Defence meets venture capital: navigating Australia's foreign investment and merger control laws

Australia's defence sector presents significant opportunities for inbound investment. The Australian Government's recently announced co-investment plan — worth up to A$1 billion — signals a clear intent to attract private capital into Australian defence and dual-use technologies. We recently shared insights on the Australian Government’s plan and the associated opportunities, which is available here.

This initiative arrives against a backdrop of mounting global pressure to increase defence spending, including following the 2025 NATO summit where member states agreed to increase defence spending to 5% of GDP annually by 2035.[1] The Australian Government has specifically been subject to increased pressure from the United States with bipartisan sentiment in Washington that Australia should increase its approximate 2.02% of GDP defence spend to the 3.5% of GDP the Trump administration seeks from its allies.[2]

This article outlines the key regulatory obligations foreign investors must navigate when entering Australia's defence and dual-use technology sector, specifically under Australia’s foreign investment regime administered by the Foreign Investment Review Board (FIRB) and Australia's new mandatory merger control regime administered by the Australian Competition and Consumer Commission (ACCC).

FIRB approval: what investors need to know

Proposed foreign investments in the Australian defence sector require careful assessment to determine whether mandatory notification and approval is required under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), which is administered by FIRB on behalf of the Federal Treasurer.  Under this framework, a foreign person must notify and obtain approval before taking a 'notifiable national security action', which includes any proposal to start a national security business, to acquire a direct interest in a national security business, to acquire a direct interest in an entity that carries on a national security business, or to acquire an interest in Australian land that is national security land. 

Relevantly, a 'national security business' includes defence and intelligence related service providers and businesses that store or have access to information that has a security classification, as well as any business that develops, manufactures or supplies critical goods or critical technology for, or intended for, a military or intelligence use by defence and intelligence personnel, the defence force of another country, or a foreign intelligence agency, or that provides or intends to provide critical services to those persons.[3] This definition will cover the types of investment envisaged by the Australian Government's recently announced co-investment plan.

Importantly for venture capital (VC) investors, the concept of a 'direct interest' under the FATA captures not only holdings of 10% or more (alone or with associates), but also holdings of any percentage where the investor, alone or with one or more associates, is in a position to influence or participate in the central management and control of the entity or business, or to influence, participate in or determine its policy. This is a critical point of distinction from many other foreign investment regimes: board appointment rights, observer rights, veto rights and other governance entitlements commonly negotiated in VC transactions need to be carefully considered, even where the equity stake is below 10%.

VC fund managers will need to carefully assess whether the fund vehicle, and/or its general partner or trustee,  is a ‘foreign person’ or a ‘foreign government investor’ under the FATA.  An entity will be a foreign person if a single foreign person holds a substantial interest of 20% or more, or if two or more foreign persons together hold an aggregate substantial interest of 40% or more.  An entity will be a foreign government investor if a single foreign government investor holds a substantial interest of 20% or more, or if multiple foreign government investors (from one or more countries) together hold an aggregate substantial interest of 40% or more.  This analysis is particularly relevant for VC funds with sovereign wealth fund or state‑owned enterprise limited partners, as classification as a foreign government investor can significantly expand FIRB approval requirements, including $0 monetary thresholds for certain investments.

In determining whether a fund vehicle, general partner or trustee is a ‘foreign person’ or a ‘foreign government investor’, investors will also need to consider the tracing provisions under the FATA which allow interests to be traced through ownership and control structures, identifying indirect foreign persons or foreign government interests that may cause the entity to be treated as a foreign person or foreign government investor for FATA purposes.  This is of particular significance for VC fund structures with foreign limited partners, where tracing may produce a different characterisation from a surface-level assessment of the fund's ownership.

As noted above, mandatory notification also applies to starting a national security business, which requires analysis of the business currently undertaken by an entity and identification of any sufficiently different activities already carried out by the investor.  This is particularly important for existing entities seeking investment under the co-contribution regime, where the strategy includes pivoting or expanding offerings into the defence sector, such as by entering new defence contracts or joint ventures that constitute starting a national security business.

Where notification is required and undertaken, the transaction will then be assessed on behalf of the Treasurer against either the national interest test or the national security test to determine whether approval will be provided.  The applicable test will depend on the nature of the action and investors should seek advice as to which test applies in their specific circumstances.

