With overseas investments into Australia on the uptick, foreign farm ownership has been the subject of intense political debate within the Commonwealth. As a result, a new wave of regulatory reforms pertaining to the agriculture industry are being rolled out by the Government to ensure that investments into Australia are in the nation’s best interest, including escalated review and approval procedures for foreign parties looking to purchase farmland, and the introduction of a national register for foreign-owned farms.
FTI Consulting’s Agribusiness team takes a closer look at the new protocols, highlighting key considerations for parties conducting transactions within the Australian agricultural market, and sharing tips and guidelines for engaging with the relevant regulatory authorities.
Australia’s Foreign Investors Under the Microscope
The Federal Government has announced significant changes to the process that foreign investors must go through prior to acquiring farmland in Australia. From 1 March 2015, any non-sovereign foreign party seeking to acquire more than AUD 15m (cumulative) worth of Australian farmland will be subject to review by the Foreign Investment Review Board (“FIRB”). Prior to 1 March 2015, the threshold stood at AUD 252m , following indexation on 1 January 2015.
Exceptions to the rule include foreign state-owned entities (which are subject to an AU$0 threshold) and investors from New Zealand, the United States, Japan, Korea and Chile (which, due to pre-existing trade agreements, only require FIRB approval when the investment goes above an AUD 1,094m threshold). Privately-owned foreign enterprises from all other countries seeking to invest in upstream Australian agribusinesses (non-farm gate) will also still be subject to FIRB approval once they go above the AUD 55m threshold (indexed from AUD 54m in 2014).
Alongside this update was a further announcement that from 1 July 2015, the Australian Tax Office (“ATO”) will begin to collect information on all new foreign direct investment (“FDI”) in agricultural land. This initiative is part of the Government’s commitment to maintain a public register of all foreign-owned agricultural land as well as foreign ownership in a range of other sectors and industries. Both announcements aim to improve transparency and give the Australian public confidence that FDI in Australia is in the nation’s best interests. The risk is that the new thresholds will drive away some foreign investors who see the increased red tape as a sign that Australia is not “open for business.” Furthermore, such a significant reduction in the farmland threshold will increase the volume of transactions subject to FIRB. This could subsequently create a backlog in the process, and as a result slow down the approval of applications put forward.
What You Need To Know As A Result Of The Changes In Regulation
Below we have highlighted some key considerations relevant to parties involved in the sale or purchase of distressed agricultural assets, and parties seeking to invest more broadly in Australian agriculture.
Sale Of Agricultural Land
- Investors subject to FIRB are unable to submit unconditional contracts, inhibiting their ability to participate in auctions and sales that require unconditional tenders;
- Vendors therefore need to undertake a level of due diligence to determine what realisation strategy is most appropriate to ensure foreign purchasers are able to participate in transactions where they are a likely bidder;
- In some cases, where a distressed asset is likely to attract foreign interest, secured creditors could consider a realisation strategy outside of a formal administration; and
- Failure to allow foreign parties to adequately participate in a sale could affect the asset’s ability to achieve market value, leaving an administrator’s process open to challenge
Investment Into Australian Agriculture
- Investors seeking vertical integration will need to consider the respective thresholds for farmland (AUD 15m) and agribusinesses (AUD 55m);
- The reduced limit for farmland may lead to a backlog of FIRB applications. It will thus be important for investors to prepare FIRB documentation early, so as to minimise possible transaction delays;
- Sell-side and counter-party due diligence will assist targets in understanding which prospective investors will be subject to FIRB and may, as a result, take longer to transact;
- If the reduced thresholds drive away some investors, there may be greater opportunities for those willing to engage in the FIRB process; and
- Greater opportunities are likely to arise for those nations exempt from the AUD 15m threshold, including the United States, Japan, Korea, New Zealand and Chile.
Impact And Implications: Our Experience In Dealing With FIRB
Our Agribusiness professionals have unparalleled experience dealing with FIRB on behalf of both private and foreign government investors. Some tips and points of interest from our engagements are as noted below.
- FIRB submissions require significant documentation. Prospective purchasers will need to include information relating to how the enterprise will operate, its impact on the competitive and economic landscapes, its likely effect on the local community and the extent to which the investor operates independently of foreign governments.
- Once an investor’s cumulative agricultural holding exceeds the FIRB threshold, every agricultural land-based transaction, regardless of size, requires FIRB approval. This includes entering into leasehold arrangements.
- FIRB will not pre-approve a generic agricultural transaction nor give any leeway for small value transactions in what amounts to an administrative title clean-up. A full FIRB submission will be required for approval.
- Foreign investors wanting to participate within Australia’s agricultural supply chain by investing in areas such as processing and manufacturing plants, grain storage and export terminal infrastructure are required to participate in the FIRB process.
- Currently, FIRB applications take around 60 days to be processed. If we see a significant increase in the number of FIRB applications, approval processes may be extended. Delays can put pressure on a sale process, particularly for enterprises with time-critical operations such as cropping (planting, maintenance and harvesting).
- As noted above, a party entering into a transaction that will be subject to FIRB review cannot bid in a public auction or execute an unconditional contract. They can only make an offer conditional on FIRB approval.
For further information, please contact:
Ben Waters, Director, FTI Consulting
ben.waters@fticonsulting.com
Lauren Morcom, Director, FTI Consulting
lauren.morcom@fticonsulting.com
Aline Teixeira, Director, FTI Consulting
aline.teixeira@fticonsulting.com
Hugh Campbell, Director, FTI Consulting
hugh.campbell@fticonsulting.com
John Corbett, FTI Consulting
john.corbett@fticonsulting.com
Toby Browne, FTI Consulting
toby.browne@fticonsulting.com
