Recent acquisitions of agricultural land and businesses by foreign investors have gained significant media and political attention. Controversial examples include the 2012 acquisition of Cubbie Station by a consortium led by Shandong RuYi (a private Chinese company) reportedly for $240 million and the potential takeover of GrainCorp Limited by Archer Daniels Midland (a private US company) for approximately $3 billion, which has now been recommended by GrainCorp's directors.
Acquisitions such as these have prompted debate in the media and across the political spectrum about the appropriateness of the current foreign investment regulatory framework. While the dominant Australian political parties have each issued strong statements to the effect that they support foreign investment, momentum appears to be building towards a review of the current foreign investment regulatory framework. The last meaningful amendment to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) occurred in 1989. The significant geopolitical changes since then have contributed to the call for an overhaul of the legislation.
In particular, the Coalition (a coalition between the conservative Liberal Party and National Party, which has its principal support base in rural Australia), the Australian Greens and various independent Members of Parliament and Senators favour tightening the foreign investment regulatory framework. However, the Australian Labor Party (the centre-left leaning party currently forming government) appears to be broadly in favour of maintaining the status quo, subject to supporting the establishment of a new national register of foreign ownership of agricultural land.
Australia's Senate Standing Committee on Rural and Regional Affairs and Transport References (Committee) has recently released a report on foreign investment and the national interest (Report). The majority of the Committee was comprised of Coalition Senators.
The Committee found that "Australia's current framework for foreign investment was significantly deficient in effectively managing a number of key challenges facing Australian agriculture". It delivered 29 recommendations (together with six recommendations in an interim report that focused on tax leakage resulting from foreign investment), which, if implemented, could have far-reaching implications for the regulation of foreign investments in Australia, in particular, investments in agribusinesses.
In this article, we set out the key implications of the recommendations in the Report for agribusinesses and potential foreign investors.
Current rules for investments in agribusinesses
The FATA, its associated regulations and Australia's Foreign Investment Policy (Policy) set out Australia's foreign investment regime. In general terms, if a foreign investor intends to acquire an interest in Australian land or an Australian business and the proposed acquisition exceeds certain thresholds, the investor must apply to the Foreign Investment Review Board (FIRB) for the approval of the Australian Treasurer for the acquisition.
The Australian Treasurer applies a national interest test, based on the principles espoused in the Policy, in determining whether to approve the acquisition.
The table below sets out some of the current rules relating to acquisitions and investments in Australian agricultural assets.
|Investor||Acquisition of agribusiness||Acquisition of rural land|
|Foreign private investor||An investor must seek FIRB approval if it proposed to acquire 15% or more (or 40% or more if aggregated with other non-associated foreign investors) of an agribusiness, where the business has total gross assets of more than $248 million (higher thresholds apply for investors from New Zealand or the United States).||For an acquisition of an interest in rural land, the same thresholds apply to a foreign private investor.|
|Foreign government investor||An investor that is a foreign government or controlled by a foreign government must seek FIRB approval for any investment that is not a passive portfolio investment of less than 10% of an agribusiness, regardless of the size of the business.||A foreign government investor must seek FIRB approval prior to an acquisition of any interest in rural land.|
"Australian rural land" is land situated in Australia that is used wholly and exclusively for carrying on a business of primary production. "Australian urban land" is simply defined as land that is not Australian rural land. This has led to seemingly incongruous results. For example, a mining tenement or a food processing and storage plant in a rural location would be characterised as Australian urban land, because it is not used wholly and exclusively for carrying on a business of primary production.
The rules for acquiring commercial urban land are more stringent. A foreign person (whether government or private) must apply to FIRB before acquiring any Australian urban land that is vacant, regardless of the value. A foreign private investor must also apply to FIRB before taking an interest in developed commercial real estate valued at $54 million or more (unless the real estate is heritage listed, in which case a $5 million threshold applies)—higher thresholds apply for investors from New Zealand or the United States. This can produce anomalous outcomes. For example, the acquisition of a potential mining site by a foreign private investor that is not "developed" (that is, it is the subject of an exploration permit, exploration licence, assessment lease or equivalent) will generally have a zero dollar approval threshold, whereas the acquisition of a mining site by a foreign private investor that is "developed" (that is, if it is used for production purposes) will generally have a $54 million approval threshold.
The Committee has recommended that these definitions be updated, as set out in the other agriculture specific recommendations section below.
