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Australia:
Draft FIRB legislation: what are the implications for Australian technology transactions?
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The Federal Treasurer has released an exposure draft of
the legislation that will implement his
previously announced reforms to
Australia’s foreign investment framework.
Among other changes, the legislation will introduce a zero
dollar screening threshold on foreign investments into any
‘national security business’. This will mean that any
direct investment by a foreigner into a national security business
will require FIRB approval.
In our
June 2020 article, we
suggested that this new national security test is likely to have
broad application to transactions in the communications, technology
and data sectors. The draft legislation has provided further line
of sight on the likely implications of the changes for technology
transactions undertaken by foreign parties in Australia.
What technology assets will be subject to the new national
security test?
The exposure draft provides further clarity on the types of
communications, technology and data assets that will constitute a
‘national security business’ and will therefore be subject
to the zero dollar screening threshold. They are:
-
Telecommunication carriers and carriage service
providers regulated under the Telecommunications Act
1997.
This includes VOIP service providers, virtual network operators
and internet service providers. There had been some concern
following the Treasurer’s initial announcement that the
definition would extend to other business regulated under the
Telecommunications Act 1997, such as social media companies and
video streaming services. The exposure draft has confirmed this
will not be the case. -
Businesses that develop, manufacture or supply critical
technologies with a military use or which are intended for a
military use.
The definition captures any critical technology that is used by
the Australian defence force or intelligence community, by any of
their respective contractors or suppliers or by a foreign defence
force in a way that may affect Australia’s national security.
This will capture emerging military technologies, irrespective of
whether the technology has been deployed or commercialised.
Businesses that supply critical technologies used by the defence
force or the intelligence community will be subject to a zero
dollar threshold, even where the technology does not have an
express military purpose, or the military use is not the main
application of the technology. The draft explanatory memorandum
notes that many such technologies will not be considered to be
‘critical’ and will sit outside the test on that basis.
However, is not clear how a foreign buyer is to make that
determination, as the exposure draft gives no guidance on when
particular technologies are to be considered ‘critical’.
The explanatory memorandum suggests that buyers look to publicly
available Defence documents, such as the Defence Industry Policy
Statement, Defence Industrial Capability Plan, and the Defence and
Strategic Goods List for guidance to form a view on whether the
target technology is ‘critical’. Some further guidance on
that point would assist the final legislation. -
Businesses that store or have access to information that
has a security classification.
This will capture data centre providers and hosted platform
services working for Australia defence forces and intelligence
agencies. -
Businesses that store or maintain personal information
of defence force personnel collected by the Australian defence
force or intelligence community which, if disclosed, could
compromise Australia’s national security and businesses that
collect such information as part of an arrangement with defence or
an intelligence agency.
Significantly, this category only captures data sets that are
collected by or on behalf of defence or intelligence agencies. This
means that commercial data sets that include personal information
of defence force personnel (such as shopper loyalty schemes) will
not be caught. -
Businesses overseen by the Critical Infrastructure
Centre (CIC), which at present, includes owners and operators of
electricity or gas supply, ports and water
infrastructure.
The list of assets overseen by the CIC is dynamic and can change
over time. As discussed in
our 2019 article, there is speculation that the purview of the
CIC may be extended to cover nationally significant data
assets.
Foreign buyers of technology assets will need to determine at an
early stage whether the target is a ‘national security
business’. If so, foreign buyers should endeavour to define the
national security concerns presented by the proposed transaction
and consider how they might be addressed in the FIRB filing or
mitigated by way of undertakings. In this regard, buyers should be
mindful of FIRB’s growing preference to deal with data security
issues by way of access undertakings (
see our earlier article here).
Unfortunately, based on the definition on the exposure draft, it
will be difficult for a foreign buyer to confidently assess whether
or not the target is a ‘national security business’ without
the seller’s help, as it assumes a relatively detailed level of
knowledge about the target’s client base and the use of its
technologies.
New call-in powers for the Treasurer
The exposure draft gives the Treasurer new powers to call-in for
review any investment which is not otherwise notifiable or already
subject to FIRB oversight on national security grounds. Where an
action is called in, it will be subject to FIRB review in much the
same way as if it had been required to be notified to FIRB in the
first place. Transactions can be called in any time, including
after completion. In these circumstances, the Treasurer will have
the power to either require a divestment of the interest by a
foreign person or terminate the relevant agreement.
The call-in powers apply to ‘reviewable national security
actions’. Interestingly, this concept goes well beyond
acquisitions and investments that would traditionally have been
subject to FIRB review. For example, it captures any significant
agreement which gives a foreign person the right to use the assets
of an Australian business. This could conceivably capture a
licensing deal for a technology product or data sharing
arrangement.
This extension of the Treasurer’s review powers brings
Australia closer to the position in the US where the Committee on
Foreign Investment in the United States (CFIUS)
has the power to review broad categories of transactions which give
a foreign party access to non-public technologies. It will be
important for FIRB and the Treasurer to provide guidance to the
market on the circumstances in which the call-in power will be
used. Without that guidance, foreign parties may feel the need to
voluntarily notify FIRB of relatively benign actions, which could
clog the approval process.
Last resort powers
The exposure draft also gives the Treasurer the right to
reassess and impose conditions on or to unwind previously approved
foreign investments. Known as the ‘last resort powers’,
this right will apply where there is a change in circumstances
after the initial assessment which gives rise to new national
security risks. This includes a material change in the activities
of a business or where the circumstances of the market become
materially different. This is particularly relevant to technology
companies which tend to be focused on the development of new
products and are more likely to experience rapid growth in their
customer base.
The last resort powers will only be available for actions that
were notified to the Treasurer on or after 1 January 2021.
Next steps
Public submissions on the draft legislation close on 31 August
2020 and the Government intends for the new regime to commence from
the start of 2021.
In the meantime, foreign investors will need to comply
with
the temporary COVID-19 measures and
should remain mindful of the changing regulatory landscape when
planning foreign investments in Australian communication, data and
technology businesses.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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