20 January, 2016
The new changes to Australia’s foreign investment rules directly affect foreign government investors but the real impact on foreign investment in Australia can be seen in the way the rules are being administered.
Summary
There are both positive and negative consequences for foreign government investors in the new legislative package. It is the way in which FIRB applications have been processed and assessed recently that has made life more difficult for foreign government investors.1
Foreign government owned entities were previously governed by the foreign acquisitions and takeovers legislative regime,2 as well as the Policy, which carried no legislative backing and was subject to ad hoc amendment by Government.
The new regime provides increased certainty for foreign government investors but it also grants the Government the power to enforce the rules against foreign government investors through divestment orders and criminal and civil penalties.
Actions by foreign government investors requiring FIRB approval
As before, the rules for foreign government investors are much stricter than those for non-government foreign investors. The kinds of acquisitions requiring FIRB approval has not changed markedly. FIRB approval is required for any of the following ‘notifiable actions’ (in addition to any actions that would be caught for a non-government foreign person):
- an acquisition of an interest in Australian land (which includes leases or licences with a right to occupy for 5 years or more);
- an acquisition of a 'direct interest'3 in an Australian entity or business;
- starting an Australian business;4 or
- an acquisition of a legal or equitable interest in a mining, production or exploration tenement, or an interest of at least 10% in an entity in which 50% or more of the assets are mining, production or exploration tenements.5
Definition of ‘foreign government investor’
An entity will be a ‘foreign government investor’ if the interest held in it by a single foreign government, separate government entity6 or other foreign government investor (each together with any associates) is 20% (as opposed to 15% previously).7
The definition of ‘associate’ has been broadened so that all government entities from a single country will be considered ‘associates’ (regardless of whether or not they are in fact acting in concert).8 The broadening of the concept of who is an ‘associate’ raises particular issues in the context of listed companies. Sovereign wealth funds and pension funds ultimately controlled by government could be uncertain as to the holdings of other entities connected to the same country but managed independently. An investor could be uncertain as to whether an acquisition of shares would mean that the investor and its ‘associates’ would meet the 20% threshold test.
Exemptions
Some but not all of the exemptions available to foreign persons generally are available to foreign government investors. Available exemptions include the exemptions relating to rights issues,9 certain corporate transactions in Australian listed entities,10 underwriters,11 easements in gross12 and taking and enforcing security under a moneylending agreement.13 If an exemption applies, the foreign person is not required to obtain FIRB approval before undertaking the investment.
There are a number of new exemptions that specifically apply to foreign government investors, including the following:
The acquisition of a series of interests in certain types of Australian land without the need to seek individual approvals, provided an exemption certificate has been obtained.14
The acquisition of a series of interests in mining, production or exploration tenements or mining, production or exploration entities, provided the interests are not 'interests in Australian land' and an exemption certificate has been obtained.15
The acquisition of an interest in a foreign entity which holds Australian assets through an Australian subsidiary provided the Australian assets are less than 1% of the foreign entity’s total assets, the total assets are valued at less than $10 million and none of the assets are assets of a 'sensitive business'.16
The act of establishing a new wholly-owned subsidiary.17
Guidance
The Policy remains in place to provide guidance on interpreting the FATA and the ‘national interest’ criteria applicable in assessing a proposed transaction.18 The Government has also released guidance notes to help investors understand their obligations under the new regime.19
Challenges in the approval processes
Recently, the Government has become more focussed on security considerations in relation to foreign investment proposals. This focus is highlighted by the announcement in December 2015, of the appointment of David Irvine, the former head of Australia’s Security Intelligence Organisation, as a part time member of FIRB.
According to media reports, bidders for the New South Wales TransGrid assets could not have a foreign shareholder exceeding 50% and various requirements regarding Australian resident independent directors with security clearances were imposed. Other sensitive acquisitions have been subject to similar conditions. A Senate enquiry in relation to the TransGrid and Port of Darwin approvals and the rejection of the S Kidman acquisition by Chinese investors is underway.20 The Terms of Reference for that enquiry concern whether legislative or regulatory changes are required to the foreign investment review framework to ensure Australia’s national interest is being adequately considered.21
There is considerable uncertainty amongst potential investors about the range of assets which might be considered to raise security issues without any real avenue available to engage with FIRB on this matter.
The ATO, whose former head, Michael D’Ascenzo, is a part time member of FIRB, has also become involved in some decisions,
seeking extensive information sometimes unrelated to the acquisition, and expressing views regarding bid structuring.
Some applications for FIRB approval are experiencing significant delays, with conditional approval available just prior to the commercial transaction deadline.
