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Australia’s ‘new’ foreign investment regime- Same product different packaging

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02 December 2015

​With effect from 1 December 2015, the Australian Government has re-written its foreign investment laws and policy.  The overall policy position on foreign investment in Australia has not changed materially although there have been a range of changes to modernise, harmonise and strengthen the regime.

Fees - immediate impact on deal costs

Fees are now payable for all foreign investment approvals.  Fees generally range from AUD5,000 to AUD100,000, depending on the type and value of transaction proposed.  For example, foreign investment approval for the acquisition of the shares of an Australian company or the assets of an Australian business will now generally attract an application fee of AUD25,000, increasing to AUD100,000 if the transaction is valued at over AUD1 billion (unless in certain cases the fee would be more than 25% of the proposed consideration, where it may be reduced to AUD1,000).

These fees are significant and foreign investors will now need to take account of these fees in their deal costs and structuring.  From a structuring perspective, to keep fees to a minimum, it will be important to ensure that the foreign investor’s commercial objectives can be met with one foreign investment application.

Individual notification threshold increased to 20%

The mandatory notification threshold in relation to the acquisition of securities of an Australian entity valued at more than AUD252 million[1] has been increased from 15% to 20% (including existing securities held by the acquirer and its associates).  In a public M&A context this increase is a welcome change as it now aligns the control threshold with the 20% takeover threshold[2] (so bidders can take a firm 19.99% interest rather than 14.99% outright and 5% subject to a FIRB condition).

Foreign persons generally

Likewise, for an entity (Australian or foreign) to be a “foreign person” to whom the re-written Foreign Acquisitions and Takeovers Act 1975 (Cth) (New FATA) applies, the individual level of foreign ownership has been increased from 15% to 20% (although the aggregate 40% test remains the same). This may mean that an Australian company with an individual foreign investor holding between 15% and 19.9%, may cease to be a foreign person. Also for the purposes of the 40% aggregate test, under the New FATA you will only need to take into account the substantial holdings (i.e. 5% or more) notified to the ASX (rather than having to make assumptions about the balance of the register).

Foreign government investors

Foreign government investors are now defined to be a “foreign person” to which the New FATA applies (rather than being dealt with under policy although the treatment is basically the same). 

Broadly, any type of proposed investment in Australia by a foreign government investor (whether in land (including a tenement), an existing company (including in a mining, production or exploration entity), trust or business or starting a new business) is a ‘notifiable action’ under the New FATA, which requires prior foreign investment approval.  A foreign government investor carrying on a moneylending business does not need approval to take a security interest.  Neither does it need approval to enforce a security interest so long as it sells the assets within 6 months (12 months if it is an Australian authorised deposit-taking institution) or such longer period as it can show it is making a genuine attempt to dispose of the interest.

In the case of an investment by a foreign government investor in a company, trust or business notification is only required under the New FATA for a proposed acquisition of a “direct interest”.  A direct interest is an interest of:

  • at least 10%;
  • at least 5% if the proposed buyer has also entered into a ‘legal arrangement’ relating to the entity or business (although it is not clear what ‘legal arrangement’ means in this context, this seems to have the same intent as the old policy where investments below 10% were caught if they also involved strategic arrangements such as preferential, special or veto voting rights); and 
  • any percentage interest that effectively gives the foreign person influence over the management or policy of the entity or business 

This is not so far removed from the previous definition of ‘direct investment’ under the old policy as to be seen as a fundamental policy shift.  However, the fact that interests of associates are now taken into account in determining whether the percentage ownership thresholds are met and the width of the zero percentage threshold where management or policy are directed by a foreign government investor, is likely to result in increased notification requirements for foreign government investors.  In this regard, under  the New FATA foreign governments, separate government entities and other foreign government investors from the same country are deemed to be associates of each other.

Land

The previous foreign investment regime focussed on Australian urban land.  The New FATA applies to all land in Australia unless below a threshold, exempt or specific rules apply. Focus on agriculture/agribusiness

The New FATA gives legislative force to the previous notification requirement under the policy in relation to acquisitions of agricultural land that result in a foreign person owning Australian agricultural land with a cumulative value of above AUD15 million[3].  This is an area of some sensitivity as demonstrated with the recent blocking of the proposed acquisition by China’s Shanghai Pengxin Group of ten cattle stations from S.Kidman &Co.

While new notification requirements also apply for investments in ‘agribusiness’ this too is no great policy shift as the Australian government has forewarned of this change for some time now.  A proposed acquisition by a foreign person of a direct interest (as discussed above) in an agribusiness valued above AUD55 million is a compulsory notifiable action under the New FATA.  The AUD55 million threshold value is calculated on a cumulative basis and includes not only the value of the consideration for the acquisition, but also the total value of the other interests held by the foreign person (and its associates) in that ‘agribusiness’ or previously acquired from that ‘agribusiness’.

Broadly, an Australian entity or business will be an agribusiness if more than 25% of its and its subsidiaries, earnings are derived from agribusiness, more than 25% of its total asset value relates to assets used by it and its subsidiaries in carrying on an agribusiness or more than 25% of the value of the total assets of the business are used in carrying on an agribusiness.

Timing for consideration of applications

While the 30 day time period for the Treasurer to consider applications has not changed under the New FATA, investors can now voluntary extend this period by providing written consent.  This is a welcome change, as foreign investors will no longer need to withdraw and resubmit applications should the Treasurer require longer than 30 days to make his decision.  Previously, this was the only option available to a foreign investor who wished to maintain the confidentiality of its transaction and avoid the publication of an interim order by the Treasurer to extend the review period by 90 days.

Increased compliance framework

The New FATA also has a strong compliance focus with the introduction of a new set of criminal and civil penalties leading to maximum fines in the non-real estate context of AUD675,000 and broader investigatory powers and surveillance from the Australian Taxation Office.

The New FATA in practice

Like its predecessor, it is likely that all of the implications of the New FATA will only be fully understood once it is tested in practice.  However, on its face, it does appear to have achieved its aim of modernising Australia’s foreign investment regime and increasing transparency for foreign investors.

We wait with interest to see whether the imposition of fees for foreign investment applications will encourage foreign investors not to seek foreign investment approval or to seek the approval later in a sales process when it has greater deal certainty.  Given the Treasurer’s wide powers to unwind transactions he determines to be contrary to the ‘national interest’, and his wide discretion to interpret this concept, we suspect that most foreign investors will view the fee as a relatively small price to pay for deal certainty.

If you are a foreign investor, the impact of the New FATA on your proposed Australian investments will depend on your individual circumstances and the specific investment action proposed.  In some cases, exemptions may be available but whether these apply needs to be considered on a case-by-case basis.  If you require detailed advice on a proposed Australian investment, please speak to your usual Allen & Overy contact, or one of the suggested contacts below.

[1]   A threshold of AUD1,094 million applies to non-government investors from free trade agreement countries being Chile, China (subject to entry into of the free trade agreement), Japan, Korea, New Zealand and the United States (unless investing in sensitive industries).
 
[2]   Note the test for voting power under the takeover provisions differs in some respects from the definition of substantial interest and aggregate substantial interest under the New FATA and so the thresholds may not always align precisely.
 
[3]   A threshold of AUD1,094 million applies to non-government investors from certain free trade agreement countries being Chile, New Zealand and United States (AUD50 million for Singapore and Thailand).