Changes to foreign private investor thresholds
The Committee was concerned that "many and perhaps virtually all private foreign acquisitions of agricultural land and businesses are proceeding without any consideration of whether it is in Australia's national interest" and considered that a new threshold was required.
The Committee was also concerned that foreign investors could make a series of smaller purchases of agricultural interests to avoid the application of the FIRB national interest test.
Accordingly, the Committee recommended that:
- an approval threshold of $15 million be implemented for private foreign investment in agricultural lands, together with an approval requirement for any further investments in agricultural lands (without regard to value) once the initial threshold is reached, and
- FIRB approval should be mandatory for all foreign acquisitions of an agribusiness:
- if the investment exceeds 15% or more in an agribusiness valued at $248 million, or
- if the investment exceeds $54 million.
Changes to the foreign investment framework
The Committee noted that a key challenge for Australia will be "ensuring that foreign investment in Australia continues to be based on commercial motives and not strategic concerns of foreign governments about food security". It was stated that there is "little evidence to suggest that the current regulatory framework and the FIRB national interest test could effectively prevent foreign government-owned entities from acting in a manner that could distort Australia's agricultural capital and trading markets".
The Committee was also "deeply concerned about the lack of a systematic approach by FIRB to the conduct of the national interest test" and that "the flexibility designed into the system is potentially detrimental to the interests of Australian agriculture". This is because the application of the national interest test is determined mostly by government policy, rather than legislation or regulation. Accordingly, the Committee recommended that:
- an independent and wide-ranging review of Australia's foreign investment regulatory framework should be commissioned
- the Government should develop a stronger, more rigorous and more transparent system for examining cases of foreign investment in Australia
- the Government should increase the transparency of the national interest test, so that it provides precise and unambiguous instructions to prospective foreign investors about how the national interest test is conducted, and
- the FATA should be amended to create more effective compliance mechanisms for companies that do not adhere to the undertakings and conditions of their FIRB approval. This recommendation appeared to be particularly aimed at foreign government investors that give undertakings to conduct an acquired business commercially, but do not do so in practice.
These recommendations, while not specifically targeted at the agricultural sector, may ultimately be the most significant in the Report. If implemented, they would have the potential to fundamentally change the way in which FIRB reviews foreign investments.
Interests of local economies
At present, there is no specific requirement that the interests of local economies and local communities be considered by FIRB in approving or rejecting acquisitions. This concerned the Committee, as it considered that the future of rural communities impacted by significant purchases by foreign entities relies more on the goodwill of individual companies than effective government regulation.
Accordingly, the Committee recommended that the interests of local economies and local communities should be considered in the assessment of foreign purchases of agricultural assets.
The Committee was strongly supportive of the commitment by the Government to establish a national register of foreign ownership of agricultural land (Register). The Register was the subject of a discussion paper released in November 2012 and submissions under the consultation process have now closed.
The Committee recommended that the Register should:
- have a zero dollar threshold for transactions—that is, all acquisitions by foreign investors have to be notified
- capture the value of the acquisition
- capture the land size and volume of water entitlements that are acquired
- take into account complex company structures, including foreign trusts, "shell companies", ownership of agricultural assets by foreign mining companies, debt structuring and ultimate ownership
- include divestments as well as acquisitions, and
- include details of the country of origin of the investors.
It was also recommended that notification of acquisitions should be mandatory and that there should be mechanisms for compliance.
Other agriculture specific recommendations
The Committee also recommended that:
- the Government establish an Independent Commission of Audit into Agribusiness to develop a comprehensive policy approach to Australian agriculture
- the definitions of "urban land" and "rural land" be updated to more accurately reflect the common understandings of those terms
- the Government commission an extensive and independent review of possible incentives and barriers for long-term capital investment in major Australian agricultural developments by Australian investors, and
- the government consider appropriate avenues for increasing access for Australian agricultural businesses to domestic finance from Australian banks.
Lessons for foreign investors
With a looming federal election, partisan political stances and continuing media interest surrounding the acquisition of agricultural assets, we expect calls for reform of foreign investment in Australia to gain momentum.
The Report identifies a number of areas of the current foreign investment regime that may be targets for change, particularly if the Coalition is elected to federal government.
For foreign investors in Australian assets, particularly agricultural assets, any such reform is likely to result in additional regulations and reporting and notification requirements, both under FATA and the Policy and in connection with the Register.
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.