What does it mean for investment in the food and agribusiness sector?
Australia's new foreign investment regime came into effect on December 1, 2015. As noted in previous editions of Cultivate (see editions 2, 3, 6 and 8), material changes to Australia's foreign investment rules as they apply to the agri sector have been foreshadowed for close to two years. Many of these foreshadowed changes have been implemented as part of the new regime. This article focuses on those changes.
Key changes – a snapshot
The key changes to the regime that relate to the agri sector include
- The introduction of a new definition of agricultural land (which replaces the old concept of "rural land').
- The introduction and regulation of the new concept of agribusiness.
- Reductions in the thresholds that will trigger the need for a notification to Australia's Foreign Investment Review Board (FIRB) for agri transactions.
- The introduction of fees for notifications to FIRB.
- The introduction of an agricultural land register.
The new thresholds for agricultural land and agribusiness investments by non foreign government investors, in summary, are:
|Investment||Monetary threshold||Percentage interest threshold||Fees|
|Agri land – land that is used, or could be used for a primary production business||
US, NZ, Chile – A$1,094m (indexed) Singapore, Thailand – A$50m (not indexed)
All others – A$15m (cumulative)
|Any interest||A$5,000 – A$100,0001|
|Agribusiness – businesses that carry on business or derive earnings from certain industries including agri, forestry and fishing and certain food product manufacturing business||
US, NZ, Chile – A$1,094m (indexed)
All others – A$55m (indexed)
US, NZ, Chile – substantial interest (20%)
All others – direct interest (usually an interest >10%)2
|A$25,000 – $100,0003|
All acquisitions by foreign government investors will have a A$0 threshold.
These changes have been driven in part by the Australian government determining that it requires a deeper understanding of foreign investment in the Australian agri sector. Consistent with this, the Australian government has also recently created an agricultural land register. Since February 29, 2016 all foreign investment in agricultural land must be registered with the Australian Taxation Office. The type of information collected for the register includes details such as location and size of the property, the interest being acquired and who the party acquiring it is. Consistent with this, the Australian government has released a consultation paper for the development of a national water interests register.
The increased understanding the Australian government will have of the Australian agribusiness sector will mean that it is in a better position to assess the potential ramifications of any particular proposed foreign investment in the sector. In particular, the Australian government will be in a better position to assess whether a proposed investment is in the national interest (noting that the investment of foreign capital into capital intensive industries such as agriculture is, in most cases, considered to be in Australia's national interest).
Agricultural land and Agribusiness – some details
Agricultural land is defined under the new regime as land that is used, or that could reasonably be used, for a primary production business. This includes land that is partially used for a primary production business, or land where only part of the land could reasonably be used for a primary production business.
The definition of a primary production business under the new regime is the same as that which applies under Australia's income tax laws. It includes cultivating or propagating plants, maintaining animals for the purposes of selling them or their produce (typical animal farming), manufacturing dairy produce, conducting operations relating to catching fish and other water animals, pearl farming, and plantation operations (planting, tending, felling and transporting trees). An important consideration in determining whether a primary production business is being carried on is whether the agricultural activity has a commercial purpose or character.
Consideration must also be given to whether the land could reasonably be used for the purposes of carrying on a primary production business. Factors that will be considered in assessing this are the zoning of the land, the history of use of the land, the characteristics of the land and any applicable lease or licence conditions or limitations.
Agribusiness is a new concept introduced into the regime. It includes any Australian entity or business that uses its assets in the carrying on of a business wholly or partly4 in any of a number of specified classes of business set out in the Australian and New Zealand Standard Industrial Classification Codes. These classes include agriculture, forestry and fishery businesses and certain food product processing/manufacturing businesses (meat, poultry, milk and cream, fruit and vegetable and seafood processing, together with cheese and other dairy, oil and fat, grain mill product and sugar manufacturing). However, certain food product businesses are excluded from the definition of an agribusiness. These include cured meat and smallgoods manufacturing, ice-cream manufacturing, cereal, pasta and baking mix manufacturing, bakery product manufacturing, confectionery manufacturing and a number of other abstract food products including food coloring, herbs, coffee and frozen meals.
Investors should also note that the definitions of agricultural land and agribusiness are not mutually exclusive. In many instances the acquisition of an agribusiness will involve the acquisition of an interest in agricultural land. In such cases, the acquisition of the interest in agricultural land may require notification to FIRB despite the value of the acquisition of the agribusiness being below the agribusiness monetary threshold. However, it will not always be the case that the acquisition of an agribusiness will include as part of it the acquisition of an interest in agricultural land – for example, food processing or manufacturing operations such as an abattoir may not be located on agricultural land.
A new fee regime has also been introduced, as noted in the above table. Substantial fees are now applicable to all relevant acquisitions in the agri sector. At the lower end, applications relating to acquisitions of agricultural land that are valued at A$1 million or less will incur a fee of A$5,000. However, acquisitions for agricultural land valued in excess of A$1 million will incur fees between A$10,000 and A$100,000, depending on the value of the property. For agribusiness investments, a fee of A$25,000 applies where the value of the acquisition is A$1 billion or less, with the fee for acquisitions above this threshold jumping to A$100,000.
