COVID-19: Changes to FIRB
Changes to Australia's foreign investment approval (FIRB) regime and what this means for investors
On 29 March 2020, the Federal Treasurer announced major changes to Australia's foreign investment approval (FIRB) regime to address risks arising from the COVID-19 pandemic. The changes, which are temporary, substantially expand the scope of transactions requiring FIRB approval and significantly lengthen FIRB review periods for applications. The changes have been implemented via amendments to the FIRB regulations that were released on 17 April 2020 (but which take effect from 29 March 2020) and through administrative means. For all foreign investors, as well as many entities operating in the real estate space more generally, understanding their impact will be critical – especially throughout the next six months.
There is now more scrutiny than ever on foreign investment in Australia in light of concerns that the negative impact of COVID-19 on Australian businesses will likely result in increased distressed asset sales to foreign purchasers at prices below the usual FIRB monetary screening thresholds.
The changes are as follows.
- Effective from 10.30pm AEDT on 29 March 2020, all monetary screening thresholds under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act) have been reduced to $0. This applies to all foreign persons subject to the Act irrespective of whether they are a private foreign investor or a foreign government investor, and irrespective of their country of origin.
- FIRB review periods for new and existing applications under the Act are being extended to up to six months. Priority will be given to processing applications for investments that protect and support Australian businesses and jobs. Priority will also be given to routine transactions such as entry into new lease agreements for developed commercial land given the potential link to protecting and supporting Australian businesses. In addition the Federal Government has stated it is committed to meeting commercial deadlines wherever possible. FIRB is triaging cases using a risk-based approach and additional staff have been brought on to manage the workload.
The reduced $0 threshold was implemented via the Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020 (Cth) (the Amending Regulations) which amend the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (the Regulations). The Amending Regulations were released on 17 April 2020 but take effect from 10.30pm AEDT on 29 March 2020. The Amending Regulations do not contain a sunset date, meaning the $0 threshold will remain in place unless and until repealed by further legislation. However, the Federal Government has indicated that the $0 threshold is a temporary measure and will remain in place for the duration of the COVID-19 crisis.
The new $0 monetary screening threshold is intended to address concerns that the negative impact of COVID-19 on Australian businesses will likely result in increased distressed asset sales to foreign purchasers at prices that are below the usual FIRB monetary screening thresholds.
The extensions to the FIRB review periods on applications are intended to give FIRB and the Treasurer sufficient time to screen applications. This is an administrative change and has not involved any changes to the Act or Regulations. It is expected that FIRB will revert to its usual processing time frames at the same time the $0 threshold is repealed.
FIRB released a guidance note on the changes – Guidance Note 53 – on 24 April 2020 and updated it on 18 May 2020. The guidance note also includes FIRB's position on pre-existing issues – in relation to extensions of property leases and the establishment of new entities – that have come to the forefront due to the reduced $0 threshold.
Based on the Amending Regulations and FIRB's guidance note, the key points and consequences of the changes include:
- $0 threshold applies to all foreign persons. The new $0 threshold applies to all foreign persons subject to the Act. This is irrespective of whether they are a private foreign investor or a foreign government investor, and irrespective of their country of origin. So it means all higher thresholds previously applying to investors from various countries that have free trade agreements (FTAs) with Australia have been reduced to $0, albeit temporarily.
- Pre-existing agreements not affected. The new $0 threshold does not apply to agreements entered into prior to 10.30pm AEDT on 29 March 2020, including in relation to acquisitions that have yet to be completed and irrespective of whether the agreements remain conditional. In this regard FIRB notes that it is possible for an 'agreement' to be reached prior to the formation of a contract, depending on the facts of each case. But the new $0 threshold will apply if material changes are made to any pre-29 March 2020 agreement as the Act considers that to be the entry into a new agreement. In relation to schemes of arrangement, any scheme implementation agreement entered into between a bidder and the target prior to 10.30pm AEDT on 29 March 2020 is not subject to the $0 threshold, even if the actual agreement involving the target's shareholders occurs later (ie. when the scheme becomes effective).
- No changes to non-monetary thresholds. The non-monetary thresholds under the Act have not changed. Nor will the definitions of notifiable action and significant action. For instance, a private foreign investor can generally still acquire less than 20% of an Australian company irrespective of value without needing FIRB approval (so long as the other special rules regarding land entities, agribusinesses and media sector businesses are complied with).
- Applicants are being asked to agree to extensions. The Act does not empower the Treasurer to unilaterally extend FIRB review periods for applications – apart from issuing interim orders to extend the period by up to 90 days. The Act effectively provides that extensions need to be agreed by applicants. The Amending Regulations have not changed this. Hence the Treasurer and FIRB have stated they will work with applicants to extend review periods to up to six months, meaning applicants will be or have been asked to agree to the extensions. It is expected that the majority of applicants will agree to longer than usual extensions to maximise their prospects of receiving approval.
- Continuation of existing exemptions but no new ones. The various exemptions under the Act (including the rights issue exception and moneylending exception) remain in place. However there are no new exemptions including no ordinary course or business as usual exemptions. Furthermore, the exemptions which apply to acquisitions of direct interests by foreign government investors – being the de minimis exception for offshore acquisitions (ie where the total value of the Australian entities is less than $55 million and less than 5% of the total assets of the target group), the wholly-owned subsidiary incorporation exception and the consortium exception – can no longer be relied on.
