26 November, 2015
This alert focuses on the new laws for foreign investment in securities in Australian entities (corporations or unit trusts) and foreign investment in Australian businesses (other than agribusinesses) under the amendments to the Foreign Acquisitions and Takeovers Act 1975 (Act) and draft regulations1, which are scheduled to take effect from 1 December 2015.
Who is a foreign person?
The concept of a "foreign person" for the purposes of the Act remains largely the same.
However, key changes are:
- the definition now extends to foreign governments, representing a codification of what was previously Australia's foreign investment policy. The definition of "foreign government investor" has also been amended, and includes foreign governments and any corporation, trust or partnership in which a foreign government has a 20% interest or multiple foreign governments have an aggregate 40% interest. As previously, the monetary thresholds under the new regime do not apply to investment by foreign government investors, which means that all foreign government investors must obtain prior approval before making various acquisitions, regardless of value (see below for more detail); and
- previously a corporation (or trust) was a foreign person if at least 15% of its shares or voting power (or 15% of the income or property of the trust) was held by a foreign person and its associates (substantial interest threshold). This has increased to 20% under the new regime. The aggregate substantial interest threshold for interests held by multiple foreign persons and their associates remains at 40%.
The increase of the substantial interest threshold from 15% to 20% may result in corporations and trusts which were previously considered to be foreign persons no longer falling within the definition of "foreign person", so they will no longer need to seek foreign investment approval for acquisitions and other transactions.
Notifiable actions and significant actions
The new regime regulates two categories of transactions:
Notifiable actions – transactions which must be notified to the Foreign Investment Review Board
(FIRB) if they meet the monetary threshold:
- acquiring a substantial interest (i.e. a 20% interest) in an Australian entity;
- acquiring an interest in Australian land;
- acquiring a direct interest in an Australian agribusiness; or
- a foreign government investor acquiring a direct interest in an Australian entity or business or an interest in land.
- Significant actions – transactions which are technically not required to be notified to FIRB, but the Treasurer has the power to block or unwind them if they meet the monetary threshold and are considered contrary to the national interest, unless they are notified and a statement of no objection is issued:
- acquiring an interest (which may be less than a substantial interest) in securities of an Australian entity, business or land;
- entering into certain agreements or altering the constituent documents of an Australian entity which enables a foreign person to control senior officers of the entity; or
- entering into or terminating significant agreements with an Australian business (i.e. agreements relating to using the business's assets or participating in its profits or management and control).
Except in the case of a foreign investor acquiring a direct interest in an agribusiness, an action in relation to an Australian entity or business only constitutes a "significant action" if it results in a change in control of the entity or business involving a foreign person. A change in control occurs if foreign persons begin to control an entity or business or there is a change in the foreign persons who control the entity or business.
For an action to be classified as a notifiable action or a significant action, the value of the Australian entity or business (other than agribusinesses) being acquired must be at least:2
- $1,094 million for non-government investors from the USA, New Zealand, Chile, Japan and Korea (agreement country investors) in non-sensitive sectors; and
- $252 million for other non-government foreign investors and investments by agreement country investors in sensitive sectors.
For an investment in securities, these thresholds apply to the higher of the target entity's:
- total asset value (based on its most recent financial statements); and
- total issued securities value (based on the consideration payable for each security multiplied by the total issued securities).
For an investment in assets, the thresholds apply to the value of the consideration for the acquisition.
Sensitive sectors remain largely the same, including media, telecommunications and transport, and now also specifically include encryption and security technologies and communication systems, given heightened sensitivities about how these matters could impact Australia's national interest.
It is likely that non-government investors from other countries, such as China, will be treated as agreement country investors once further free trade agreements are agreed and ratified.
Importantly, the definition of "agreement country investors" remains confined to a corporation or entity incorporated or established in the relevant country. Therefore, even a wholly owned Australian subsidiary of a US company still does not qualify for the increased thresholds. This needs to be considered in structuring any acquisition vehicle if investors want to take advantage of the more favourable thresholds.
Investment by foreign government investors
The new laws represent a codification of Australia's foreign investment policy which previously regulated investments by foreign government investors. A "foreign government investor" now includes a foreign government and any corporation, trust or partnership in which:
- a foreign government or other foreign government investor (together with its associates, including any such entity from the same country) has a 20% substantial interest; or
- two or more foreign governments or other foreign government investors from multiple countries (together with their associates) have a 40% aggregate substantial interest.
