14 August, 2016
There has been no indication that the changes to Australian foreign investment rules for the agricultural sector have limited foreign investment in agribusiness. The Treasurer’s message is that investment is welcome where it is in the national interest.
Summary
There has been no indication that the significant changes made to Australia’s foreign investment rules for the agricultural sector in 2015 have limited the amount of foreign investment into Australian agribusiness.
The Treasurer’s consistent message is that foreign investment is welcome where it is consistent with Australia’s national interests.
In the context of public criticism regarding sales of agricultural interests to foreign investors, there has been a clear focus on identifying the relevant national interest concerns and ensuring the national interest test is met. This has been evident in the Treasurer’s public comments on the S Kidman and Co. (Kidman) and Van Diemen’s Land Company (VDL) applications.1
The identification and satisfaction of national interest matters has led to added timeframes in the FIRB process which has caused problems in competitive bid processes.
Continued foreign investment in Australian agribusiness
Foreign Investment Review Board – Annual Report 14/152
The Annual Report for 2014 – 2015 published by the Foreign Investment Review Board (FIRB) includes the period since the lower screening threshold for agricultural land was introduced on 1 March 2015. The Report found that the increased value of investment into the agricultural, forestry and fishing sector over the 2013 – 2014 period could be linked to that change.3
The Report noted that 17 proposals were approved for agricultural land which would not have been captured previously. Proposed investment in the agricultural, forestry and fishing sector increased from $3.4billion in 2013 – 2014 to $5.3billion in 2014 – 2015 and the number of approvals increased from 58 to 77.4
However, as noted in the Report, the data captures approvals. Unfortunately, the data cannot be relied on to capture executed transactions as a number of applications for approvals may be lodged in a competitive process, with only one being ultimately successful.
Updated data will be available when the FIRB Annual Report for 2015 – 2016 is published.
Foreign investment activity in Australian agribusiness
Apart from the Kidman and VDL sales discussed below, other notable recent transactions in the agricultural sector that obtained foreign investment clearance include:
- the investment by Hong Kong listed Legend Holdings Corporation of a strategic investment in Kailis Bros, Australian wholesale processing and export seafood business;5 and
- the sale of agricultural properties in the wheat belt in Western Australia to CK Life, where, reportedly, the approval process took five months.6
National interest focus in assessing applications in Australian agribusiness
The focus on the national interest in assessing applications in the agricultural sector has been clear in the Kidman and VDL reviews.
Kidman sale
In November 2015, the Treasurer blocked the Kidman proposal on the basis that the sale in the form proposed would be contrary to the national interest. The Treasurer’s specific concerns were the size and significance of the portfolio and security concerns because part of the land was in the Woomera Prohibited Area.7
In February 2016, the Treasurer issued a statement that he welcomed the re-opening of the Kidman sale process.8 On 15 April 2016, the Treasurer extended the statutory period for review of the application as further time was needed to consider the application.
However, on 29 April 2016, the Treasurer advised that he had informed the investors of his preliminary view that the proposal was contrary to the national interest.9
Despite the fact that part of the land (including the Anna Creek property in the Woomera Prohibited Area) offered in the original process had been excised from the sale, the Kidman portfolio was still the largest in Australia, representing over 2% of Australia’s agricultural land. The size and significance of the portfolio remained a matter of concern for the
Treasurer. Other factors cited by the Treasurer were:
- that it was critical to the Australian economy to provide jobs and growth;
- the acquisition of an 80% interest in Kidman by Dakang Australia Holdings Pty Ltd may be contrary to the national interest. The Treasurer noted that there were not too many jurisdictions in the world where foreign acquisitions of large holdings would be permitted; and
- the impact the decision may have on broader Australian support for foreign investment in Australian agriculture.
The Treasurer appointed Professor Graeme Samuel to conduct an independent review on whether the competitive process offered fair opportunity for Australian bidders to participate. This was because the Treasurer was concerned that the size of the Kidman asset made it difficult for Australian bidders to be able to make a competitive bid. The Treasurer reported that the review found the sale process followed a satisfactory commercial practice that offered the opportunity to Australian parties to make an offer and also found there remained significant domestic interest in Kidman.
The applicant subsequently withdrew from the Kidman sale process.
VDL sale
The Treasurer publicised his decision in February 2016 not to object on national interest grounds to the sale of the NZ owned dairy company VDL to Moon Lake Investments, a privately owned Chinese company.10
National interest factors flagged by the Treasurer included that:
- the new owner would honour all existing supply contracts;
- the guarantee of 140 jobs and a commitment to an additional $100m investment in the business which will create a further 95 jobs;
- the agreement to honour the terms of all environmental and cultural agreements;
- there was an ‘in principle’ approval to construct a Devil Proof Fence; and
- new conditions were imposed to protect against the new owner engaging in transfer pricing to shift profits overseas to avoid paying tax in Australia.
Apparently in response to certain public criticism that Australian bidders were not successful, the Treasurer noted that ‘the alternative decision’ would have added a sovereign risk premium to every other transaction in the country that would follow. No investor could have confidence that their successful bid would not be gazumped by unsuccessful bidders pressurising the Treasurer to reopen the process.
Senate Committee11
The recommendations in April 2016 of the Senate Committee into the foreign investment review framework included increasing transparency about the review process and the Treasurer’s rationale for decisions, whether positive or negative.12 As the Committee included only members of the ALP and the Greens, it is not assured that
the recommendations will be enacted into law.
