26 November, 2015
This alert focuses on the new laws for foreign investment in Australian agribusiness 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.
Previously, foreign investment in agribusiness was subject to the same thresholds that applied to other foreign acquisitions of Australian companies or business assets.
Under the new regime, foreign persons who propose to enter into an agreement to acquire a direct interest in an agribusiness where the value of the investment is more than $55 million2 are required to notify the Foreign Investment Review Board (FIRB) before entering into that agreement.
Consistent with prior policy, all proposed direct investments by foreign government investors, including in agribusiness, will continue to be reviewed regardless of value.
What is an "agribusiness"?
An "agribusiness" is defined by reference to specified and well recognised industry classifications as set out in the Australian and New Zealand Standard Industrial Classification Codes. These industry classifications include agriculture, forestry, fishing and also most food manufacturing or what has been described as "first stage downstream manufacturing".
A business or entity will be considered an agribusiness if the business or entity (or a subsidiary of the entity) carries on such activities and where at least 25% of the value of such assets of the business/entity are used in, or at least 25% of the earnings are derived from, carrying on such activities.
What is a "direct interest"?
Investments in agribusiness by foreign persons are only required to be notified to FIRB where they involve the acquisition of a "direct interest", being:
- an interest of at least 10% in the agribusiness entity or business;
- an interest of at least 5% in the agribusiness entity or business, where there is also a legal arrangement which relates to the businesses of the investor and the agribusiness, such as an agreement to secure the offtake of commodities produced by an agribusiness; or
- any interest where the investor is in a position to influence or participate in the central management and control of the agribusiness entity or business or is in a position to influence, participate in or determine its policy.
While the direct interest test involves a lower threshold than the substantial interest test (which applies to a non-agribusiness acquisition), it should be noted that the tracing provisions, under which a
substantial interest in a corporation or trust is traced up through the chain of ownership, do not apply in determining whether the acquisition of a direct interest in an agribusiness is a notifiable action.
Calculating the relevant threshold
The acquisition of a direct interest in an Australian entity or Australian business that is an agribusiness requires FIRB notification where the total of:
- the value of the consideration for the acquisition (which will be taken to be a reasonable assessment where the parties are not at arms' length or there is no agreement relating to the acquisition); plus
- the total value of the other interests held by the investor, alone or together with one or more associates:
- in the relevant entity or business; or
- in an entity or business previously acquired from the relevant entity or business, exceeds $55 million.
Investors should note that the threshold for agribusiness is based on the value of the investment, rather than the value of the target and in this respect differs from the threshold applied to an acquisition of non- agribusiness companies or assets.
Where the proposed acquisition of a direct interest in an agribusiness does not meet this threshold, the general foreign investment rules may still apply to the investment. These rules include a requirement that a non-government foreign investor must notify FIRB and obtain prior approval before acquiring agricultural land which takes the aggregate value of all agricultural land held by the foreign investor and/or its associates above $15 million. This $15 million threshold for foreign investments in agricultural land was first implemented through Australia's foreign investment policy in March 2015.
Free trade agreements
The $55 million threshold applies to any foreign person, other than a "relevant agreement country investor". This term currently includes a national or an enterprise (or branch of an enterprise) of the United States, New Zealand or Chile. Relevant agreement country investors and enterprises or nationals of Singapore and Thailand are also not subject to the cumulative $15 million threshold for acquisitions of agricultural land.
Consistent with Australia's free trade agreements with the United States, New Zealand and Chile, investors from these countries are excluded from the lower screening thresholds and an investment in agribusiness or in agricultural land is subject to the same thresholds that would apply to that investor in respect of an acquisition of an Australian company or business assets in general, being $252 million for investments in sensitive sectors and $1,094 million for investments in other sectors. Singaporean and Thai investors that acquire an interest in agricultural land that is used wholly and exclusively for a primary production business may disregard the fact that the land is agricultural land.
The free trade agreements with Japan, Korea and China (if and when it enters into force) preserve the Australian Government's ability to apply a lower screening threshold for investments in agribusiness and therefore enterprises and nationals from these countries are not "relevant agreement country investors" and the lower thresholds outlined above apply to such investors.
Investors should also note that from 1 December 2015 notifications to FIRB will incur an application fee.
The fee for notifying FIRB in respect of an acquisition of a direct interest in an agribusiness where the consideration for the acquisition is $1 billion or less is $25,000, or $100,000 otherwise, payable when the notice is given.3
Additionally, investors should note that, until the applicable fee is paid (or waived), the notice is taken not to have been given and the decision period which FIRB has to consider the application will not start until the fee is paid. Accordingly, failure to pay the applicable fee will adversely impact deal timeframes.
Agricultural land register
Investors in the Australian agribusiness sector should also be aware of the Register of Foreign Ownership of Agricultural Land (Register), which was introduced on 1 July 2015. Foreign persons who have an existing interest in agricultural land are required to lodge notice of that interest with the Register by 31 December 2015 and to register any agricultural land interests acquired on and from 1 July 2015 on the Register within 30 days of the acquisition.
Sunset clause and water entitlements
Investors should note that the amendments to the legislation include a sunset clause which provides that the legislation in relation to the Agricultural Land Register will expire and cease to have effect on 1 December 2016 if a register of foreign ownership of water entitlements is not established by that time. This will be subject to a public consultation process before implementation.
This proposal to establish a register of foreign owned water entitlements was proposed by the Australian Greens, who have also stated they have also secured a commitment from the Government to review whether foreign acquisitions of water holdings should be subject to assessment by FIRB.
Impact of the amendments
The introduction of the new definition of agribusiness and new screening threshold for investments in agribusiness is likely to lead to more transactions requiring FIRB approval.
Foreign investors looking to invest in Australian agribusinesses should assess whether they will be required to notify FIRB and, if so, structure acquisitions to accommodate obtaining FIRB approval, including taking into consideration any impact on the acquisition timetable (i.e. making FIRB approval a condition precedent to completion).
The legislative changes which increase penalties and give stronger powers to the Treasurer to make disposals and other orders for breaches reflect the Government's approach to more rigorously review and enforce foreign investment in respect of agribusiness. This was also demonstrated by the Treasurer's recent determination that the proposed acquisition by foreign investors of S. Kidman and Co.
Limited (which owns significant agricultural land with an average herd of 185,000 cattle) would be contrary to the national interest. However, investors should note that the Treasurer's decision was based on:
- national security issues – as part of the land is located in the Woomera Prohibited Area (WPA) (which was also the reason cited for blocking the proposed sale of OZ Minerals to foreign investors in 2009); and
- the size and significance of the total portfolio of Kidman properties – Kidman owns 2.5% of Australia's agricultural land.
Further, both the Treasurer and the Prime Minister left open the possibility that a restructured proposal (presumably one which excludes the sale of land within the WPA to foreign investors) would not be blocked by FIRB.
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. 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