If you are an Australian business seeking foreign investment, you will likely need to comply with Australia's foreign investment framework. This is as a result of temporary changes introduced during the COVID-19 outbreak. From 29 March 2020, if a foreign person or company is acquiring 20% or more of your company, they will require FIRB approval, no matter the value of the investment.
These rules are even stricter if:
- your company operates in certain industries (including media, telecommunications, transport, and various military applications);
- your company holds agricultural land; or
- a potential investor is associated with a foreign government.
As such, you should take legal advice prior to negotiating any potential transaction. This article sets out when the foreign investment rules apply to a capital raise.
When the Foreign Investment Rules Will Apply
From 29 March 2020, all proposed foreign investments into Australia will require approval from FIRB. This is regardless of the value of the investment if that investment is a:
- significant action; or
- notifiable action.
These temporary changes do not apply to agreements entered into prior to 10:30 pm AEDT on 29 March 2020. This is even if the investment has not completed.
What Is a Significant Action?
A 'significant action' will occur if a person acquires an interest in securities in an entity that carries on an Australian business (or the holding company of such an entity) which results in one or more foreign persons controlling the entity, whether alone or with any associates.
A business is an 'Australian business' even if it is an international business which is partly carried on in Australia. A 'foreign person' includes:
- an individual who is not ordinarily resident in Australia; and
- a corporation or trust, if an individual who is not ordinarily a resident in Australia, a foreign corporation or a foreign government holds at least a 20% interest in the corporation or trust. This includes where two or more of these parties hold a 40% interest in the corporation or trust.
Foreign persons will have 'control' over an entity if they can determine the policy of the entity.
What is a Notifiable Action?
A 'notifiable action' will occur if a foreign person acquires a 'substantial interest' in an Australian business. This includes the holding company of such an entity.
Where there is more than one foreign person acquiring an interest in your Australian entity, a substantial interest is an interest in at least 40% of the voting rights or share capital on issue.
What Do I Do to Comply With the Rules?
The foreign person making the proposed investment must apply to FIRB for approval. They will have to pay a fee when making this application, which is based on the value of the investment.
The investment in the Australian entity is not permitted to complete until the Treasurer has given a notification that the Commonwealth does not object to the action. As a result of the increase in applications due to the COVID-19 changes, the amount of time that the Treasurer has to make its decision has been extended from 30 days to six months. If the Treasurer had not made a decision after six months, the investment can proceed after a further ten days.
Applications which support Australian businesses and Australian jobs will be prioritised. FIRB is permitting applicants to advise of any commercial deadlines related to their investments. This assists FIRB to prioritise applications.
The Treasurer also has the power to prohibit the action if it would be contrary to the national interest. It may also impose conditions on the investment.
A foreign investor may have the benefit of an exemption certificate. Under this, multiple investments are pre-approved. As of July 2020, there are three new categories of streamlined exemption certificates. One is for investors acquiring interests in entities in non-sensitive sectors that fall below the old monetary thresholds.
Practical Steps You Can Take
As FIRB now has six months to process applications, you will need to factor this into your timetable when deciding whether to raise capital from foreign persons. It may be impracticable for a foreign investor to participate in fundraising if they require FIRB approval. This may result in a significant delay to the provision of capital which your company needs.
An investment will fall outside of the foreign investment framework if the foreign investor is acquiring less than 20% of the shares or voting rights in the company. This is provided that the investor is not given the power to determine the policy of the company. If there is more than one foreign investor, they will need to acquire less than 40% of the shares or voting rights in the company to fall outside of the framework.
If the foreign investment is for more than 20% of the company, the investment could be restructured to complete in two tranches. The first tranche would be for just under 20% of the company. Then, the remaining investment will follow once you have obtained FIRB approval. This provides your company with some of the investment funds upfront.
We also recommend that, if an investment into your company will fall within the scope of the Foreign Investment Rules, the subscription or investment agreement should be conditional on FIRB approving the transaction. This will ensure that the investment does not complete in breach of the Rules.
The changes to the Foreign Investment Rules are quite complex and will affect your business if you are raising funds from foreign entities.
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.