"

By Geoff Hoffman, Samy Mansour and Stuart MacGregor

Foreign investors looking to acquire businesses in sectors now considered "critical" will need to carefully evaluate (and factor into their transaction processes and timelines) whether they will need to obtain FIRB approval (including engagement with the sellers / target) and, if so, when to approach FIRB.

Amendments to the Security of Critical Infrastructure Act 2018 (Cth) (the SOCI Act) which came into effect on 14 December 2021 have expanded the scope of what is considered a "national security business" under Australia's foreign investment laws.

This means that all foreign investors must obtain prior approval from the Foreign Investment Review Board (FIRB) for investments of 10% or more in this expanded list of Australian companies, regardless of the value of the investment.

These changes apply to any investments made after 14 December 2021 in a significant number of "critical" Australian businesses in the following sectors:

  • financial services and banking;
  • telecommunications;
  • energy;
  • food & grocery;
  • health;
  • data centres and cloud providers;
  • defence;
  • higher education and research;
  • water and sewage;
  • airports and air transport and cargo; and
  • freight services and public transport.

What's changed for "critical infrastructure assets"

Since 1 January 2021, under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA Act), Australia has had a mandatory pre-approval regime for any proposed acquisition of a direct interest (10% or greater) by a foreign person in a "national security business", regardless of the value of the investment.

This is a much stricter regime than the "standard" foreign investment regime for Australian entities and businesses which generally only requires mandatory pre-approval of investments of 20% or more and excludes investments below the relevant financial threshold (currently $AUD289m for non-treaty country investors).

In addition to the traditional defence and security-related businesses, "national security businesses" are defined to include owners and operators of "critical infrastructure assets". Until recently these "critical infrastructure assets" were limited to a defined list of electricity, maritime ports, water and gas assets.

However, the amendments to the SOCI Act have significantly expanded the list of "critical infrastructure assets". This expanded list of assets (and the businesses that own and operate them) are deemed to be "national security businesses"  – and so any proposed acquisition of a direct interest (10% or greater) by a foreign person in any of those business now requires prior FIRB approval, regardless of the value of the business.

Impact on offshore transactions

The FATA regime for "national security businesses" (including the owners and operators of "critical infrastructure assets') also requires mandatory pre-approval of offshore investments if a foreign person acquires an interest of 20% or more in an offshore company which has a subsidiary that is a "national security business" (regardless of the value of that "national security business"). The direct interest (10% or more) test is applied at the Australian entity level  – but a 20% interest level is applied for the purposes of upstream tracing of interests.

The amendments to the SOCI Act therefore mean that a significant expanded class of offshore investments that were previously notifiable on a voluntary basis are now subject to the mandatory pre-approval regime.

Expanded list of "critical infrastructure assets"

Set out below is a general guide to the expanded scope of "critical infrastructure assets" and the relevant entities which own or operate those assets which are now subject to the mandatory FIRB approval regime for the acquisition of direct interests (10% or more) by foreign investors.

The list does not include assets or businesses which are voluntarily notifiable and which FIRB Guidance recommends be notified owing to their relevance to "national security" (noting that the Treasurer retains a "call in power" on the basis of national security concerns in respect of such transactions, if they are not voluntarily notified).

The list also does not include other businesses which are "national security businesses" for other reasons (eg. suppliers of services, technology or equipment to defence or security services). For further guidance, refer to the FIRB Guidance Notes, particularly Guidance Note 8 (National Security) which was refreshed in December 2021 and includes more detail on the new updates. 

Mandatory FIRB notification – relevant assets and entities

Communications

Telecommunications

Relevant entities: Entities that are "telecommunications carriers" (owners and operators or telecommunications network assets and infrastructure) and telecommunications carriage service providers – being all businesses that sell telecommunications services to residential and small business customers, including telephone services, mobile services, internet access or VoIP calls.

There are approximately 350 licensed telecommunications carriers in Australia. The list of carriage service providers is much longer, and is estimated to be more than 2,000 businesses.

Broadcasting assets

Relevant entities: An entity that owns or operates broadcasting transmission assets and operates from, or intends to operate from, at least 50 different sites. It also includes TX Australia Pty Ltd (a joint venture owned by the television broadcasters Channel 7 and Channel 9).

au Domain name system

Relevant entities: .au Domain Administration Ltd (ABN 38 079 009 340) or any entity that administers the ".au" country code Top Level Domain.

Financial services and markets

Banks

Relevant entities: An authorised deposit taking institution (ADI) which has assets over $50 billion. This includes the Commonwealth Bank of Australia, Westpac Banking Corporation, Australia and New Zealand Banking Group, National Australia Bank and Macquarie Bank. The Government estimates that this is likely to include up to 10 Australian ADIs.

Superannuation funds

Relevant entities: A registrable superannuation entity that holds assets over $20 billion. This includes Commonwealth Superannuation Corporation, AustralianSuper, Qsuper, Aware Super, UniSuper in a total of more than 20 superannuation funds (according to Government estimates).