The S. Kidman and Co. property portfolio, Australia's largest private landholding, was offered for sale in 2015. The portfolio comprised 11 beef and associated properties across four states and territories covering more than 100,000 square kilometres. The portfolio included the world's largest cattle farm, Anna Creek (~23,500 square kilometers). The Anna Creek property is adjacent to and overlays the weapons testing site at the Woomera Protected Area (WPA).
There was significant foreign interest in this opportunity, speculated to include investors from Canada and China. In November 2015 for only the fourth time in 20 years, the Treasurer (on the recommendation of FIRB) blocked the proposed sale in its original form on national interest grounds. Treasurer Scott Morrison said in a statement: "Given the size and significance of the total portfolio of Kidman properties along with the national security issues around access to the WPA, I have determined, after taking advice from FIRB ... that it would be contrary to Australia's national interest for a foreign person to acquire S. Kidman and Co. in its current form". Two things were clear from the Treasurer's statement – that the size of the portfolio (not just its proximity to the WPA) was of concern, and that if the form of the transaction was changed then the Treasurer and FIRB might reach a different conclusion.
This decision followed shortly after the granting of a long term lease of the Port of Darwin by the Northern Territory government to a Chinese company allegedly linked to the People's Liberation Army. As the port is infrastructure owned by an Australian state or territory, FIRB approval was not required for the Northern Territory government to enter into the lease. The port transaction therefore took both the Australian government and the US government by surprise (US troops regularly pass through the port). The Obama administration apparently heard of the transaction through reporting in the US press, and President Obama specifically raised his government's surprise with Australia's Prime Minister Malcolm Turnbull5.
Given this background, there are some who have suggested that the blockage of the Kidman transaction was made for local and international political reasons, rather than due to genuine concerns for the national interest. However, the Treasurer's position at that time was consistent with that taken by the previous Australian government in 2009, when Chinese SOE Minmetals was prohibited from acquiring parts of OZ Minerals because OZ's Prominent Hill mine was located in the WPA.
The second round proposal selected by Kidman as its preferred bidder appeared to address the Treasurer's national security and portfolio land area concerns regarding the proposed sale in its initial form. Dakang Australia Holdings (Chinese controlled) entered into a consortium arrangement with Australian Rural Capital in a bid crafted to assure an ongoing Australian ownership interest in the portfolio (20 per cent), the carve out of Anna Creek (and the Peake holding) from the portfolio, and significant investment in the asset which is expected to lead to increases in production and increased international markets. We understand that this restructuring of the offer was undertaken in consultation by all involved parties with FIRB as to what an acceptable deal structure would likely need to be – the Kidman chairman stated that "the Consortium and Kidman have complied with all requests by the FIRB...".
Despite this, on April 29, 2016 the Australian Treasurer announced that his "preliminary view" was that the 2nd round proposal by the consortium was contrary to the national interest. In his announcement the Treasurer noted that a relevant consideration was ensuring the Australian public maintained confidence in the government's regulation of foreign investment so that the public continued to support foreign investment, that the offering of the portfolio as an aggregated asset made it difficult for Australian bidders to be able to make a competitive bid and for any single Australian group to acquire the entire operation, and that he is not yet satisfied that his concerns regarding the size of the portfolio have been addressed by the consortium's proposal. The Treasurer gave the consortium a "natural justice period" of four days (spread over a weekend) to respond to his preliminary finding.
The Treasurer also noted that he had commissioned a former head of the Australian Competition and Consumer Commission (ACCC) to investigate the sale process, and he had found that the sale process was satisfactory and offered Australian parties an opportunity to make an offer but also that there was significant domestic interest in the business.
Some aspects of this latest decision by the Treasurer are noteworthy
- The Treasurer commissioning the report by the former head of the ACCC to assess market integrity issues around the sale process and to advise on whether the process offered a fair opportunity for Australian bidders to participate, together with the Treasurer stating that the size of the asset makes it difficult for an Australian enterprise to acquire the entire operation, suggests that the national interest test has a broader meaning than has previously been understood. In particular, it suggests that the national interest now requires that sale processes be structured in a manner that facilitates competitive Australian participation in such processes. Such a concept will likely prove challenging for future vendors. For example, when is the line crossed between an Australian bidder simply being outbid (noting that a number of Australian bidders participated in the second round bid process for the Kidman portfolio), and a transaction being structured so as to deny an Australian bidder a reasonable opportunity to participate? Additionally, why should the fair opportunity test apply only to Australian bidders rather than bidders generally, and how do you balance the application of that test against the right of the vendor (who may well be Australian) to secure the best price it can for the asset it has developed?
- The Treasurer stating that a relevant consideration was ensuring that the Australian public maintained confidence in the government's regulation of foreign investment so that the public continued to support foreign investment. It is surprising that "public opinion" now appears to be a meaningful aspect of the national interest test. We expect that in most instances the national interest of Australia is best served by the government approving an appropriate transaction and clearly communicating to the public why that transaction was not contrary to the Australia's national interest rather than to reject proposals because they are perceived by the Australian public (which is largely uninformed about the details of them) not to be in the national interest.
