INSIGHT

Proposed changes to FIRB approval rules

By Wendy Rae, Jeremy Low, Andrew Wong
Foreign Investment Review Board (FIRB) Media, Advertising & Marketing Mergers & Acquisitions

Proposed changes to FIRB approval rules in response to review of FIRB reforms 8 min read

On 14 February 2022, the Government released proposed changes to the FIRB (Foreign Investment Review Board) approval rules in the form of an exposure draft of the Foreign Acquisitions and Takeovers Amendment Regulations 2022 (Cth), which would amend the Foreign Acquisitions and Takeovers Regulations 2015 (Cth).

The proposed changes represent the Government's immediate response to the outcome of the review of the 1 January 2021 FIRB reforms. According to the Government, the 'amendments are designed to reduce regulatory burden by clarifying certain aspects of the framework and streamlining some less sensitive types of investment'.

The Government is currently consulting on the proposed changes. The deadline for submissions is 25 February 2022. It is proposed that the changes come into effect on 1 April 2022.

The Government has also released a discussion paper seeking written submissions on possible further changes to the FIRB approval rules. The deadline for submissions is 11 March 2022.

In this Insight, we outline and comment on the changes proposed by the Foreign Acquisitions and Takeovers Amendment Regulations 2022 (Cth).

Moneylending exemption

Under the current FIRB regime, there is a moneylending exemption that relieves many foreign debt financiers (such as banks) from the need to obtain FIRB approval for the acquisition and enforcement of security interests over Australian assets.

However, the exemption is drafted in a way that does not fully reflect common debt financing practices.

  • Currently, the exemption is available only where the person entering into the relevant moneylending agreement already has an established moneylending business. But sometimes moneylenders create new entities (finance vehicles) to act as lender in a particular transaction. The Government proposes to expand the moneylending exemption so that it is available in these situations, provided the new entity is created predominantly for the purpose of lending money and has not previously carried on a business unrelated to that purpose.
  • The Government proposes to expand the pool of persons who can rely on the moneylending exemption when they acquire or enforce security interests on behalf of a person who has entered into the moneylending agreement (the latter being referred to in the current FIRB regime as the first entity).
    • The pool currently includes a person who is in a position to determine the investments or policy of the first entity. The Government proposes to expand the reference to exempt entity to capture subsidiaries and holding entities of the first entity.
    • The pool currently also includes a security trustee who holds or acquires an interest on behalf of the first entity. The Government proposes to expand the reference to the first entity to capture subsidiaries and holding entities of the first entity, as well as any person who is in a position to determine the investment or policy of the first entity or of a subsidiary or holding entity of the first entity.
    • The pool currently also includes a receiver appointed 'in relation to' any other person in the pool. The Government proposes to clarify (and correct) the drafting to include a receiver appointed 'by' another person in the pool, to ensure it covers situations where the security trustee or lender exercises a right under its moneylending agreement to appoint a receiver.
  • Currently, moneylenders that are licensed financial institutions and have at least 100 security holders, and are not foreign government investors, are covered by the exemption in respect of the acquisition of interests in residential land. The Government proposes to expand this to include entities (such as non-stock or mutual entities) that do not have securities on issue, but who have at least 100 members.

Australian media businesses

Currently, a foreign person needs FIRB approval to acquire a 5% or greater interest in an Australian media business. The Government proposes to increase the threshold to 'direct interest' (generally 10% or more) to align with the threshold applying to acquisitions of interests in national security businesses and acquisitions by foreign government investors of interests in Australian entities.

In addition, the Government proposes to narrow the definition of Australian media business by:

  • removing from the 'content test' in the definition any content that reports, investigates or explains current issues or events of interest to Australians’, as that (according to the Government in the amending regulations explanatory statement) has the potential to capture non-media businesses such as a bank which publishes interest rates; and
  • narrowing the 'threshold test' in the definition so that the daily audience threshold of 10,000 people for electronic services is limited to people in Australia.

