How will the proposed FIRB reforms impact investment in the health and life sciences sector?

By Alison Choy Flannigan, Conrad Smith and Lauren Krejci

The exposure drafts of the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 (Bill) and Foreign Investment Reform (Protecting Australia’s National Security) (National Security Business) Regulations 2020 (Draft Regulations) were released for public consultation on 31 July 2020.

The Bill and Draft Regulations are the first tranche of legislation the Australian Government is proposing to introduce as part of what is set to be the most comprehensive reforms to Australia’s foreign investment review framework in more than 20 years. The proposed legislation:

• introduces a new national security test;
• amends the definition of ‘Foreign Government Investor’;
• strengthens the enforcement of FIRB conditions and an increased penalty regime; and
• implements other foreign investment regime integrity measures.

The key aspect of the Bill and Draft Regulation for the health and life sciences sector is the new national security test (including the new definition of a ‘national security businesses’ which will be subject to it) together with the Treasurer’s proposed ‘call in’ and ‘last resort’ powers that will give the Treasurer extensive authority to review and make orders over a wide range of foreign investment on national security grounds.

These changes, if adopted, are set to commence on 1 January 2021. Comments on the exposure draft are due by 31 August 2020.

The new ‘national security test’

The Bill introduces a new category of actions called ‘notifiable national security actions’, which must be notified to FIRB regardless of the value of the investment.

What is a direct interest?

These actions involve a foreign person acquiring a ‘direct interest’ in a ‘national security business’ being either:

• an interest of 10% or more in the business entity;
• 5% or more if the foreign person has a legal arrangement in place with the target business; or
• any interest where the foreign person is in a position to influence or participate in the central management of the business or to influence, participate in, or determine its policies)[1].

What is a ‘national security business’ and how is it relevant to Australia’s health and life sciences sector?

Relevantly for investors and investees in Australia’s health and life sciences sector, the Draft Regulations define a ‘national security business’ to include:

• a business that supplies critical goods that are, or intended to be, for a military end-use by defence and intelligence personnel in activities relating to Australia’s national security or the defence force of another country in activities that may affect Australia’s national security;
• a business that provides, or intends to provide, critical services to defence and intelligence personnel in activities relating to Australia’s national security or the defence force of another country in activities that may affect Australia’s national security;
• a business that stores or maintains personal information, collected by the Australian Defence Force, the Defence Department or an agency in the national intelligence community of persons who are covered by the definition of defence and intelligence personnel and which, if accessed, could compromise Australia’s national security; and
• a business that collects, as part of an arrangement with the Australian Defence Force, the Defence Department or an agency in the national intelligence community, personal information of persons who are covered by the definition of defence and intelligence personnel and which, if disclosed, could compromise Australia’s national security.

The breadth of the ‘national security business’ definition will likely capture hospitals that provide health services to the Australian Defence Force (ADF), primary health carers with ADF health records and their suppliers including IT, pharmaceutical and medical devices suppliers that may hold personal information of defence or intelligence personnel.

There are a number of issues which arise in relation to the draft wording including:

• what is the meaning of ‘intends to provide’; and
• the impact on multi-national companies that may supply to multiple governments internationally – how may that affect Australia’s national security?

Streamlining less sensitive investments

The Government will exempt certain investments made by entities which are currently classified as ‘Foreign Government Investors’. This exemption will apply only where no foreign government investor has, or could be perceived to have, influence or control over the investment or operational decisions of the entity or any of its underlying assets.

New treasurer powers

‘Call in’

The Bill also proposes to empower the Treasurer to ‘call in’ significant actions that have not been notified and certain actions currently not covered by the Foreign Acquisitions and Takeovers Act 1975 (Cth) for review on national security grounds.

Under this new power, the Treasurer may impose conditions on the action, require that the person divests assets or prohibit the action.

The Treasurer will not be able to exercise the ‘call in’ power if an action has already been the subject of a no objection notification or exemption certificate issued by the FIRB.

The time limit by which the Treasurer must ‘call in’ an investment for review is not specified in the Bill or Draft Regulations, it will form part of the second tranche of draft legislation to be released in September.

‘Last resort’

Under exceptional circumstances, the Treasurer will have a final opportunity to review an action for which a no objection notification has been given if a national security risk arises.

There are a number of factors that must be present to enliven the power. For example, if the nature of the foreign person changes or the Treasurer becomes aware of an omission or misstatement by the foreign person after the no objection notification is given.

Further, there are certain conditions that must be met. The Treasurer must conduct a review, receive advice from the national intelligence community and conclude that existing regulatory systems will not adequately mitigate the national security risk.

After these requirements have been met, the Treasurer may impose conditions, vary or revoke conditions or prohibit an action.

Further information on the proposed amendments is available in the ‘Foreign investment reforms’ publications on the Treasury’s website. The Treasury’s call for stakeholder views can be found here.

In releasing the Bill and Draft Regulations, the Government has advised that it expects that the overwhelming majority of investments will not be called in for review.

Hall & Wilcox has a FIRB app which has been designed to help foreign investors, investees and advisors determine whether Foreign Investment Review Board approval is required before a proposed transaction or acquisition is implemented.

The app is updated as the FIRB rules and requirements change (including during COVID-19) and is a useful tool.

[1] Section 16 Foreign Acquisitions and Takeovers Regulation 2015 (Cth)