Mergers & Acquisitions

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Focus: Australia's foreign investment regime post the SGX-ASX decision

27 May 2011

Chinese language version

In brief: The Federal Treasurer recently rejected the SGX-ASX merger proposal on national interest grounds. Partner Jeremy Low (view CV) and Senior Associate Andrew Wong report on how the decision fits in with the Government's foreign investment policy and its broader implications for future foreign investment applications.

How does it affect you?

  • While the Treasurer's decision to reject the SGX-ASX proposal was based on national interest concerns in a unique set of circumstances, it gives insight into the decision-making process for foreign investment applications.
  • The decision is significant for the following reasons:
    • It indicates that the Foreign Investment Review Board (the FIRB) and the Treasurer may, as part of the process of deciding whether a proposed transaction is contrary to the national interest, take into account its benefits to the national interest. This suggests that when preparing an application to FIRB, it would be helpful to explain any benefits that would accrue from a proposed transaction, as well as explaining why it would not give rise to negative consequences for Australia.
    • It indicates that the five 'national interest' factors articulated in the Federal Government's foreign investment policy are not exhaustive and are to be read broadly.
    • It indicates that, in addition to foreign state-owned acquirers and national security considerations, it is expected the FIRB will heavily scrutinise foreign persons' acquisitions of businesses that, in the Government's view, provide or perform some function that is critical to the Australian economy.


On 25 October 2010, ASX Limited (ASX) and Singapore Exchange Limited (SGX) announced a merger proposal whereby SGX would acquire all of the shares in ASX in exchange for the payment of cash and the issue of SGX shares to ASX shareholders.

The proposal was subject to various conditions, including:

  • foreign investment approval from the Federal Treasurer, Mr Wayne Swan, under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA); and
  • Parliament amending the Corporations Act 2001 (Cth) to remove the 15 per cent individual shareholding cap on ASX.

It was announced on 5 April 2011 that the Australian Treasurer was disposed to the view the merger proposal should be rejected, as contrary to the national interest under the FATA. On 8 April 2011, the Treasurer issued a media release, stating he had made an order under the FATA prohibiting the proposal.1

Following the Treasurer's decision, SGX and ASX agreed to terminate their merger proposal and, accordingly, the proposed amendments to the Corporations Act to remove the 15 per cent individual shareholding cap on ASX were not put to Parliament.

Reasons for decision

The Treasurer's 8 April 2011 media release sets out his reasons for rejecting the SGX-ASX proposal. This represents only the second time that written reasons for prohibiting a proposal under the FATA have been published.2

He stated that his decision was 'based on unambiguous and unanimous advice from the FIRB that the proposed transaction was contrary to the national interest'.

In summary, his reasons were as follows:

  • ASX plays a central role as Australia's primary equities and derivatives exchange, and as the sole clearing house for equities, derivatives and bonds;
  • ASX also operates infrastructure that is critically important for the orderly and stable operation of Australia's capital markets;
  • the transaction would result in the Federal Government not having full regulatory sovereignty over the ASX-SGX holding company, which would present material risks and supervisory issues impacting on the effective regulation of ASX's operations, particularly its clearing and settlement functions; and
  • the diminution of regulatory sovereignty over ASX could only be justified if there were very substantial benefits for Australia (for example, greater access to global capital markets) – on this point, the Treasurer concluded that, given SGX was a smaller exchange with a smaller equities market than ASX, the potential benefits from the merger would not be sufficient to justify the loss of sovereignty.

Relevance of benefits to the 'national interest'

In deciding that the SGX-ASX merger was contrary to the national interest, the Treasurer took into account the merger's possible benefits to the national interest as well as the possible negative consequences. He stated that the negative consequence of the SGX-ASX merger (namely, the diminution of full regulatory sovereignty over ASX) could be overcome if there were very substantial benefits for Australia (namely, greatly enhanced opportunities for Australian businesses and investors to access global capital markets). However, the Treasurer concluded that, given the size and nature of SGX – which is a smaller exchange with a smaller equities market than ASX – the opportunities and benefits that were offered under the proposal were not sufficient to justify that loss of sovereignty.

Note that the FATA expresses the 'national interest' test in the negative; that is, the Treasurer is empowered to prohibit a proposal if it would be 'contrary to the national interest'. Given this formulation, it would be understandable to assume that in assessing foreign investment applications, the test's focus would almost exclusively be on the potential negatives of a transaction. However, the SGX-ASX decision demonstrates that this is not necessarily the case. It would appear that the potential benefits of a transaction are also relevant to the 'national interest' test. Indeed, the Government's foreign investment policy, as updated on 30 June 2010, states that 'Assessing the national interest allows the Government to balance potential sensitivities against the benefits of foreign investment'.