Under the new laws, a "foreign government investor" no longer includes entities which are controlled by
a foreign government by means other than holding a substantial interest.
Foreign government investors are likely to include sovereign wealth funds, government related pension funds, state owned enterprises and possibly private equity or other funds which have foreign government investors (depending on their aggregate interests).
As previously, the monetary thresholds under the new laws do not apply to investment by foreign government investors so that, regardless of the value of the investment, all foreign government investors must get prior approval before:
- acquiring, offering to acquire or increasing a "direct interest" in an Australian entity or business (i.e. the investor together with its associates having an interest of 10% or more, an interest of 5% or more in connection with a strategic relationship with the target entity, or any interest in connection with certain control rights);
- starting a new business;
- acquiring certain direct or indirect interests in a mining, production or exploration tenement; or
- acquiring an interest in land.
In addition, certain exceptions under the new laws do not apply to foreign government investors, such as the relaxation of tracing rules for indirect acquisitions of Australian entities via offshore transactions.
"Associates" include persons who are acting in concert in relation to an entity or business and others who are deemed to be associates. Importantly, all foreign government investors from a single country are now deemed to be associates, so that their interests will be aggregated for determining whether relevant thresholds are met. This has implications for determining both:
- whether an entity is considered a foreign government investor (e.g. an Australian company could be a foreign government investor if one or more foreign government investors and their associates hold sufficient shares in that company); and
- whether a transaction involves a notifiable acquisition of a "direct interest" by a foreign government investor and its associates.
The new laws confirm the Government's intention to continue to carefully scrutinise investments involving foreign governments. The amendments are helpful in codifying and clarifying who will be considered a foreign government investor and what is a direct investment requiring FIRB approval. However, deeming all foreign government investors from the same country to be associated, so that their interests are aggregated for certain tests, may result in approvals being required for more transactions involving foreign government investors.
When should you notify FIRB?
It is mandatory to notify FIRB and obtain approval for notifiable actions, and a failure to notify is an offence. The acquisition cannot proceed unless FIRB gives approval (which may be conditional). Similar to the previous regime, the Treasurer has the power to make disposal orders if notifiable actions contrary to Australia's national interest proceed without FIRB approval.
Although notification of significant actions is not mandatory, foreign investors should still consider whether to notify FIRB in order to obtain the certainty offered by a "no objection" notice from FIRB for significant transactions if there is any potential that a transaction could be considered to be contrary to the national interest. A "no objection" notice prevents the Treasurer from making a disposal order in connection with a significant action.
Consistent with the previous regime, it is possible to enter into an agreement involving a notifiable or significant action without breaching the Act if the action only becomes legally binding once FIRB approval is obtained, such as by including a condition precedent relating to obtaining FIRB approval in the relevant agreement, offer, bidder's statement for a takeover etc. Foreign persons should seek to ensure that the relevant transaction document allows them sufficient time to obtain FIRB approval before they are required to complete the transaction.
Review by FIRB
Consistent with the previous regime, FIRB has 30 days after receiving an application to make a decision on the application. Importantly, any such time period only commences once the full application fee required has been paid. If FIRB decides there is no objection to the proposed action, it must give the applicant a "no objection" notice within 10 days of the decision. The proposed action may be taken on the day a "no objection" notice is received but otherwise must generally not be taken until 40 days after
FIRB receives the application and the application fee has been paid.
If necessary, an applicant may request FIRB to extend the 30-day decision period. Under the previous regime, applications were often withdrawn and resubmitted for this purpose, but under the new regime this practice would incur further application fees and so has been simplified to allow an extension.
Again, in line with the previous regime, FIRB has the ability to publish an interim order which extends the time FIRB has to consider an application for a further 90 days from the day the interim order is published. In practice, in the event that FIRB requires more time to consider an application (for example, if awaiting merger clearance) it is likely that FIRB will suggest that a foreign investor request an extension of the 30-day decision period, rather than FIRB publishing an interim order extending the period.
FIRB has released guidelines regarding the information required in an application, which in some respects is even more detailed than required under the previous regime.
Applications will be assessed against national interest criteria, such as national security, competition, consistency with Australian Government policy (particularly tax), impact on the economy and the community, and the character of the investor.
