Participants in Australia's infrastructure sector are, as a general rule, already familiar with the Foreign Investment Review Board (FIRB) and Australia's foreign investment regime. Large assets, significant landholdings, and the involvement of a variety of foreign financial investors (including sovereign wealth funds) mean that FIRB is rarely a non-issue. And then there is the overlay of the Critical Infrastructure Centre, with its focus on system integrity and data security in critical sectors.
So the infrastructure sector should be well placed to deal with the recently-announced changes to Australia's foreign investment regulation.
However, there are still likely to be a number of unexpected complications, and participants will need to tread carefully to ensure they don't inadvertently fall foul of the new laws.
As has been well publicised, Australia's foreign investment laws have been temporarily altered in response to the COVID-19 crisis, in order to address the perceived risk that many otherwise viable Australian businesses will be opportunistically acquired by foreign buyers without any government oversight, presenting risks to Australia's national interest.
Key elements of the changes are as follows:
- All monetary thresholds for FIRB review (which previously ranged from AU$0 to AU$1,192, depending on the nature of both the asset and the investor), have been reduced to AU$0.
- FIRB's timeframe for reviewing transactions has been increased from 30 days to up to 6 months, with priority given to transactions that protect and support Australian businesses and Australian jobs.
Other thresholds for approval generally remain unchanged. For example, non-sovereign investors generally still do not need approval for acquisitions of <20% in Australian companies and trusts (other than land entities), or <10% in listed land entities. Additionally, transactions covered by agreements entered into before the 29 March 2020 changes, and existing exemption certificates granted by FIRB, remain unaffected.
Participants in the infrastructure sector, despite being fairly FIRB-savvy already, may well find that there are a number of unexpected complications arising from these changes, and they would be well advised to think ahead and factor these issues into their business planning.
Particularly noteworthy are each of the following:
- Secured finance – foreign lenders who take security over Australian businesses typically require FIRB approval if the value of the assets secured exceeds the various mandated monetary thresholds. Those thresholds have now all been reduced to AU$0. The main exception from the need to obtain approval is for security taken in the "ordinary course of carrying on a money lending business". However, many non-traditional lenders may struggle to fall within the specifics of this exception, and hence they will need FIRB approval from the first dollar of secured property. This may affect the commercial and competitive landscape in recapitalisation processes, and will need to be factored into transaction timetables and structures.
- Existing infrastructure businesses with foreign owners will need FIRB approval for even the most minor business-as-usual acquisitions. And these sorts of transactions are unlikely to be at the top of FIRB's priority fast track list.
- Similarly, internal restructures and other clean-ups are unlikely to receive priority treatment from FIRB, unless necessary for business survival.
- Any leases or sub-leases of small parts of infrastructure assets to foreign persons (eg retail tenancies in airports) will require FIRB approval if the term (including options) is reasonably likely to be over 5 years. This approval requirement will also apply to material amendments of existing arrangements if the remaining term (including options) is reasonably likely to be over 5 years.
- Offshore deals with an Australian component run the risk of being significantly delayed by FIRB approval requirements, and parties may look to carve out the Australian component or otherwise deal with it separately. While some offshore deals are not subject to compulsory notification, this is often not the case in the infrastructure sector because relevant Australian entities are "land entities" (i.e. more than 50% of the entity's total assets comprise interests in Australian land).
- There is some doubt as to whether an Australian trust can even be formed by a foreign person absent a FIRB clearance.
Infrastructure owners and investors, already grappling with all types of strategic, operational and financial complications, need to add unanticipated FIRB complications to that list.
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.