On 30 June 2010 the Treasury issued a rewrite of its Foreign Investment Policy document (Framework). The Framework provides details on how the Australian Government applies its Foreign Investment Policy (Policy), and replaces the previous policy document issued by the Treasury in September 2009 (Previous Framework).
Under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) the Australian Government has the power to review investment proposals which meet certain threshold tests by foreign persons (including foreign governments). This review process involves the Treasurer deciding whether foreign investments are contrary to the national interest. When making these decisions, the Treasurer relies on advice from the Foreign Investment Review Board (FIRB), who review proposals in accordance with the Policy. In addition to setting out how the Australian Government will apply the FATA, the Policy contains some investment restrictions which are not contained in the FATA that apply to entities owned by Foreign Governments.
Summary of key changes
In general the Framework re-states current Policy, but there are some important substantive changes to the Policy particularly in relation to entities owned by Foreign Governments seeking to invest in Australia. The key changes are:
For Foreign Governments and their Related Entities:
- Foreign Governments and their Related Entities are now able to acquire up to a 10 per cent interest in an Australian enterprise without the need to notify Foreign Investment Review Board (FIRB) (unless the acquisition is one which could influence the control of the target company or is preparatory to a takeover bid).
- The "six principles" which the Treasury used to have regard to in deciding whether Foreign Government investment was contrary to the national interest have been removed from the Framework and replaced with a broad consideration of whether the investment is commercial in nature or whether the investor may be pursuing broader political or strategic objectives that may be contrary to Australia's national interest.
- There is a new definition of what constitutes "Foreign Governments and their Related Entities", which sets out FIRB's previous unwritten policy that any entity in which a foreign government or its agency has an interest over 15% is regarded as a "Foreign Government or Related Entity".
For all foreign investors:
- The acquisition threshold for Australian enterprises has increased from $210 million to $231 million (for non-US investors), and from $953 million to $1004 million for US investors (this is not a policy change but an increase in the threshold as a result of indexation for inflation).
- All foreign persons must have FIRB approval before making investments of 5 per cent or more in the media sector (previously portfolio investments in excess of 5 per cent and all non portfolio investments irrespective of size were notifiable).
10 per cent threshold for notification of foreign government investment
Under the Framework, all Foreign Governments and their Related Entities must notify the Government and get prior approval before making a "direct investment" in an Australian enterprise, regardless of the value of the investment. A "direct investment" is defined as an investment which:
- involves acquiring an interest of 10 per cent or more in an enterprise
- Involves acquiring an interest of less than 10 per cent in an enterprise where that interest can be used to influence or control the company (for example, Foreign Government investors must notify FIRB where they acquire preferential voting rights, the right to appoint directors, and enter into certain contractual agreements such as off take agreements)
- is preparatory to a takeover bid
- involves the enforcement of a security interest over a business' assets or shares.
This position is a relaxation of the Previous Framework, which required Foreign Governments and their agencies to notify FIRB prior to any investment in Australia, irrespective of size.
Removal of the "six principles"
The "six principles" were a set of guidelines issued by the Treasury on 17 February 2008 to be applied in assessing whether proposed investments by Foreign Governments or their agencies in Australia were contrary to Australia's national interest. The six principles were set out in an attachment to the Previous Framework.
Under the new Framework, the six principles have been removed. The Framework now states that where a proposal involves a Foreign Government or a Related Entity, the Australian Government will consider whether the investment is commercial in nature or whether the investor may be pursuing broader political or strategic objectives that may be contrary to Australia's national interest. FIRB will look at whether the investor's governance arrangements could facilitate actual or potential control by a Foreign Government (including the investor's funding arrangements). If the investor can show that it is commercially independent and operates on a fully arm's length basis then this will be less likely to raise national interest concerns.
Where the investor is partly privatised, FIRB will consider the size, nature and composition of any non-government interests and any restrictions on the exercise of their rights as interest holders.
Factors that will assist investors who fall within the definition of a Foreign Government or Related Entity are:
- the existence of external partners or shareholders in the investment
- the level of non-associated ownership interests
- the governance arrangements for the investment
- ongoing arrangements to protect Australian interests from non-commercial dealings
- whether the target company will remain listed on the Australian Securities Exchange (ASX) or another recognised exchange.
Definition of "Foreign Governments and their Related Entities"
The Framework includes a new definition of what constitutes a Foreign Government or a Related Entity. Foreign Governments and their Related Entities are defined to include:
- a body politic of a foreign country
- companies or other entities in which foreign governments, their agencies or related entities have more than a 15 per cent interest
- companies or entities that are otherwise controlled by foreign governments, their agencies or related entities.
The Previous Framework made no mention of this threshold but in practice FIRB policy was to treat a company or other entity in which a foreign government had more than a 15 per cent interest and a company or other entity controlled by a foreign government as a government investor.
Changed rules for investments in the media sector
The Previous Framework required that all "non portfolio" investments in the media sector, irrespective of size, and all portfolio investments above 5 per cent, were subject to prior approval from FIRB. Under the new Framework, all foreign persons (including US investors) are required to get prior approval before making investments of 5 per cent or more in the media sector.
How do the changes affect you and how can we help?
Foreign investors need to be aware of how the new Framework will impact their investments into Australia. With over 1800 lawyers in 30 offices around the world, Norton Rose has the resources and experience to assist clients from all jurisdictions in their investments into Australia. We have a strong working relationship with the Australian Government, including the FIRB, and have acted for international clients on some of the largest investment deals in Australian history.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.