Foreign investment update – Modernisation options - Inward/ Foreign Investment

Introduction

On 25 February 2015, the Australian government released an Options Paper seeking feedback on proposed changes to Australia's foreign investment regime, primarily in relation to residential real estate and agriculture.

Following this, on 2 May 2015 the Australian government announced a series of changes to the foreign investment regime. These included further details on the lower threshold for agriculture-related acquisitions, new application fees and a stricter enforcement regime for real estate acquisitions. Further details of these changes are available in our most recent Foreign Investment Update.

Further changes to modernise the foreign investment regime are proposed. Having considered the initial feedback provided following the February Options Paper, on 18 May 2015 the government released a Modernisation Options Paper.

Norton Rose Fulbright Australia made a submission to the Foreign Investment Review Board (FIRB) in response to some of the proposals in the Modernisation Options Paper. Our responses are included in this update, together with a summary of some of the key modernisation options proposed by the government.

Timing of legislative change

The government released on 6 July 2015 three bills to effect the changes to the foreign investment regime announced on 2 May 2015, being the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (Cth), the Register of Foreign Ownership of Agricultural Land Bill 2015 (Cth) and the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015 (Cth).

The government also released draft regulations which will outline how the new legislative regime will operate.

The government is currently seeking feedback on the two substantive bills (the Foreign Acquisitions and Takeovers Fees Imposition Bill is a standard tax imposition bill so the government is not seeking feedback on this)."

Summary of modernisation proposals

The Modernisation Options Paper outlines the following key proposals:

Incorporating prior notification and approval requirements into legislation

Currently, Australia's foreign investment regime includes numerous prior notification and approval requirements that are not contained in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and have no statutory backing. Rather, these requirements, which relate to foreign government investors, the media sector and heritage listed developed commercial property, are contained in Australia's Foreign Investment Policy (Policy).

To increase transparency and provide greater certainty for investors, the government proposes to:

incorporate the foreign government investor rules into the current legislation. Our submissions support this proposal as it will ensure that these requirements are subject to proper legislative review and provide greater clarity to foreign government investors;
legislate the media specific requirements and increase the percentage threshold from 5% to align with direct investment (10%) or substantial interest (15%) under the current legislation; and
abolish the special screening requirements for heritage listed commercial developed property.

The Policy will still provide guidance on operational matters. The government also proposes to retain some flexibility to make changes through the regulations.

Updating legislation to reflect administrative practices, regulatory concepts and modern business and corporate finance practices, and alignment with other federal legislation

The current legislation is not in line with current administrative and regulatory practices.

To reduce regulatory costs and promote compliance, the government's proposals include legislating to allow:

applicants to voluntarily agree to extend the screening period. Our submissions support this proposal. The current foreign investment regime requires the applicant to withdraw and resubmit the application in order to extend the screening period of 30 days (so as to avoid the use of an interim order that is publicly gazetted). The current practice of withdrawal and resubmission creates an unnecessary administrative burden on applicants. The government's proposal will allow applicants to voluntarily agree to extend the screening period on a confidential basis; and
the Treasurer to vary enforceable conditions (subject to a no detriment test) and impose conditions if applicants fail to notify. Our submissions support this proposal as it will streamline the process for the removal of conditions imposed in connection with a transaction that subsequently become redundant.

A number of proposals will align Australia's foreign investment regime with other federal legislation, including:

increasing the 15% substantial interest threshold for a single foreign person in the FATA to 20% (which is the current substantial interest threshold in the takeovers rules in the Corporations Act 2001 (Cth) (Corporations Act)). Our submissions support this proposal as, in our view, an investor with an interest of 19.9% in an Australian entity has a comparable level of control to an investor with an interest of 14.9%. Both investors have a blocking stake with respect to potential takeovers. Accordingly, we believe that the increased threshold will not materially diminish the government's ability to screen transactions that are likely to have a control effect on Australian businesses;
considering options to refine the 'associate' and 'foreign person' definitions to better align with modern practice. Our submissions support this proposal as removal of the 40% aggregate ownership threshold may provide much needed certainty for widely-held entities or funds. Currently, there is no equivalent aggregate ownership threshold under the Corporations Act, and both the FATA and Corporations Act already include very broad definitions of 'associate' which would capture an arrangement between different foreign shareholders. The legislative purpose for requiring a diverse group of foreign shareholders to notify under the FATA remains unclear when, individually considered, they would not have control over the operation of the relevant Australian business;
considering options to reduce the regulatory burden for substantially Australian entities;
better aligning the money lending exemption with current lending practices. Our submissions support this proposal. Currently, the money lending exemption in the Policy only applies to a foreign government investor that is an authorised deposit-taking institution (ADI). The exemption is silent on the application of the exemption to foreign banks which are not ADIs. In our view, this part of the Policy should be clarified so that it is consistent with the money lending exemption as it applies under Australian takeovers law, which does not discriminate between ADI and non-ADI banks; and
importing selected exceptions from Australia's takeover rules in Chapter 6 of the Corporations Act (subject to any necessary modifications). These are proposed to be an exemption for acquisitions in the ordinary course of underwriting and an exemption from compulsory notification acquisitions where a majority owner is increasing its direct interest. Our submissions support these proposals as we believe that an exception for creeping acquisitions similar to item 9 of section 611 of the Corporations Act (ie 3% creep in 6 months) should be allowed as creeping acquisitions do not have any significant control effect and this exemption would assist FIRB to better target applications.