As a practical matter, one conclusion that could be drawn from this decision is that an application to the FIRB would be more compelling if it gave not only an analysis of why the transaction would not result in negative consequences for Australia but also why it would result in beneficial consequences.

'National interest' factors not exhaustive and to be read broadly

As explained in an earlier Focus, the Government's foreign investment policy now sets out five national interest factors that it typically considers when assessing foreign investment proposals. These are:

  • National security – the extent to which foreign investments affect Australia's ability to protect its strategic and security interests;
  • Competition – in addition to examination by the Australian Competition & Consumer Commission (the ACCC), the FIRB will examine the effect that foreign investment will have on the diversity of ownership within Australian industries and sectors to promote healthy competition;
  • Other Federal Government policies – including the impact on Australian tax revenues and environmental objectives;
  • Impact on the economy and the community – the impact on the general economy, including the following: plans to restructure the target entity, the nature of acquisition funding arrangements, the level of Australian participation in the target entity following the transaction and obtaining a fair return for the Australian people; and
  • Character of the foreign investor – the extent to which the foreign investor operates on a transparent commercial basis, and is subject to adequate and transparent regulation and supervision. This also includes special considerations in relation to foreign governments and their related entities.

On the basis of the Treasurer's reasons for his decision, it does not appear that the SGX-ASX merger proposal gave rise to national security concerns. Nor were there any competition concerns, as the ACCC had already cleared the proposal by the time he announced his decision. In relation to the factor 'Character of the foreign investor', the Treasurer did not indicate concern that a Singapore sovereign wealth fund, Temasek, held about 23 per cent of SGX.

In relation to the factors 'Other Australian Government policies' and 'Impact on the economy and community', SGX had proposed various concessions. These concessions, as announced by SGX and ASX on 15 February 2011, included the following:

  • impact on tax revenues and plans to restructure the target entity – SGX gave a commitment that all physical assets required for the operation of ASX's businesses would continue to be located in Australia, and owned and operated by Australian companies;
  • level of Australian participation in the target entity – SGX had committed to ensure that the board of each ASX group company (including ASX itself) would comprise a majority of Australian citizen directors and an Australian citizen as chair, and that ASX's senior management would continue to be based in Australia; and
  • obtaining a fair return for the Australian people:
    • SGX had committed to ensure that ASX would continue to meet the needs of the Australian market for a comprehensive range of listing, trade, execution, clearing, settlement and market information products and services for Australia's primary, secondary and derivative markets; and
    • SGX had also committed to ensure that capital expenditure in Australia would be at least 5 per cent of Australian operating revenue (excluding interest income) per annum with a minimum expenditure of A$30 million in the first five years, in keeping with investment levels of recent years.

On the surface, it might appear that any concerns arising from the five national interest considerations could be addressed in some way by undertakings offered by SGX. However, these conditions were ultimately not sufficient to address the Treasurer's concerns, such concerns not being strictly confined to the national interest factors set out in the policy.

The foreign investment policy does not state that the five national interest factors are the only things the Government will consider. Indeed, the policy is clear in stating that 'national interest' concerns are determined on a case-by-case basis.

Unique features of the proposal and possible regulatory reform

While the Treasurer referred to the loss of full regulatory sovereignty over ASX as the main reason for rejecting the proposal, he was also keen to indicate this would not represent a permanent roadblock to any future merger proposal or other commercial arrangement involving ASX and a global stock exchange.

The Treasurer stated that he had asked the Council of Financial Regulators to consider potential regulatory reform to remove the risks of the Federal Government not having full regulatory sovereignty over ASX. While the Treasurer did not provide specifics of what that reform might entail, it appears to us that if ASX were to divest itself of its clearing and settlement functions, that ought to address substantially any regulatory sovereignty concerns in any future deal.

So, on the one hand, while one could point to the unique features of this transaction (in particular, that ASX is Australia's sole clearing house for securities transactions) to distinguish it from other proposals that have been subject to FIRB review, the decision does indicate that, in addition to foreign state-owned acquirers and national security considerations, the FIRB will heavily scrutinise acquisitions by foreign persons of businesses that, in the Federal Government's view, provide or perform some function that is critical to the Australian economy.

  1. See media release.
  2. The first time was in April 2001, when the then Federal Treasurer, Peter Costello, blocked Royal Dutch Shell's proposed acquisition of Woodside Petroleum. See media release. 

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