- The Treasurer making a "preliminary" finding. This has never occurred previously. This new approach is not of itself a cause for concern – presumably bidders would welcome increased opportunities for consultation that may facilitate a proposed transaction being approved (provided that consultation does not cause undue delay in the process). But there has been some cynicism about the limited practical usefulness of a four day natural justice period in all the circumstances of the transaction, the consortium and the asset.
The backdrop to this decision is that the government has called a federal election to be held in early July 2016. There has been speculation by commentators, and criticism from the Federal opposition, that the decision is politically motivated with an ear to the nervousness of the broader electorate regarding the sale of Australian land to foreign interests.
The new definition of agricultural land incorporates land used for a primary production business together with land that could reasonably be used for a primary production business. Accordingly, foreign investors acquiring Australian land need to carefully consider all possible uses of the land they are acquiring in case the lower agricultural land thresholds apply. Foreign investors also need to consider the aggregate interests they hold in Australian agricultural land when considering new investments because the A$15 million threshold applicable to agricultural land is a cumulative one.
The new concept of agribusiness covers a wide range of farming and food product manufacturing businesses. Foreign investors need to be mindful that the monetary thresholds for notifying FIRB of a proposed investment in agribusinesses are lower than for investments in other types of Australian entities and businesses.
Fees and timing
The fees now payable for notifying FIRB of a proposed investment are material, and for larger transactions quite substantial. We have already seen that the fees can be onerous for consortia of foreign investors (as each consortium member has to pay a separate fee), and so expect that this will be an area of ongoing scrutiny for investors and, as a result, the Australian government. We are also seeing delays in FIRB processing notifications as compared to what had previously been the norm – it will be interesting to see whether these delays become standard practice or fall away once FIRB and its staff become more familiar with the new regime and its intricacies.
Likely points of sensitivity
Foreign investment in Australian agriculture is focussed in the beef, wheat and dairy sectors. The Kidman decision shows that FIRB and the Australian government will look closely at the proposed acquisition by foreigners of very large tracts of Australian land, significant tracts of Australian land in a particular geographic area, and particularly acquisitions of tracts of land that are adjacent to or overlap areas that are otherwise sensitive. These issues need to be carefully considered by potential acquirers in the Australian beef and wheat sectors. Further, the Australian dairy industry is likely to be considered by the Australian government to be an important and sensitive Australian industry. Accordingly, while the scale of dairy land holdings being offered for sale is less likely to raise concerns, if foreign interests are considering acquiring a key player in the Australian dairy industry or a majority of the dairy holdings in a geographic area they should expect that the proposal will come under close scrutiny by FIRB and the Treasurer.
Engage with FIRB
The first round of the Kidman process highlights how an adverse recommendation by FIRB and determination by the Treasurer can significantly impact a sale process. There are lessons in this for both vendors and bidders – to engage with FIRB about the proposed structure of any significant transactions in advance, and where commercially viable to structure the offering and any bids in a manner more likely to be considered acceptable by FIRB and the Treasurer. As the Kidman experience demonstrates, there can be no guarantees of success through adopting this approach, but the advantages will be considerable if a satisfactory transaction structure can be submitted to FIRB. While FIRB will not give specific structuring advice, it has confirmed to us that it will consider hypothetical scenarios and give an indicative view as to whether the proposed action might or might not fall within the scope of the regime and thus require notification to FIRB. Accordingly, FIRB encourages transaction parties to liaise with it in advance, particularly in relation to potentially sensitive or high value transactions. Interested parties should therefore carefully consider the potential advantages to opening an advance dialogue with FIRB.
National interest test
The national interest test under Australia's foreign investment regime was not amended as part of the regime rewrite, but continues to be a very relevant consideration for foreign investors. The test remains deliberately vague, so as to give the Australian government the flexibility to take steps to block or to impose conditions on proposed acquisitions by foreign investors as and when it considers appropriate and necessary to do so. The Treasurer's most recent announcement regarding the Kidman transaction starkly highlights the flexibility this test provides the Australian government, and arguably constitutes an expansion of what falls within the scope of this test. Further, the novel aspects of the steps taken by the Treasurer, and his reasoning set out in that announcement, highlight the particular sensitivity to proposed acquisitions by foreign persons of large tracts of Australian agricultural land.
1 A fee of A$5,000 applies to land valued at or below A$1m, and fees of between A$10,000 - A$100,000 will apply to land valued above A$1m.
2 A direct interest can be less than 10% in certain circumstances, including where the acquirer has an agreement relating to the entity or business being acquired or where the acquirer is in a position to participate in or influence the central management and control of, or influence participate or determine the policy of, the entity or business. Refer to FIRB Guidance Note 18 for further details.
3 A fee of A$25,000 applies to agribusinesses valued at or below A$1bn, and a fee of A$100,000 applies to agribusinesses valued above A$1bn.
4 At least 25% of the acquired business or entity must derive earnings from agribusiness or the value of the assets used for agribusiness must exceed 25% of the total value of the assets.
5 This has prompted the Australian government, from 31 March 2016, to tighten the rules around the disposal of key infrastructure owned by the Australian states and territories to foreign investors.