Amid growing geopolitical instability and uncertainty, investment in the defence sector is on the rise. At the same time, regulators are tightening trade and investment controls – particularly the screening of foreign investment. Australia's Foreign Investment Review Board (FIRB) regime specifically targets investments in 'national security businesses'. The national security business definition is not limited to Australian entities and can include foreign entities carrying on business in Australia. In this update, we unpack the concept of a national security business, and what it means for transactions in the defence sector.
What is a national security business?
The definition of national security business is multi-faceted. As a rule of thumb, it is helpful to think about national security businesses as falling into one (or more) of the following four categories:
- Critical infrastructure – businesses that hold certain interests in or are responsible for 'critical infrastructure assets', so defined under the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act);
- Telecommunications – businesses that are carriers or nominated carriage service providers to which the Telecommunications Act 1997 (Cth) applies;
- Critical goods, technology and services – businesses that develop, manufacture or supply 'critical goods' or 'critical technology' that are (or are intended to be) for a military or intelligence use and businesses that provide 'critical services' to defence or intelligence customers; and
- Sensitive or classified information – businesses that store or have access to security classified information or store, maintain, collect or have access to sensitive personal information of Australian defence or intelligence personnel.
The above is a summary only. There are important nuances in the definition and investors should seek advice to assess whether a business carries on a national security business.
Preliminary question – is there a business being carried on wholly or partly in Australia?
To establish that a business is a national security business, the first question to answer is whether the business is carried on wholly or partly in Australia. If not, the business will not be a national security business, no matter what the business produces. The FIRB rules do not comprehensively define what it means to carry on a business in Australia. In practice, some presence in or connection to Australia is required.
In assessing whether a business has a presence in or connection to Australia, investors should consider the relevant factors set out in Treasury's published guidance:
- physical presence in Australia (eg local employees, office space);
- the requirement for Australian regulatory approvals, and whether the business has an ABN;
- the requirement for the business to comply with Australian law;
- receipt of customer payments into an Australian bank account;
- whether the terms of the contract require the performance of certain obligations in Australia;
- use of an agent in Australia to assist with the business; and
- a website with an .au domain.
Note however that the above list is not exhaustive. Foreign investors should consider the full circumstances of the business to determine whether it is carried on wholly or partly in Australia. Importantly, it is not a requirement that the entity carrying on the business is an Australian entity. Businesses that have limited physical presence in Australia but deliver goods, technology or services in Australia under ongoing supply contracts may still be characterised as carrying on a business in Australia.
Critical defence industry assets
While the term 'critical infrastructure' often relates to civilian infrastructure, one of the critical infrastructure assets under the SOCI Act is a 'critical defence industry asset'. These are assets that are being supplied to the Department of Defence or Australian Defence Force under a contract that consists of or enables a critical defence capability. Critical defence capability is defined to include: material; technology; platforms; networks; systems; and services that are required in connection with the defence of Australia or national security. The upshot is that businesses that would not ordinarily be described as defence-sector businesses may be national security businesses if they support critical defence capability.
When are goods, technology or services 'critical'?
Treasury's guidance note on national security provides a useful starting point for assessing whether goods, technology and services are sufficiently 'critical' for national security business purposes. Prior to investing in businesses that supply goods, technology or services to defence or defence-sector customers, foreign investors should ask the following questions:
- Are the goods, technologies or services being provided vital to advancing Australia's national security? Anything that enables a core defence capability or platform will likely fall into this category.
- What would be the detriment to Australia's national security if the goods, technologies or services were not available or were misused? Where the exploitation of goods, technologies or services would result in significant harm, this suggests the goods, technologies or services are critical.
- Are the goods, technologies or services widely available, generic or 'off the shelf'? Where goods, technologies or services are customised or bespoke and are not easily substitutable, they are more likely to be deemed critical.
An important nuance to the test is that to be 'critical', goods and technologies must either be for or intended for defence or intelligence use. This does not mean that only arms or weapons or surveillance/intel collection systems are captured. Critical inputs into defence and intelligence systems and platforms can be within scope. Notably, there is no 'use' qualifier for services – a business (carried on wholly or partly in Australia) that supplies 'critical services' to defence and intelligence customers will be a national security business, irrespective of what those services provide or enable.
Access to security classified information
Businesses that store or have access to information that has a security classification (ie information classified as 'Protected' or higher within the Australian Government Protective Security Policy Framework or equivalent foreign classification) are national security businesses. This applies irrespective of whether the business provides critical goods, technology or services, meaning non-sensitive, non-defence specific businesses can be captured.
Having the capacity to access security classified information is enough to meet the test – even if that access is not routinely exercised. One key gating question investors can ask is whether the business requires any employees to hold security clearances to fulfil customer requirements under contracts. If so, this suggests that the business may be a national security business.
Sensitive information of Defence/ADF personnel
Businesses that store, maintain, collect or have access to sensitive personal information of employees of the Department of Defence, Australian Defence Force or national intelligence community agencies may be national security businesses. Information is sensitive if its disclosure could compromise Australia's national security. Investors should not lightly assume that information will not compromise Australia's national security if disclosed. Where businesses have any personal information of Australian Defence or intelligence personnel, investors should closely examine the nature of such information and carefully think through the potential consequences of its disclosure.
What does a ‘national security business’ characterisation mean for my transaction?
Foreign investors generally require approval through the FIRB process to acquire (directly or indirectly) an interest of 10% or more in an entity (Australian or foreign) that carries on a national security business. FIRB approval is also required for foreign investors to acquire an interest of 10% or more in the assets of a national security business. In both cases, the threshold can be less than 10% if the investor enters legal arrangements relating to the business or has certain influence or control over the business.