Closer alignment with takeovers regime
- Increase in substantial interest threshold from 15% to 20%
Under the new regime, a foreign investor only requires approval (subject to a number of exceptions) if it acquires, together with its associates, an interest in 20% or more of the securities of an entity, compared with the previous 15% threshold. This brings the foreign investment regime into line with the 20% control threshold in the takeovers provisions of the Corporations Act and broadly aligns non-government investor business acquisitions requiring notification with acquisitions that are subject to the Australian takeovers rules.
The aggregate substantial interest threshold of 40% (which determines, for example, whether two or more foreign persons "control" an entity or business) has not changed.
The takeovers exceptions for rights issues and dividend reinvestments (where the target has its primary market listing in Australia) have also been reflected in the new regime.
- Narrowing of "associate" definition
The new laws exclude an "associate of an associate" from the definition of "associate", in order to recognise the realities of the modern business environment in which, for example, there are many individuals who are directors on multiple boards.
- Inconsistencies between the foreign investment and takeovers regimes remain
Differences between the takeovers regime and the new foreign investment regime still exist. Accordingly, there remains the possibility that a foreign investor in an Australian public company may require FIRB approval despite not reaching the takeovers threshold under the Corporations Act (and potentially vice versa).
An example of this is that under the Act a person who can veto a resolution of the board, central management or a general meeting of an entity will be deemed to be in a position to control 20% of the potential voting power in the entity. There is no similar deeming provision in the takeovers provisions of the Corporations Act. Therefore a person who has a veto right under a shareholders agreement may be deemed to have a 20% interest even if they only hold a much smaller interest in securities of the entity. If that person is a foreign person then this could result in the entity also being considered to be a foreign person or a new shareholder who assumes the veto right triggering the need for FIRB approval.
As a result, foreign investors still need to carefully consider the circumstances of their investments in order to ensure compliance with both the foreign investment regime and the takeovers provisions of the Corporations Act.
Tracing of interests
Consistent with the previous regime, the new laws contain tracing provisions under which an interest in a corporation or trust is traced back through the ownership of relevant entities. For example, if a foreign person acquires a non-Australian entity which has a substantial interest in an Australian entity, the foreign person is deemed to acquire the same substantial interest in the Australian entity and may require FIRB approval.
These tracing provisions generally do not apply in determining whether the acquisition of an interest in an Australian entity is a notifiable action. For example, while the type of offshore acquisition mentioned above could constitute a significant action, it would not constitute a notifiable action under the new regime.
However, the tracing provisions continue to apply for most other purposes, including:
- to determine if an acquisition is a significant action;
- in relation to actions taken by foreign government investors; and
- to determine whether an entity is considered a "foreign person" or "foreign government investor" as a result of foreign persons or governments holding direct or indirect substantial interests in the entity. For example, an Australian investment fund in which a foreign entity has a direct or indirect substantial interest will continue to be treated as a foreign person and to require approval for relevant transactions (unless that foreign interest falls below the new 20% threshold).
The new regime focuses more closely on major reorganisations within a corporate group which meet the monetary thresholds. In particular, as part of assessing the national interest, the application guidelines indicate that FIRB will require and review detailed information relating to the reorganisation including:
- the tax implications of the reorganisation in Australia for the next five financial years;
- whether the applicant expects to attribute its Australian sourced business profits to a permanent
- establishment located in Australia following the proposed reorganisation; and
- any proposed increase in debt funding given the effect this may have on tax revenues in the short term.
This indicates that FIRB will carefully scrutinise any reorganisations which could have implications for significantly reducing Australia's tax revenue base, and that foreign controlled groups will need to have cogent commercial rationale for implementing reorganisations, aside from potential tax benefits for the group, in order to be able to satisfy the national interest requirements to obtain FIRB approval.
Stapled securities structures
The new laws specifically extend to acquisitions of securities in stapled entities and other entities operating on a unified basis, such as dual listed entities, if any of the stapled or dual listed entities carry on an Australian business. In those circumstances, even if the acquisition involves securities in one of the non-Australian entities forming part of the stapled or dual listed entity, then the acquisition will be deemed and treated as if it was the acquisition of the relevant entity that carried on the Australian business, so that the acquisition may require FIRB approval if the relevant thresholds are met.
