From 29 March 2020, proposed foreign investments into Australia which previously did not require Foreign Investment Review Board (FIRB) approval because the value of the transaction / target was below an applicable monetary threshold will now require FIRB approval, regardless of the nature of the foreign investor, and approval times will be longer. For parties on the cusp of M&A or capital raising these unanticipated changes will require some immediate rethinking of the new rules governing inbound foreign investment. Where a transaction is genuinely urgent, parties will need to clearly demonstrate benefits for Australian business and Australian jobs.
The Commonwealth Government has announced significant temporary changes to Australia's foreign investment regime to deal with the economic implications arising from the spread of COVID-19 (Treasurer's announcement and related materials here). Under the changes, the monetary screening thresholds for all foreign investments (including interests in land, shares and businesses) have been reduced to $0.
In outlining the reasoning for the changes, FIRB stated that "Australia is being fundamentally disrupted by the coronavirus, including potentially threatening economic security and the viability of critical sectors. Businesses are increasingly under pressure. There will likely be a rise in debt restructuring transactions for Australian businesses, along with opportunities to invest in distressed assets. Without these changes, it is possible many normally viable Australian businesses would be sold to foreign interests without any government oversight, presenting risks to the national interest."
While the Government's announcement stressed that Australia is still open for business and recognises that investment at this time can be beneficial if in Australia's national interest, applicants should assume that obtaining FIRB approval will take longer than in the past and that they will have to more clearly demonstrate benefits to Australian business and jobs.
These are temporary measures that will remain in place for the duration of the COVID-19 crisis.
Impact on timing for approvals
The immediate impact will be to require more transactions to seek approval under Australia's foreign investment procedures, and to extend application review periods to up to six months.
The Government will prioritise urgent applications for investments that protect and support Australian business and Australian jobs. Any applicant looking to prioritise its application will need to be able to demonstrate how a proposed transaction will meet these key objectives. We expect priority will be given to urgent recapitalisation transactions where it can be demonstrated that Australian businesses and jobs can be saved by the recapitalisation.
Prior signed transactions
FIRB has announced that the regulations will specify that the new thresholds do not apply to agreements entered into prior to 10:30pm AEDT on 29 March 2020, including in relation to acquisitions that have not yet occurred, regardless of whether there are unmet conditions or not.
Interests in land – commercial property
Acquisition of developed commercial land, or the entry into a lease over developed commercial land (such as offices, retail stores, warehouses) where the term of the lease (including any extension or renewal) is reasonably likely, at the time it is entered into, to exceed five years, will now require FIRB approval, regardless of the value of the acquisition or transaction.
Exempt transactions are still exempt
Transactions which are exempt from approval under the Act (other than due to being below an applicable monetary threshold) are still expected to be exempt. For example, the following types of transactions should still not require notification to FIRB, but investors should seek advice before entering into them, particularly in light of the rapidly evolving situation and the fact that the amending regulations are still being drafted:
- participation in pro rata rights issues by Australian entities in respect of an investor's pro rata entitlement;
- acquisitions by foreign investors (other than foreign government investors) of interests below the 20% investment threshold in entities other than Australian land entities (Australian land entities are entities with more than 50% of their assets being interests in Australian land);
- acquisitions of interests of less than 10% in listed Australian land entities (subject to certain carve-outs);
- acquisitions by foreign government investors of 'portfolio' interests of below 10% in Australian entities provided there are no related rights relating to governance or other contractual arrangements with the entity;
- offshore acquisitions by foreign investors other than foreign government investors where the entity is not an Australian land entity; and
- offshore acquisitions by foreign government investorswhere Australian assets are below the de minimis levels – this includes offshore acquisitions by funds with significant foreign government investor limited partners, where the Australian assets of the target are valued at less than $55 million and constitute less than 5% of total global assets.
Impact for foreign and Australian investors
One impact of the announcement is, for some transactions, to put all foreign investors in the same position as foreign government investors, partially levelling the playing field as between foreign investors.
For Australian investors, this potentially provides a significant advantage in any contested transaction, given the potential timing advantages in being able to commit to a transaction which does not require foreign investment approval.
What should foreign investors do?
Investors which are wholly or partly foreign owned should seek specific advice in relation to any proposed investment or transaction, particularly given the full details of the proposed changes have not yet been released.
Common transactions which may now require approval include:
- acquisitions of interests in Australian real estate, regardless of value or type, including investments in funds or entities which directly or indirectly hold Australian real estate;
- entry into property leases with a term which is reasonably expected to exceed five years;
- acquisitions of interests of 20% or more in Australian entities, regardless of value, including M&A transactions and equity capital raising transactions;
- corporate restructures of foreign-owned groups with Australian assets; and
- acquisitions of interests in agribusiness, media businesses and the financial sector.
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.
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