Insurers

Relevant entities: An entity that carries on insurance business, life insurance business or health insurance business 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). The Government estimates that this is likely to include around 15 insurance businesses, 10 private health insurance businesses and 10 life insurance businesses.

Financial market and payment system businesses

Financial markets: An entity that owns or operates the holder of a Tier 1 market licence under the Corporations Act and meets specified turnover thresholds.

Clearing and settlement facilities: An Australian incorporated entity that owns or operates the holder of an Australian clearing and settlement facility licence or a related body corporate of that licence holder that is required to comply with the financial stability standards under the Corporations Act.

Payment systems: Any entity that owns or operates a payment system that is critical to the security and reliability of the financial services and markets sector – including the following payment systems – Mastercard, Visa, EFTPOS and New Payments Platform.          

Derivative trade repositories: Any entity that owns or operates the holder of an Australian derivative trade repository licence incorporated in Australia (or a related body corporate of that holder) where the repository has at least $20 trillion average daily notional value of outstanding transactions.

Benchmark administrators: An entity that owns or operates the holder of a benchmark administrator licence or a related body corporate of that licence holder and administer a benchmark that is declared under the Corporations Act.

Data storage and processing

Relevant entities: An entity which owns or operates 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".

In addition to the major providers (Amazon, IBM and Equinix) there are an estimated 780 business providing these kinds of services in Australia. The Government estimates that the definition will capture at least 100 data centre entities and at least 30 cloud service providers.

Defence

Relevant entities: Any entity which supplies a "critical defence industry asset" to the Defence Department, or the Australian Defence Force, under a contract and consists of, or enables, a critical defence capability.

Higher education and research

Relevant entities: The owner or operator of a university that is registered in the Australian University category of the National Register of Higher Education Providers (eg. Australian National University, University of Sydney, University of Melbourne, University of Queensland).

Energy

Electricity

Relevant entities: These include owners and operators of:

  • 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 contracted to provide a system restart ancillary service; or
    • has an installed capacity of at least 30 MW,

and is connected to a wholesale electricity market.

The capacity of the relevant generation station was previously much higher (1,400MW in the case of New South Wales, for example). The reduced capacity requirement significantly expands the number of assets (and entities) falling within the regime.

Gas

Relevant entities: These are largely unchanged, and include owners and operators of:

  • gas processing facilities;
  • gas storage facilities;
  • networks or systems for the distribution of gas; or
  • gas transmission pipelines,

that meet specified size and capacity criteria.

Energy market operators

Relevant entities: Australian Energy Market Operator Limited, Power and Water Corporation, Regional Power Corporation (Horizon Power), or Electricity Networks Corporation (Western Power).

Liquid fuel

Relevant entities: An entity that owns or operates any of the following liquid fuel assets:

  • the liquid fuel refineries at Corio (Victoria) and Lytton (Queensland);
  • 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 with a storage capacity of more than 50 megalitres of liquid fuel.

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

Food and grocery

Relevant entities: The owners of the following food and grocery networks: Aldi Pty Limited, Coles Group Limited, Woolworths Group Limited and MetCash Trading Limited or their subsidiaries. 

Healthcare and medical

Relevant entities: An entity that owns or operates a hospital that has a general intensive care unit.

Transport

Ports

Relevant entities: This is unchanged and still includes any entity that owns or operates any of the 11 ports specified as critical ports for the purposes of the SOCI Act.

Freight infrastructure asset

Relevant entities: An entity that owns or operates one or more of the intermodal terminals listed in rules made under the SOCI Act. There are currently 14 such terminals and they are currently owned and operated by Pacific National, SCT Logistics, Victrack, Linfox and TasRail / IPEC.

Freight services asset

Relevant entities: An entity that has an annual revenue of at least $150 million and provides a freight transport (on road, rail or water) or freight forwarding service that involves the transport or storage of food and groceries for Aldi, Coles, Metcash or Woolworths, registered therapeutic goods, certain medicines, liquid fuel from critical liquid fuel assets, 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".

Public transport

Relevant entities: An entity that owns or operates a public transport network or system that is managed by a single entity and is capable of handling at least 5 million passenger journeys per month.

Aviation

Airports: An airport or an entity that is an airport operator (as defined by the Aviation Transport Security Act 2004).

Aircraft operators: An entity that is an aircraft operator used in connection with the provision of an air service (as defined by the Aviation Transport Security Act 2004).

Air cargo agents: An entity that is a regulated air cargo agent used in connection with the provision of an air service (as defined by the Aviation Transport Security Act 2004).

Water and sewage

Critical water asset

Relevant entities: This is unchanged and still includes any entity that owns or operates a water or sewerage system or network that ultimately delivers services to at least 100,000 water connections or 100,000 sewerage connections.

What this means for businesses and foreign investors

Foreign investors looking to acquire businesses in sectors now considered "critical" will need to carefully evaluate (and factor into their transaction processes and timelines) whether they will need to obtain FIRB approval (including engagement with the sellers / target) and, if so, when to approach FIRB. Sellers will also need to consider whether buyer foreign investment approval is required and, if so, its impact on sale processes.

Thanks to Vanessa Jan and Danielle Crowe for their help with this article.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.