Benefits for certain investors
The new laws contain a number of exceptions from the regime which may benefit certain types of investors:
- Benefits in relation to listed companies
The laws contain new exceptions in relation to rights issues and dividend reinvestment plans,
similar to exceptions under Australia's takeovers regime.
Listed entities with their primary listing on an Australian securities exchange are now able to disregard non-substantial holdings below 5% when determining if they are a "foreign person".
- Benefits for underwriters
The laws contain a new exception for acquisitions in the ordinary course of underwriting by foreign
financial institutions which are licensed by ASIC as underwriters, subject to various requirements.
- Indirect acquisitions of Australian corporations via offshore transactions
The indirect acquisition of Australian corporations via offshore transactions, while being a significant action, will not be a notifiable action and is therefore not subject to compulsory notification, except in the case of an investment by a foreign government investor.
Under the previous regime, no fees applied to applications for approval. From 1 December 2015, this will change to a "user pays" model with the introduction of application fees for the various forms of investment. The fees are payable at the time the application is made or the notice is given.
Type of action Applicable fee3
Business and agribusiness investment where the value of the transaction is greater than $100,000 $1 billion
Business and agribusiness investment where the value of the transaction is $1 billion or $25,000 less
Internal reorganisation (a separate fee may be payable for any related action that is not $10,000 part of the internal reorganisation)
Foreign government investor starting a business or acquiring certain direct or indirect $10,000 interests in a mining, production or exploration tenement
Acquisitions (excluding internal reorganisations) where the fee would otherwise be more $1,000 than 25% of the value of the investment
There is no application fee where a majority owner (greater than 50%) is acquiring further securities (except where the transaction is part of an internal reorganisation).
The new laws introduce tough criminal and civil penalties for most breaches of the foreign investment regime, as well as infringement notices for less serious breaches in relation to residential land. The maximum penalties for some offences have significantly increased and include maximum criminal penalties of:
- for individuals – $135,000 or three years' imprisonment; and
- for companies – $675,000.
There are also civil penalties of up to $45,000 for individuals and $225,000 for companies.
A foreign person may be liable if the person:
- fails to notify FIRB before taking a notifiable action;
- gives notice to FIRB stating that a significant action or notifiable action is proposed to be taken and takes the action before obtaining FIRB approval or the expiration of the period for FIRB to object;
- contravenes an order made by the Treasurer in respect of a proposed transaction; or
- contravenes a condition in a "no objection" notice.
Criminal and civil penalties can also extend to officers of a corporation which breaches the Act if they authorise or permit the breach or were reckless or negligent in failing to take reasonable steps to prevent the breach.
Third parties also may be liable to the same penalties if they are involved in a breach, for example, by aiding, abetting or inciting the breach or (in the case of civil breaches only) being "knowingly concerned" in the breach. This can include company officers and also other third parties who knowingly assist in a breach, such as advisers or real estate agents who may be involved.
The Treasurer also has broad powers to make disposal and other orders in relation to a breach. These increased penalties are indicative of the Government's approach to stronger compliance and
enforcement of the Act as part of the strengthening of Australia's foreign investment framework.
Preparing for transition to new regime
Any transaction involving an acquisition of an interest in securities in an Australian entity or an Australian business which is notified to FIRB under the previous laws, and which is still being reviewed by FIRB on 1 December 2015 when the new laws take effect, will be treated as being notified under the relevant section of the new laws. Fees will not be payable in respect of notifications of such transactions.
Foreign investors who are contemplating acquisitions or who have signed but not yet completed acquisitions should consider the effect of the new laws and whether approval may no longer be required (e.g. because of the increase in the substantial interest threshold from 15% to 20%) or whether approval may now be required because of changes from the previous laws.
Impact of the amendments
The amendments to the Act represent a significant overhaul of Australia's foreign investment regime. While some aspects of the new laws may relax the requirements for foreign investment approval, the law remains complex and is likely to continue to impose compliance burdens on foreign investors. The increased penalties and enforcement powers under the Act also emphasise the need for investors to carefully consider if and how they need to take steps to comply with the Act.
1. A number of important aspects of the new regime will be determined by regulations, which are currently in draft form. This alert assumes that the regulations will be passed as drafted.
2. Transaction thresholds are indexed annually on 1 January. All dollar figures in this alert refer to Australian dollars. 3. Fees are indexed annually on 1 July by reference to the consumer price index.
For further information, please contact:
Simon De Young, Partner, Baker & McKenzie