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14 August, 2016
It has been over six months since Australia’s foreign investment laws were reformed. We discuss the trends, tips and traps that we have observed under the new process.
Recent trends
It has been over six months since Australia’s foreign investment laws were reformed. We are seeing a number of trends in terms of how FIRB is assessing foreign investment applications and how investors are approaching the FIRB approval process.
Increased scrutiny of infrastructure assets and assets in other sectors thought to be sensitive
The government has continued its focus on security considerations with ASIO and other agencies involved in relation to proposed acquisitions of critical infrastructure assets. The government’s focus appears to be widening to embrace quite small infrastructure assets and a range of assets in other sectors not previously thought to be sensitive, such
as healthcare.
The Treasurer imposed various conditions on the TransGrid sale late last year which had not been seen before, including a 50% cap on foreign ownership and requirements that the operation and control of its transmission system and telecommunications business be undertaken solely from within Australia and for two independent directors (including the chairman) and half the board of TransGrid to be Australian residents having a security clearance.
We have not seen the 50% cap applied to other transactions at this point but conditions requiring independent directors, compliance with laws and physical control of assets remaining within Australia have been imposed on other assets considered strategic, particularly where the buyer or a member of a buyer consortium is a foreign government investor (FGI).
On 31 March 2016, a new regulation1 was introduced requiring FIRB approval to acquire government owned critical infrastructure assets2 valued above $55 million. Previously, FIRB assessment was only required when government owned critical infrastructure assets were sold to foreign government investors.
This change did not come as a surprise following the controversy surrounding the privatisation of Port Darwin last year.
Increased sensitivity to large agricultural acquisitions
The government’s approach to the sale of the Kidman pastoral business is indicative of increasing sensitivity in this area, although several other substantial acquisitions in the sector have been approved, so the rejection of the Kidman application does not appear to have implications for most agricultural transactions.
Increased role of ATO
The ATO has become much more involved in FIRB applications in recent times. Conditions regarding compliance with laws and “tax conduct” are now common.3
Anticipating conditional approvals
It is difficult to predict upfront and prior to engaging with FIRB as to when conditions are likely to be imposed. Other government agencies such as the ATO and ASIO are increasingly involved in assessing applications, with FIRB seeming to have less visibility over the potential concerns they may raise. It is not always possible to explore with FIRB conditions that may be imposed and, if they may be problematic for an investor, whether there may be other solutions which better suit investors’ needs and any concerns which the conditions are intended to address.
However, in our experience, dialogue with the ATO concerning any tax conditions is relatively easy to arrange.
Delays to the FIRB approval process
The greater involvement of other agencies is leading to delays in some approval processes with significant transactions involving strategic assets taking up to 4 months (and sometimes longer) to be approved.
For large scale sales processes we are also seeing a trend where FIRB is assessing rival bidders’ applications on a parallel basis with the outcome delivered at the same time so as not to disadvantage any party. This can delay bidders that submit their application early in the process.
Under the new law, instead of applicants being required to withdraw their applications and resubmit them if a decision cannot be made within 30 days, bidders can request an extension (not necessarily of 30 days) for FIRB to complete its work. However, the new procedure makes little difference to the timing of processing applications in practice.
FIRB conditionality and impact of FIRB approvals on transaction processes
In the past it has been common for a buyer and seller to agree that the FIRB condition precedent (CP) for their transaction is satisfied where FIRB has approved the transaction either unconditionally or subject to conditions acceptable to the buyer (acting reasonably).
In some recent transactions we have seen a tendency for this FIRB CP to be modified to specifically refer to the revised set of tax conditions that FIRB announced on 3 May 2016 so that the buyer must accept these tax conditions (excluding the possible two additional conditions4 FIRB has indicated it may impose where a particular tax risk is identified) and that the FIRB CP will still be satisfied if these are the only conditions imposed by FIRB.
Where transactions may have security implications or a risk of more complex conditions, sellers are increasingly reluctant to accept a FIRB CP and are encouraging bidders to seek FIRB approval early.
However, bidders are often reluctant to do this given the fees involved. Hence, some transactions are becoming extended to allow bidders to make a preliminary assessment of the asset before seeking FIRB approval.
Tips and traps
Investors are finding the new foreign investment laws more complex and difficult to navigate.
FIRB has made extensive efforts to assist investors by releasing 46 Guidance Notes to explain how the new legislation works.
However there are still a number of uncertainties in how the recent laws are intended to operate. We have set out below a few practical tips for how to manage some of these uncertainties.
What land falls within a ‘prescribed airspace’?