Even where mandatory notification is not triggered, the Treasurer retains a 'call-in' power to review 'reviewable national security actions' on national security grounds, exercisable up to 10 years after the action has been taken.  A foreign person may extinguish this power by voluntarily notifying FIRB, which is encouraged for a number of entities within the defence sector, including those with defence contracts or that develop, manufacture or supply critical goods, services or technologies.  Investors should also note the Treasurer's separate 'last resort power', which permits the Treasurer to review previously approved investments if exceptional circumstances arise, including material changes in the investor's business, structure or activities, and, as a last resort, require divestment. 

The FATA framework is complex and goes beyond the key concepts discussed above.  We encourage all investors to seek expert advice before proceeding with an investment or preparing a FIRB application, whether for an individual action or for a series of actions.

ACCC approval: Australia's new merger control regime

Australia's merger approval regime has undergone significant change following the introduction of a new mandatory approval framework on 1 January 2026, discussed by our Competition team in an article, available here.

Under the new mandatory regime, businesses can no longer elect whether to notify based solely on their own assessment of competitive risk.  Where the relevant thresholds are met and no exclusions apply, notification and approval by the ACCC is required prior to completion — regardless of whether the parties consider the transaction to raise a competition concern.  If a notifiable transaction is not notified to and approved by the ACCC before completion, it will automatically be void.[4]

The regime has also undergone considerable change since its introduction, including amendments targeting specific voting power increases in entities irrespective of whether investors gain control as a result of the transaction, for example, voting power movements from 20% or below to over 20% for unlisted and not widely held body corporates. These thresholds are due to come into effect on 1 April 2026.

This is particularly onerous for VC funds that hold minority stakes in certain entities, which may soon be notifiable even without control, and for investments in similar businesses which can be captured under the creeping or serial acquisition thresholds where multiple acquisitions have occurred over the prior 3 years.  For those unfamiliar, 'creeping' or 'serial' acquisitions refer to a series of acquisitions where the shares or assets acquired under those acquisitions relate, directly or indirectly, to the carrying on of a business that predominantly involves the supply or acquisition of the same goods or services, or goods and services that are substitutable for, or otherwise competitive with, each other (disregarding any geographic factors or limitations), which are aggregated for the purpose of assessing whether the relevant thresholds are met.

In addition to considering whether approval is required, investors should be aware of the time frames for processing applications, which vary from approximately 10 business days for simple waiver applications to 6-9 months for complex transactions requiring consideration of whether the acquisition has the effect, or likely effect, of substantially lessening competition.[5]

These time frames will need to be factored into VC fund investment proposals and deal structuring.  In particular, the mandatory standstill obligations applicable to notifiable transactions may disrupt traditional transaction timetables, giving rise to risks of delay or misalignment in relation to financing commitments, capital call and drawdown schedules, and exit timing where the relevant thresholds are triggered.

The amendments to the merger regime also directly target acquisitions by large funds through the introduced serial and creeping acquisition thresholds, meaning VC funds should exercise caution and seek expert advice to assess whether approval is required in relation to a single transaction or a series of transactions. 

Investors should also be aware that certain information disclosed during the approval process is maintained on the ACCC mergers and acquisitions public register.  Appropriate measures should accordingly be taken to prevent inadvertent disclosure of sensitive or classified information, having particular regard to the entity’s confidentiality requirements, security clearance and other contractual and legal obligations - including engagement with the ACCC to prevent such disclosures.

Key takeaways and next steps

The co-contribution regime presents compelling opportunities for inbound investment into Australia’s defence and dual-use technology sector.  However, the dual regulatory burden imposed by FIRB and the ACCC's new mandatory merger control regime means that navigating this opportunity requires careful advance planning.  Early engagement with both approval processes — rather than treating them as a late-stage transaction step — will be key to avoiding delays, managing confidentiality risks, and positioning investments for success.  The interaction between the Government's co-investment framework and the regulatory pathway also raises questions that are still evolving, making specialist advice all the more important.

Investors seeking to navigate these regulatory requirements and position themselves to benefit from the co-contribution framework are encouraged to contact our Corporate M&A team, supported by our Competition team, both of whom have deep experience advising on Australian defence transactions