The FIRB regime: what foreign investors in technology need to know

Foreign investment in Australian technology is rarely “just another deal” anymore.

Over recent years, the Australian Government’s foreign investment regime has evolved to balance facilitating investment from foreign parties with ensuring national security. This is aptly demonstrated by how the framework addresses the acquisition of interests in critical sectors, especially technology, where regulatory scrutiny has increased.

For foreign investors and Australian technology businesses alike, Foreign Investment Review Board (FIRB) approval is no longer just a regulatory formality, but a factor that can materially affect transaction timing, structure and post-completion operations.

When FIRB treats technology as a national security asset

With the national framework jointly administered by the FIRB and Treasury, foreign investors seeking to acquire interests in Australian companies are required to notify and seek approval from the FIRB should the nature of the action be ‘notifiable’ or ‘significant’. However, investments in technology companies deemed to be ‘national security businesses’ attract a higher degree of scrutiny under the regime.

Foreign investors must make a compulsory foreign investment proposal under the regime to acquire any direct interest in a national security business (being an interest of at least 10%, or lower if the interest conveys influence or control), requiring mandatory notification and approval from the Treasurer.

Under the Foreign Acquisitions and Takeovers Regulation 2015 (Cth), a ‘national security business’ is broadly defined but expressly includes businesses involved in ‘critical infrastructure assets’, which extends to critical technology systems and services supporting military or intelligence use, defence assets, telecommunications carriers, domain name systems and data storage and processing systems to the extent captured by the legislation.

Why sensitive data is driving FIRB attention

The key role that national security businesses play in handling and controlling sensitive data, as opposed to more traditional control metrics, is a central consideration of the regime that designates foreign acquisitions in such businesses as high-risk.

This concern for the control of such data extends the range of businesses that are likely to come under scrutiny in the approval process beyond the aforementioned sectors and into areas including the health sector and energy providers, where foreign investors may elect to voluntarily seek investment approval as a means of demonstrating that their control of large sensitive datasets is aligned with the national interest.

What FIRB approval conditions can mean in practice

In the event that an approval, formally known as a ‘no-objection notification’, is issued, it is within the Treasurer’s power to impose binding conditions with which the foreign investor must comply to retain its interest. Such conditions are more likely to apply to investments that are considered high-risk under the FIRB regime to preserve Australia’s national interest and can be wide-ranging in their operational and commercial impact.

Such conditions can include:

• Enhanced reporting conditions, such as independent compliance audits;
• How sensitive data is treated, stored and accessed, including the policies and systems implemented (for example, requiring data to be stored and processed in onshore Australian facilities);
• The composition and characteristics of the company’s board and governance, including whether a certain proportion of directors must be Australian citizens; and
• Measures to mitigate the acquisition’s impact on the Australian community and economy, such as requiring the company to maintain its headquarters in Australia.

What this means for investors and target companies

In light of the approach taken towards national security by the FIRB regime and the deep integration of sensitive information within companies heavily based in technology, it is evident that foreign investors need to be attuned to this heightened scrutiny and display foresight by preparing to comply with any potential FIRB requirements from the preliminary stages of an acquisition.

Foreign investors should also extend preliminary considerations beyond typical commercial factors and contemplate the logistics of approval being granted, subject to conditions and continued compliance requirements.

While Australia remains accessible to foreign investors seeking to acquire interests in technology-related companies, successful and efficient acquisitions will be characterised by foresight and preparedness to comply with the regulatory requirements foreign investors may encounter under the FIRB regime.

Navigating FIRB risk in technology transactions requires careful planning and early engagement with the regulatory framework. Macpherson Kelley’s experts regularly advise foreign investors and Australian businesses on FIRB approvals, national security considerations and transaction structuring. For further information or assistance, please contact a member of our team.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.