We hope that greater clarity will emerge soon, that security considerations and associated conditions will be confined to a small number of genuinely strategic assets and that the processing by FIRB of applications by foreign government and other investors will become more streamlined.
FOOTNOTES
1 For a summary of the package of the new legislation, including the new application fees, please refer to the article by Tony Damian and Malika Chandrasegaran entitled ‘FIRB changes: a snapshot of what you need to know’ on page 2 of this edition of the Australian Foreign Investment Review.
2 Comprising the Foreign Acquisitions and Takeovers Act 1975, Foreign Acquisitions and Takeovers Regulations 1989 and Foreign Takeovers (Notices) Regulations 1975.
3 A 'direct interest' can be an interest of 10% (or further acquisitions past 10%); an interest of at least 5% if the investor has entered into a legal arrangement with the target e.g. a strategic alliance between two airlines (but not an ordinary arm’s length goods or services agreement on ordinary commercial terms); or an interest of any percentage if the investor would be in a position to influence or participate in the central management and control of the target or in a position to influence, participate in or determine the policy of the target: Regulations 2015, s 16.
4 'Start an Australian business' means starting to carry on an Australian business or starting to carry on a new activity that falls within a different Division under the Australian and New Zealand Standard Industrial Classification Codes: Regulations 2015, s 10.
5 Regulations 2015, s 56. Acquisitions include when an existing tenement is being converted to a different type of tenement. For a detailed discussion of the impact of the reform package for the energy and resources sector, please refer to the article by Paul Branston and Nathan Colangelo entitled ‘FIRB changes: impact on the energy and resources sector’ on page 11 of this edition of the Australian Foreign Investment Review.
6. A 'separate government entity' is an individual, corporation or corporation sole that is an agency or instrumentality of a foreign country and is not part of the body politic: Foreign Acquisitions and Takeovers Act 1975, s 4.
7. Regulations 2015, s 17. For aggregate foreign government holdings, the relevant threshold remains at 40%.
8. The Act, s6(1)(l). This definition does not apply to foreign government investors in which no individual foreign government, separate government entity or foreign government entity holds a substantial interest (i.e. 20%): Regulations 2015, s 45(5).
9. An exemption applies for an acquisition pursuant to a rights issue provided it is not a secondary offering: Regulations 2015, s 41(2).
10. Exemptions apply where the relevant target entity has a primary listing on an Australian stock exchange and the acquisition is pursuant to a dividend reinvestment plan, bonus share plan, distribution reinvestment plan or switching facility: Regulations 2015, s 41.
11. An acquisition by a professional underwriter will be exempt provided an exemption certificate has previously been obtained from FIRB: Regulations 2015, s 42.
12. An acquisition of certain public utility easements in gross, for example, an easement created for the purposes of providing electricity, gas, water, sewerage or drainage to the public: Regulations 2015, s 39(b).
13. Foreigngovernmentinvestorsarenotrequired to obtain FIRB approval before acquiring a security under a 'moneylending agreement'. A 'moneylending agreement' is narrowly defined, refer Regulations 2015, s 5. Approval is also not
We hope that greater clarity will emerge soon, that security considerations and associated conditions will be confined to a small number of genuinely strategic assets and that the processing by FIRB of applications by foreign government and other investors will become more streamlined.
required for an acquisition by way of enforcement of security under a 'moneylending agreement' where the foreign government investor is an authorised deposit-taking institution and the interest is held for less than 12 months or a genuine attempt is being made to dispose of the interest after 12 months. For non-ADIs, the relevant period is 6 months: Regulations 2015, ss 27(1) and 27(3).
14. Regulations 2015, s 58.
15. Regulations 2015, s 43. An 'interest in Australian land' includes leases or licences giving rights to occupy Australian land for more than 5 years (including extensions).
16. Regulations 2015, s 56(4) for details of the exemption. A 'sensitive business' is a business carried on wholly or partly in the media, telecommunications or transport sectors or certain defence-related businesses: Regulations 2015, s 22(2).
17. However any acquisitions by this new subsidiary may be captured by the regime.
18. See http://firb.gov.au/resources/ policy-documents/.
19. See http://firb.gov.au/resources/guidance/.
20. For a detailed discussion of the blocked S Kidman acquisition, please refer to the article by Matthew FitzGerald and Mary Boittier entitled ‘FIRB changes: Impact on Australian agribusiness’ on page 4 of this edition of the Australian Foreign Investment Review
For further information, please contact:
Robert Nicholson, Partner, Herbert Smith Freehills
robert.nicholson@hsf.com