However, it would appear that the public commentary regarding VDL and Kidman may have been a factor in the Treasurer making a number of public statements including disclosing his rationale for the decision.
Lessons for foreign investors
Vendors – consider if sale structure may cause national interest concerns
Vendors of significant Australian agricultural assets are well advised to test FIRB’s likely position on the proposal prior to finalising their acquisition structure taking into account the likely field of interested buyers and to ensure the sale process is competitive and fair to both Australian and foreign investors. This is a lesson from the Kidman proposal where the Treasurer commissioned an independent review on whether the competitive process offered a fair opportunity for Australian bidders to participate.13
Foreign investors – be mindful of national interest considerations
Foreign investors should not be deterred from considering investments in the agricultural sector and should regard the Kidman FIRB process as the exception rather than the rule.
The Government’s message that ‘Australia is open for business’ has not changed. However, foreign investors should be careful to ensure that their application for FIRB approval clearly states the basis on which the proposal is in Australia’s national interest. Factors to emphasize include tax, the guarantee of existing jobs or commitments to create new jobs and the honouring of existing contracts and environmental and cultural agreements.
Foreign investors should also consider engaging with FIRB prior to lodging proposals for significant investments in agribusiness.
These discussions may help foreign investors understand specific national interest concerns the Government may hold and the conditions the Treasurer may be considering imposing on the proposal should it be approved.
Foreign investors should not underestimate the time required to prepare an application and the engagement time that may be required to satisfy all queries raised by FIRB. Where there is a competitive bid process for the acquisition, a foreign investor that does not actively engage with FIRB early in the bidding process may be placed at a competitive disadvantage to other bidders who open a dialogue with FIRB early.
Given the Treasurer’s power to order divestment for failure to comply with approval conditions, foreign investors should carefully monitor compliance with any conditions that are imposed. Where it may not be possible to comply with a condition by a prescribed deadline for legitimate reasons, a foreign investor should engaged with FIRB early and seek a reasonable extension for compliance or a variation of the conditions.
The Treasurer recently granted Shandong Ruyi an extension to sell down its interest in Cubbie Station. The Treasurer commented that this decision was reflective of the genuine undertakings made to sell down the interest and recognised that Shandong Ruyi had met other undertakings placed on it through the FIRB approval process.14
Agricultural land register and proposed water register
Agricultural land register
To increase transparency regarding the level of foreign ownership in Australian agricultural land, the Government has established a register of foreign ownership of agricultural land in conjunction with the ATO. All foreign individuals, companies and trustees were required to notify the ATO of any existing interests by 29 February 2016.
The Senate Committee has recommended that the Agricultural Land Register be publicly available and include as much information as possible in order to increase public confidence in the foreign investment process.15 As noted above, the Senate Committee’s recommendations may not be adopted.
Proposed water register
The Government is progressing its commitment to establish a register of all foreign investment in water by 1 December 2016. In February 2016, the Government issued a consultation paper16 requesting feedback and comments from stakeholders on issues relevant to the proposed register.
FOOTNOTES
1. See the announcements of the Treasurer at:
http://sjm.ministers.treasury.gov.au/ media-release/011-2015/, http://sjm.ministers. treasury.gov.au/media-release/003-2016/, http://sjm.ministers.treasury.gov.au/ media-release/050-2016/ and http://sjm. ministers.treasury.gov.au/ media-release/014-2016/.
2. For a summary of the Annual report, please refer to the article by Paul Branston entitled ‘Overview of the FIRB Annual Report – Trends in the regulation of foreign investment in Australia’ on page 12 of this edition of the Australian Foreign Investment Review.
3. See Foreign Investment Review Board Annual Report 14/15, page 25.
4. See Foreign Investment Review Board Annual Report 14/15, page 27.
6. See http://www.abc.net.au/ news/2016-03-24/real-estate-company-cbre- firb-approval-process-long/7275494 and https://au.news.yahoo.com/thewest/ wa/a/31175672/tardy-firb-rulings-blasted/.
7. See http://sjm.ministers.treasury.gov.au/ media-release/011-2015/.
8. See http://sjm.ministers.treasury.gov.au/ media-release/003-2016/.
9. See http://sjm.ministers.treasury.gov.au/ media-release/050-2016/.
10. See http://sjm.ministers.treasury.gov.au/ media-release/014-2016/.
11. For a summary of the Senate Committee report, please refer to the article by Tony Damian and Malika Chandrasegaran entitled ‘Senate Committee calls for greater transparency in the FIRB review process' on page 2 of this edition of the Australian Foreign Investment Review.
12. See Senate Economics Reference Committee Report: Foreign Investment Review Framework (April 2016).
13. http://sjm.ministers.treasury.gov.au/ media-release/050-2016/.
14. Text of new footnote 14 referred to above is as follows: http://www.abc.net.au/ news/2016-06-21/cubbie-ownership- changes/7517058
15. See Senate Economics Reference Committee Report: Foreign Investment Review Framework (April 2016).
16. Australian Government: National register of foreign ownership of water access entitlements Consultation Paper February 2016.
For further information, please contact:
Matthew Fitzgerald, Partner, Herbert Smith Freehills
matthew.fitzgerald@hsf.com