Unlisted Australian land entities

Currently, the acquisition by a foreign person of less than a 5% passive interest in an unlisted Australian land entity that does not invest in established dwellings is exempt from the FIRB approval requirements. The Government proposes to increase the threshold from 5% to 10%, bringing it in line with acquisitions of interests in listed Australian land entities.

Rights issue exemption

Currently, the acquisition by a foreign person of interests in an entity's securities pursuant to a pro rata rights issue is exempt from the mandatory FIRB approval requirements.

To date the term 'rights issue' has been undefined, giving rise to uncertainty as to the breadth of the exemption. The Government proposes to specify that the term 'rights issue' has the same meaning as in the Corporations Act 2001 (Cth) (Corporations Act).

However, this gives rise to further uncertainty which the Government should address, because:

  • the definition in the Corporations Act has been amended by ASIC regulatory instrument (currently the definition has been amended by ASIC Corporations (Non-Traditional Rights Issues) Instrument 2016/84), whereas the proposed amending regulations do not take this into account;
  • the amending regulations explanatory statement states that 'The exemption applies to foreign persons when they acquire additional securities in an Australian entity under a rights issue as long as it is a voluntary, pro-rata rights issue under the Corporations Act 2001 (or a law of a foreign country or part of a foreign country)' – which comes as a surprise given it has generally been understood that the rights issue exemption applies to rights issues by both Australian and non-Australian entities; and
  • the Corporations Act definition of rights issue requires offers to be made to registered security holders in Australia or New Zealand – because foreign companies might, as may be permitted by local laws – exclude such security holders.

New exemption for acquisitions which will not increase percentage interest

The Government proposes to introduce a new exemption from the mandatory FIRB approval requirements for the acquisition of an entity's securities where there are reasonable grounds to believe that the person's percentage interest in the entity will not increase as a result of the person's acquisition.

This change will have far-reaching (and welcome) consequences, such as (as noted by the Government in the amending regulations explanatory statement)

  • the acquisition by a person of additional interests in securities of a wholly-owned subsidiary not being subject to the mandatory FIRB approval requirements (which we note will remove the need to seek to rely on the rights issue exemption); and
  • the acquisition by a person of additional interests in a securities as a result of a capital call, where the person is required to contribute additional funding to an investment vehicle along with other investors who are also required to contribute additional funding in their respective ownership proportions, not being subject to the mandatory FIRB approval requirements (which we note will remove the need to seek to structure a capital call regime as a rights issue).

The new exemption is not limited to those circumstances and can cover scenarios such as where a foreign person is seeking to acquire additional securities to avoid dilution following the issuance of securities to other investors under a placement.

Foreign custodian corporations

The Government proposes to both narrow and expand the exemption currently available to foreign custodian corporations who hold legal interests in assets on behalf of others.

Currently, one of the pre-requisites for the availability of the exemption is that the equitable interest in the asset is not held by the foreign custodian corporation. The Government proposes to change this so that the equitable interest in the asset is not held by any foreign person. This narrows the availability of the exemption, as it means the exemption is available only where non-foreign persons have equitable interests in the assets. It would be preferable for the change not to be made, as it ignores the policy underlying the exemption (ie foreign custodian as a bare trustee and not making substantive decisions relating to the asset) and it does not seem logical for the exemption to not be available simply because one foreign person has an equitable interest in the asset (could be a very small percentage interest). It is unclear what mischief the proposed change seeks to address, given that the acquisition by foreign persons of substantial interests in entities and of interests in real property is already captured by other aspects of the FIRB regime.

The Government proposes to expand the exemption so that a right by the foreign custodian corporation to be indemnified for any liabilities incurred in good faith and without negligence in the provision of the relevant custodian services is not to be considered an equitable interest in assets for the purposes of the exemption.

A further technical change proposed by the Government is that the pre-requisite requiring that the foreign custodian corporation only exercise voting rights associated with the interest at the direction of the equitable interest holder or another custodian only applies if voting rights are associated with the interest. For example, voting rights are usually associated with shares in a company but not with a freehold interest in real property.