The Foreign Investment Review Board (FIRB) has recently published new guidance on its assessment of foreign investment proposals under the "national interest" test.
The new policy statement provides particular guidance relating to investments in Australia by foreign governments and their related entities, and represents a clearer enunciation of the matters of which FIRB takes account when assessing investment proposals. It also provides guidance on investments in the "media sector".
The national interest test
The Foreign Acquisitions and Takeovers Act (1975) (Cth) (FATA) permits the Treasurer to prohibit certain acquisitions by foreign persons if s/he considers that the acquisition would be "contrary to the national interest".
Australia's "national interest" is not defined in the FATA or other legislation. This has allowed the Government to apply a flexible and case-by-case methodology to assessing foreign investment proposals. However, it has also drawn criticism that the test and the decision-making process are therefore somewhat opaque.
In its September 2009 report Foreign Investment by State-owned entities, the Senate Economics Reference Committee recommended that "FIRB develop a more effective communication strategy to improve public understanding of the risks and benefits of foreign investment to Australia. This strategy should also provide additional information about how foreign investment decisions are made and provide information about the emergence of sovereign wealth funds and state-owned entities internationally."
In June 2010, FIRB released a new policy statement - entitled "Foreign Investment Policy" which articulates FIRB's approach to assessing foreign investment proposals, including by foreign governments and their related entities.
National interest considerations
The Government will continue to assess foreign investment proposals against the "national interest" test on a case-by-case basis.
The policy states that the Government typically considers the following factors when assessing foreign investment proposals:
- National Security – the extent to which investments affect Australia's ability to protect its strategic and security interests;
- Competition – whether a proposed investment may result in an investor gaining control over market pricing and production of goods or services in Australia, and the impact that a proposed investment has on the make-up of the relevant global industry. This consideration is additional to any examination of the proposal by the Australian Competition and Consumer Commission (ACCC);
- Other Australian Government Policies – the impact on other policies including taxation revenues and environmental matters;
- Impact on the Economy and the Community – the impact on the general economy, including what level of Australian participation in the enterprise will remain, the interests of employees, creditors and stakeholders, and the extent to which the investor will develop the relevant project and ensure a fair return for the Australian people; and
- Character of the Investor – the extent to which the investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision.
Investments by foreign governments and their related entities
Which foreign government investments must be notified?
In short, according to the new guidance, all of them regardless of value.
With regard to investment in Australian enterprises, FIRB requires that "all foreign governments and their related entities should notify the Government and get prior approval before making a direct investment in Australia, regardless of the value of the investment".
In this respect, the policy appears to go beyond the strict requirements of the FATA, in that:
- while ordinarily under the FATA, acquisitions of interests in companies or businesses below a specified dollar value1 do not require compulsory notification, the policy implies that FIRB considers that these thresholds do not apply in respect of foreign government investors; and
- while the usual shareholding thresholds under the FATA for an entity to become a "foreign person" (and subject to compulsory notification) are 15% (individual foreign shareholder) and 40% (aggregate foreign shareholders), FIRB's policy contemplates interests below 15% being sufficient to make an entity a "foreign government investor" (and therefore subject to compulsory notification) if there is a degree of control of the entity by a foreign government (for example, an entity in which a foreign government is a 10% shareholder and has rights to board representation might be considered a "foreign government investor" by FIRB).
With regard to starting new businesses or acquiring interests in Australian urban land. FIRB requires that it is notified of all such proposals and its approval obtained.
In light of the rise of prominence and activity of sovereign wealth funds, it is therefore now even more important to monitor shareholder registers carefully – any significant shareholding by a foreign government or agency could be enough to make an entity a foreign government investor from FIRB's perspective.
How are foreign government investments assessed?
In assessing investments by foreign governments and their related entities, a key consideration for FIRB is whether the investment is commercial in nature or whether the investor may be pursuing broader political or strategic objectives.
The policy states that "proposals from foreign government entities operating on a fully arms length commercial basis are less likely to raise national interest concerns than proposals from those that do not."
Factors that the Government examines in this regard include:
- the existence of external partners or shareholders;
- 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 will be or remain listed on a stock exchange; and
- the size, importance and potential impact of the investment.
The "media sector" clarified
The new policy statement requires that all foreign persons (including US investors who ordinarily have the benefit of more relaxed thresholds under the FATA) need to notify the Government and get prior approval for investments in the "media sector" of 5% or more, regardless of the value of the investment.
The policy provides that the "media sector" refers to daily newspapers, television and radio (including internet sites that broadcast or represent these forms of media) (emphasis added).
The express inclusion of internet news sites represents an updating of the policy and recognition of the importance and prevalence of internet news services.
1. A$219m in calendar year 2009, indexed for changes in GDP.
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