Transactions that occur offshore from Australia may require FIRB approval even where the target has no Australian subsidiaries if any of the target's subsidiaries carries on a national security business. It is critical that, where any business activity in Australia is identified, investors assess whether that business amounts to a national security business within the meaning of the FIRB rules. Failing to obtain the necessary FIRB approval can result in civil or criminal penalties.
Need for 'reasonable enquiries' on national security business criteria
A business is not considered to be a national security business unless it is publicly known, or could be known upon the making of reasonable enquiries, that the business meets the relevant criteria. Investors are expected to make reasonable enquiries to ascertain whether a target business satisfies the national security business criteria. However, what constitutes 'reasonable enquiries' depends largely on the transactional context and the information realistically available to the investor.
Friendly transactions
In private treaty M&A or a friendly takeover of a publicly listed target (whether on the ASX or a foreign securities exchange), the investor typically has access to target management as part of due diligence. In this context, reasonable enquiries typically entail asking the target management to complete a detailed national security business questionnaire. Investors rely on the target's responses to form a considered view on whether a national security business obligation is triggered.
Hostile transactions
In a hostile takeover of a publicly listed target (whether on the ASX or a foreign securities exchange), there is no practical scope to request target management to respond to a national security business questionnaire. Therefore, reasonable enquiries would be limited to publicly available information about the target group. This presents a challenge to foreign investors as publicly available information may not reveal any information that supports a conclusion that that target or any member of its group qualifies as a national security business.
The target, as an overt defence strategy, can itself assert that it or a member of its group is carrying on a national security business. In this case, the foreign bidder must amend its offer to include a FIRB condition. This can present a significant practical difficulty for the bidder because under most public takeover regimes it is generally not permissible for a bidder to introduce new conditions after the offer is publicly announced.
Where a bidder is unable to independently verify information provided by target management due to the hostile nature of a transaction, navigating FIRB's requirements can be particularly challenging, especially where the information available to the bidder is limited. We have assisted bidders in these circumstances, including advising on how to satisfy FIRB's reasonable enquiries expectations where access to relevant information is constrained. In these cases, careful legal drafting is critical to clearly articulate the enquiries undertaken, explain any limitations on information access and provide FIRB with a robust basis for accepting the bidder's conclusions.
Key considerations for foreign bidders in a hostile takeover include:
- document your reasonable enquiries – maintain clear records of the sources reviewed and the conclusions drawn;
- review all reasonably accessible public sources – a hostile context limits but does not eliminate the enquiry obligation and FIRB frequently accesses publicly available information when undertaking review and compliance processes;
- be prepared for defensive assertions by the target that it or a subsidiary is an NSB – consider how such an assertion may be responded to in the context of offer timetables that may not accommodate new regulatory conditions; and
- act quickly – early and proactive engagement with FIRB can assist in securing a timely outcome.
Well-crafted submissions that align with FIRB's expectations can materially reduce execution risk and maximise the prospects of a timely review process, allowing bidders to progress their takeover offers with minimal disruption.
What needs to be covered in your FIRB application?
Once a foreign investor has identified a national security business on the target side, they will need to notify the proposed transaction through Treasury's Foreign Investment Portal. Key points for foreign investors to cover in the portal submission are:
- what is the level of control the foreign investor will have over the national security business;
- are any changes planned for the national security business;
- what kind of sensitive information does the national security business hold, and how will data security be maintained; and
- what risks will the proposed transaction have for Australia's national security.
Practical tips and reminders
Under the pressure of transaction deadlines, it is tempting to treat the FIRB application as a 'tick and flick' exercise – especially if the target business only narrowly reaches the threshold of a national security business. In practice, providing complete and candid information in the FIRB application gives foreign investors the best chance of receiving approval promptly and with as few conditions as possible.
Foreign investors should also remember that FIRB approval may be required for internal reorganisations involving national security businesses. Foreign investors should be aware that once they obtain FIRB approval to acquire a national security business, a separate subsequent FIRB approval may be required to move the national security business pursuant to an internal reorganisation.
If foreign investors are unsure about whether a target business is a national security business, it is open to submit a notification to FIRB to get a definitive view. If FIRB determines the business is not a national security business, the foreign investor can withdraw the FIRB application or proceed to seek approval on a voluntary basis. Ideally, the transaction documents will allow the foreign investor to take either course of action and still satisfy the FIRB condition precedent.
Future reforms
On 19 May 2026 Treasury unveiled a package of proposals for reforming Australia's foreign investment regime (see our update on the reforms here). One such proposal is to give Government the power to 'quickly adjust mandatory notification requirements for investments in sensitive sectors in response to emerging or changing risks'. This new power could complement the national security business concept by allowing investments in defence-adjacent businesses to be screened. This might capture, for example, investments in AI, high-tech materials, critical minerals or other products in the defence supply chain.
The Australian Government has also announced that it is developing a set of national data centre principles in partnership with the states and territories to clarify what it means for investment in data centres to align with Australia's broader national interests. While the national data centre principles are expected to focus on matters such as power requirements, grid connection, energy efficiency and water usage, as part of this policy focus on data centres, the Government may also seek to clarify the foreign investment position for data centres, including whether to prescribe or adjust the threshold at which data centres constitute critical infrastructure, and data centre related businesses constitute national security businesses, for FIRB purposes.
Whatever final shape the future FIRB reforms take, foreign investors can safely assume that the trend in Australia (and globally) will be for greater regulatory scrutiny of investments in the defence sector. To capitalise on the significant commercial opportunities in this space, while at the same time navigating compliance with the FIRB regime, foreign investors should seek advice well ahead of proposed transactions. Doing so will help minimise the risk of the FIRB process delaying or even blocking investments.