Exempting certain proposals that are unlikely to affect national interest

This proposal aims to increase the consistency of the exemptions available across the different acquisition types.

The key proposals are to:

allow annual program arrangements to cover indirect acquisitions of interests in urban land (currently, these programs only apply to acquisitions of direct interests in urban land), and to extend such programs to foreign government investors;
fix and update the exemption for passive investments in urban land trusts, which is no longer operational as a result of obsolete references in the regulations;
broaden the scope of exemptions for Australian land corporations and trusts by extending the current exemptions to interests acquired indirectly through urban land corporations and trusts;
raise the developed commercial real estate screening threshold for non-sensitive commercial real estate from A$55 million to A$252 million (indexed);
adjust the definition of 'foreign government investor' to reflect the proposed new single foreign person control threshold of 20% (discussed above); and
extend existing exemptions for non-governmental investors to foreign government investors. Our submissions support this proposal as we believe that a pragmatic approach should be taken to investments by foreign investors and we support an extension of exemptions to these investors, including in respect of pro-rata capital raisings.

Amending legislation so that it applies irrespective of transaction structuring

The current foreign investment regime produces inconsistent outcomes between some direct and indirect acquisitions due to its focus on shares, rather than other securities such as units.

The government proposes to amend the legislation to simplify the regime through greater consistency, and to ensure that the exemptions apply equally irrespective of the transaction structuring.

General tidy-up of legislation and Policy

The government also proposes to undertake a general tidy-up of the Policy and FATA to remove obsolete provisions and provide more clarity.

The government released a revised Policy on 29 June 2015 which included the following changes:

the registration by foreign persons and foreign government investors of their interests in agricultural land from 1 July 2015 (regardless of the value of that land);
confirmation that non-resident foreign persons cannot buy established dwellings as investment properties or homes, regardless of the vehicle used to purchase the dwelling (subject to some exceptions); and
a limit of $3 million for foreign persons purchasing interests in new dwellings in developments where the developer has provided a pre-approval certificate. Foreign persons will need to apply separately if they wish to acquire interests in new dwellings in the same development above this limit.

Further clarification changes are also proposed. For example, the government has proposed to clarify the differences between Australian urban and rural land in the FATA. The government is considering:

replacing the existing definition of 'Australian rural land' with an alternative broader definition of 'agricultural land'; and
splitting the existing definition of 'Australian urban land' into 'residential land', as it is commonly understood, and a new category of 'other land', which will cover industrial and commercial land such as mining tenements.

In light of these new definitions, our submissions proposed that the government should also consider the circumstances in which an application is required in respect of dealings in mining tenements, particularly mining tenements that only authorise prospecting or exploration activities.

In particular, we submitted that, to the extent an application regarding a transaction involving a prospecting licence or exploration licence is made and no objections are raised, a further application should not be required for the conversion of that prospecting or exploration licence to a mining lease.

Further submissions

In our view, the government should also consider updating the application of the foreign investment regime to downstream acquisitions of Australian subsidiaries owned by a foreign holding company.

Currently the application of the 'prescribed corporation' rule captures acquisitions of small foreign companies that:

are well below the acquisition threshold that applies to normal business acquisitions; and
would have been exempt from the application of the Australian foreign investment rules if the foreign investor had acquired the Australian subsidiary directly.

Our submissions proposed that the current legislation should be updated so that acquisitions of foreign holding companies are only caught if the value of the Australian subsidiaries or assets is more than half of the value of the global assets of the target company, and the total value of the Australian subsidiaries or assets is above the relevant monetary threshold that applies to acquisitions of Australian companies or businesses.

Australia: Foreign investment update – Modernisation options