Hong Kong-based company CK Infrastructure Group's (CKI) $13 billion bid to buy Australian APA Group and its energy network has been rejected by Treasurer Josh Frydenberg. The Foreign Investment Review Board failed to reach a unanimous ruling on the tender application but expressed concerns that the acquisition would give a single foreign company monopoly of a majority of Australian pipelines. The Treasurer came to a preliminary decision on 7 November to reject the bid on the basis that it was 'contrary to the national interest' as it would result in an 'undue concentration of foreign ownership...in [Australia's] most significant gas transmission business'. CKI was given two weeks to reapply with a renewed proposal, which it did not do. The final decision to officially reject the proposal was made on 20 November 2018.
Acquisition by a 'foreign person'
The regulation of certain acquisitions by 'foreign persons' of Australian land or entities is set out under a framework of legislation known as the FIRB regime. The decision-making power to approve or deny foreign investment proposals rests with the Treasurer, who is advised by the Board. It is the role of the Board to examine these proposals and determine what 'national interest' implications may arise.
The tests under the FIRB regime to determine whether an acquisition is being made by a 'foreign person' can be complex, with consideration undertaken on a case-by-case basis. CKI fits within the definition of a 'foreign person' under the FIRB regime, as it is a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest. A substantial interest under the FIRB regime is 20% or more of voting power or shares in a company.
The mechanism by which a transaction is governed under the FIRB regime depends on whether the acquisition is classed as a 'notifiable action' or a 'significant action'. 'Notifiable actions' carry criminal penalties if FIRB approval is not obtained before proceeding with the transaction. 'Significant actions' give the Treasurer broad powers to make orders if satisfied that the transaction would be contrary to the 'national interest'.
Categorising a transaction is not always straightforward, with different tests within each of these classes of action for different types of transactions. For example, a transaction involving a business that is valued above the prescribed threshold and involving a change in control of the business would be classed as a 'significant action'. The prescribed threshold varies depending on whether the investor is from a Free Trade Agreement country, is a foreign government investor, or whether the target acquisition is a sensitive business. On the other hand, a transaction involving a foreign person acquiring a substantial interest in an Australian corporation carrying on an Australian business; or an Australian unit trust; or a holding entity of either, would be classified as a 'notifiable action'. Further, different tests apply to transactions involving agribusiness, land-rich entities, media, and mining, oil and gas.
The classes of action are not mutually exclusive. For instance, where the acquisition by a foreign person is of a substantial interest in an Australian corporation carrying on an Australian business that is valued above the prescribed threshold, the transaction can be deemed as both a notifiable action and a significant action. As CKI was proposing to completely take over the APA Group, this acquisition was considered both a significant and a notifiable action under the FIRB regime. The transaction would also have been caught under the special rules relating to transactions involving mining and oil and gas companies.
Accordingly, CKI required approval under the FIRB regime before proceeding with the APA Group takeover and had to satisfy the Treasurer that the proposed acquisition was not contrary to the 'national interest'.
The 'national interest' test
The FIRB regime gives the Treasurer a broad discretion to decide whether a particular investment that has been classed as a 'significant action' would be contrary to the 'national interest'. No definition of 'national interest' is provided in the legislation, however, Australia's Foreign Investment Policy issued by the Treasury states the following factors will be considered when assessing foreign investment proposals:
- national security
- other Australian Government policies (including tax)
- impact on the economy and the community
- character of the investor.
The Treasurer is advised by the Board, who examines the foreign investment proposal and advises on 'national interest' implications. The Treasurer may also seek advice from other relevant governmental agencies in relation to certain factors under the 'national interest' test.
Consideration of 'national interest' factors in CKI's proposal
While the Board expressed concerns in relation to CKI's proposal about a potential market monopoly, it was unable to come to a unanimous decision in its advice to Mr Frydenberg. The Treasurer also sought advice from the newly established Critical Infrastructure Centre, a unit of the Department of Home Affairs designed to provide 'clear, consolidated and early' national security advice. Although the Treasurer was silent on the details of this advice, consultation with the Centre seems to have played a part in the national security factors considered in his decision.
In relation to competition factors, the Policy makes clear that the examination of competition factors by the Australian Competition and Consumer Commission (ACCC) in relation to a proposed investment is independent of the FIRB regime. This helps to explain the contrasting decision reached by the ACCC in relation to CKI's takeover where clearance was given by the Commission in September. The ACCC approved the bid after an enforceable undertaking was given by CKI to divest certain APA Group assets in Western Australia after the takeover. However, this promise seemingly failed to alleviate the Treasurer's concerns about CKI's aggregation of ownership in the Australian energy sector. Mr Frydenberg indicated that the ACCC had not considered the concentration of foreign ownership in explanation for this difference in outcomes.
The APA Group is by far the largest oil and gas transmission business in Australia, controlling 56 per cent of Australia's pipelines. It is clear from Mr Frydenberg's comments that the aggregation of ownership in this particular, and important, asset by a single foreign company played a large part in his decision to reject CKI's proposed takeover. In February, then Treasurer Scott Morrison announced that the level of aggregation of ownership in critical infrastructure assets, such as those held by the APA Group, would also be taken into account in considering the national security implications of foreign investment.
Mr Frydenberg further noted in his decision that CKI is already a substantial investor in Australia's gas and electricity sectors, which appeared to exacerbate the Treasurer's market concentration concerns. The character of CKI as an investor was not, however, a factor deemed to be contrary to the 'national interest', with the Treasurer noting that the Australian Government welcomed CKI's investment and offering a two-week window to apply with a renewed proposal.
Ultimate discretion of the Treasurer
The FIRB regime gives the Treasurer power to approve foreign investment proposals, impose certain conditions on the investment or make a public order prohibiting the investment on 'national interest' grounds. The initial verdict by Mr Frydenberg in relation to the APA Group takeover demonstrates the ultimate discretion and broad powers of the Treasurer in foreign investment decisions despite an unsettled verdict by the Board and, accordingly, the potential for politics to play a part in the decision making process.
The major concern of market monopoly expressed in this decision indicates that, for a revised bid to be successful, CKI would have had to address this issue, with possible solutions including teaming up with an Australian partner or undertaking to sell more assets on acquisition of the APA Group. Had the Treasurer approved a renewed proposal by CKI, he may have exercised powers under the FIRB regime to impose binding conditions that would ensure the investment aligned with the 'national interest'. It is common for the Government to work with foreign investment applicants to ensure a transaction fits with Australia's 'national interest', rather than outright rejecting the foreign acquisition and, in doing so, discouraging foreign investment.
This decision demonstrates the importance of 'national interest' factors when a foreign investment proposal is being assessed under the FIRB regime. The national security, competition, political, economic and community considerations must be contemplated by foreign investors when putting an investment proposal to FIRB and, ultimately, the Treasurer who, as evidenced here, holds significant discretion in such matters.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
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