- No impact on exemption certificates. The Amending Regulations make clear that any exemption certificate granted before 10.30pm AEDT on 29 March 2020 to acquire commercial land over a certain period and up to a certain amount and which excluded acquisitions of low threshold commercial land will continue to be subject to that exclusion, notwithstanding the repeal of the low threshold commercial land provisions in the Regulations. It is also the case that business exemption certificates which exclude acquisitions of sensitive businesses will continue to be subject to that exclusion, as the concept of sensitive business has not been repealed by the Amending Regulations.
- Conditions to approvals. The Federal Government has stated that conditions imposed on FIRB approvals will remain for so long as required to protect the national interest and, as such, may remain in place after the expiry of the temporary COVID-19 changes. This is notwithstanding that, many transactions did not require FIRB approval under the pre-29 March 2020 FIRB regime but now require approval.
- Establishment of new entities. The Federal Government has stated that FIRB approval will generally not be required for the mere establishment of:
- an Australian company in anticipation of, and solely for the purposes of executing transaction in the future (where that transaction would require FIRB approval); and
- an Australian unit trust (however a later transaction involving the trust, such as the entry by the trustee into a lease, could require FIRB approval).
- Extensions of property leases. FIRB considers that a tenant under an existing property lease is taken to have entered into a new agreement if there is an extension to the term, and that the remaining term is added to the period of extension in ascertaining whether the lease has a term of more than 5 years and therefore whether there is an acquisition of an interest in land for FIRB purposes. This is not a new issue introduced by the COVID-19 changes but is one that has come to the forefront due to the new $0 threshold.
- Agreements for lease. FIRB takes the view that the entry into an agreement and lease and the entry into a lease are generally considered as two separate actions under the Act. The consequence is that a person with a FIRB approval for an agreement for lease may need to apply for separate approval for the lease where the term exceeds 5 years, unless the approval specified both the agreement for lease and the lease and both documents are entered into during the period specified in the approval letter (usually 12 month period). This is not a new issue introduced by the COVID-19 changes and seems at odds with FIRB's stated position that a person who has an option to acquire an interest in land is taken to acquire the interest at the time the option is created, irrespective of whether they subsequently exercise the option.
FIRB has also announced it will consider refunding application fees paid by applicants who withdraw their applications as a direct result of COVID-19, and also consider fee waiver requests for acquisitions of interests in developed commercial land for between $10 million and $55 million so that non-foreign government investors pay the same fee as foreign government investors, ie. $2,000 rather than $26,200.
The new $0 monetary screening threshold will have a significant impact on proposed transactions where the acquirer is a foreign person. For instance:
- Australian companies. Every acquisition by a foreign person of a 20% or greater equity interest in an Australian company now requires FIRB approval irrespective of value. Previously there was a monetary threshold of $275 million (and $1.192 billion for certain FTA investors).
- Australian land corporations. Every acquisition by a foreign person of any equity interest in an Australian land corporation now requires FIRB approval irrespective of value, unless it is a passive interest of less than 10% in a listed company or a passive interest in less than 5% of an unlisted non-residential company. Previously there were monetary thresholds which varied depending on the type of land held by the Australian land corporation.
- Australian agribusinesses. Every acquisition by a foreign person of a 10% or greater equity interest in an Australian agribusiness now requires FIRB approval irrespective of value. Previously there was a monetary threshold of $60 million.
- Capital raisings. Whilst the pro rata rights issue exception remains, a foreign person seeking to underwrite a capital raising by any Australian company (regardless of the value of the company) needs FIRB approval unless they enter into arrangements to cap their potential interest in the company to less than 20%, or unless the underwriter has an exemption certificate.
- Offshore acquisitions by private foreign investors. Where a private foreign investor indirectly acquires a 20% or greater interest in an Australian company via an offshore acquisition, it remains the case that such acquisition does not trigger the mandatory FIRB approval requirements unless the Australian company is an Australian land corporation or agribusiness and the applicable monetary threshold has been exceeded. The difference is that now the applicable monetary threshold is nil, meaning all offshore acquisitions of a 20% or greater interest in a foreign company which holds an Australian land corporation or agribusiness require FIRB approval (regardless of the value of the Australian land corporation or the agribusiness).
- Offshore acquisitions by foreign government investors. The above for private foreign investors applies equally to foreign government investors with one critical difference – offshore acquisitions by foreign government investors trigger mandatory FIRB approval. As mentioned above, the de minimis exemption no longer applies.
- Internal restructures. More internal restructures now requires FIRB approval and be subject to oversight by government agencies, particularly the Australian Taxation Office.
- Australian land. Every acquisition by a foreign person of an interest in Australian land now requires FIRB approval irrespective of value. This affects not just acquisitions of freehold, but also the entry into any property lease or extension of the term of any property lease (in each case whether it be commercial, retail or otherwise) as a tenant where the term (inclusive of any option to renew) exceeds five years or, for an extension of term, where the remaining term and the period of extension exceeds five years. Previously there were monetary thresholds which varied depending on the type of land. Separately, given FIRB's position on agreements for lease (see above), where there is a risk that the contemplated lease is not entered into within the FIRB approval's specified period (usually 12 months) it might be desirable for agreements for leases to contain put and call options for the entry into a lease so that for FIRB purposes the tenant is taken to acquire an interest in Australian land at the outset.
Given that the changes will require more transactions to be subject to FIRB scrutiny and involve longer assessment periods, foreign persons undertaking more than one-off transactions may wish to consider applying for exemption certificates to cover a program of acquisitions instead of applying for individual FIRB approvals.