As a general rule, commercial developed land is subject to a $252 million notification threshold. However, a lower $55 million notification threshold5 applies where investors acquire commercial developed land that is ‘sensitive’ and the investors have the right to occupy the land or to be involved in the central management and control of the entity that holds the land.
Sensitive land includes land that is (amongst other things) under ‘prescribed airspace’ (as defined under section 181 of the Airports Act 1996 (Cth) (Airports Act)).
One might expect that prescribed airspace only covers land immediately surrounding an airport. However, upon investigation of relevant regulations and maps, it is apparent that prescribed airspace covers large parts (but not all) of the Melbourne and Sydney CBD. This has particular implications for property developers that acquire CBD properties and for joint ventures where one or more of the joint venturers is foreign.
What monetary thresholds apply for mining tenements?
Generally, a foreign investor requires FIRB approval to acquire a mining or production tenement regardless of the value of the acquisition.6
However, it is unclear whether this $0 monetary threshold also applies where the investor acquires an interest in an Australian land corporation or Australian land trust that holds a mining or production tenement. It may be possible to interpret the legislation and regulations in a way that the $0 monetary threshold does not apply in these circumstances.
Fees
FIRB will not process an application until the prescribed fee has been paid. Usually, FIRB will advise the relevant fee that is payable within 24 hours but it can take up to a week. It can be difficult to decide which category the acquisition fits into and often the acquisition price is difficult to determine when the application is made, which can create difficulties determining the correct fee. In some cases the consideration is not known (e.g. in a competitive bid). If a higher sum is ultimately paid, it may be necessary to top up the fee.
Foreign government controlled institutional investors
Often pension and sovereign wealth funds are counted as foreign government investors because a national or local government can appoint its governing board.
The new legislation deems that FGIs from the same country are ‘associates’ of each other. This means that the interests held by a FGI from one country in an entity are aggregated with the interests held by other FGIs from the same country.
FIRB has updated Guidance Note 23 to assure investors that the government will not impose fines or pursue penalties or offences for breaches of the legislation where it is not reasonable for a FGI to know that one or more other FGIs from the same country already hold or are concurrently acquiring interests in the target entity where it is not apparent from public disclosures. This is helpful for all FGIs, but particularly institutional investors which generally operate quite independently of government and of other entities with a connection with government.
Upstream acquisitions by FGIs
FGIs need FIRB approval to acquire a ‘direct interest’7 in an Australian entity. The updated Guidance Note 23 also clarified that where a FGI acquires a direct interest in an offshore entity that also holds, directly or through a chain of entities, a direct interest in an Australian entity, the FGI will be deemed to acquire a direct interest in the Australian entity.
This clarification appears to have been made in response to some uncertainty as to whether the new legislation applied in this manner, particularly where the direct interest being acquired was not also a substantial interest (being an interest of 20% or more).
Conclusions
The complexity of the new law and some of the challenges in its administration means it is desirable to seek advice early in any investment process involving foreign investors to ascertain whether approval will be required and how best to approach the process.
FOOTNOTES
- Foreign Acquisitions and Takeovers Amendments (Government Infrastructure) Regulation 2016 (Cth).
- Critical infrastructure assets include airports, ports, electricity, gas, water and sewerage treatment systems or facilities, roads, railways, inter-modal transfer facilities, telecommunications networks and nuclear facilities.
- For more detail of the ATO’s role, please refer to the article by Toby Eggleston entitled ‘FIRB & Tax’ on page 11 of this edition of the Australian Foreign Investment Review.
- These conditions are set out in part B of the document issued by the Foreign Investment Review Board titled “Taxation conditions of certain no objection decisions”, version 3 May 2016 and require the applicant to (1) engage with the ATO in good faith to resolve any tax issues with the transaction and its holding of the investment and (2) provide information as specified by the ATO on a periodic basis including at a minimum a forecast of tax payable.
- The $55m lower threshold does not apply for nationals or enterprises from US, Chile, China, Japan, South Korea and NZ that are not FGIs.
- The $0 monetary threshold does not apply for nationals or enterprises from US, Chile, China, Japan, South Korea and NZ that are not FGIs.
- A direct interest in an entity or business is an interest of: (i) at least 10% in the entity or business; (ii) at least 5% in an entity or business if the acquirer has entered into a legal arrangement relating to the entity or business and the acquirer’s business; or (iii) any percentage if the acquirer is in a position to control or influence the entity or business.
For further information, please contact:
Robert Nicholson, Partner, Herbert Smith Freehills
robert.nicholson@hsf.com
