Client Update: Proposed changes to the foreign investment screening regime
20 February 2009
In brief: The Treasurer recently announced that the Commonwealth Government intends to amend legislation to clarify the operation of the foreign investment screening regime. Partner Alex Ding and Lawyer Laijing Lee report.
- The amendments
- The effect of the amendments
- Sovereign wealth funds/foreign government-backed investment funds
- What does this mean?
The Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA) provides the authority for the Treasurer to examine proposed foreign investments in Australian businesses and assets to ensure that they are not contrary to the national interest.
On 12 February 2009, the Treasurer, Wayne Swan, announced the Government's intention to introduce legislation into Parliament as soon as practical that will amend the FATA and which will take effect from the day of the announcement. The amendments will:
- clarify the operation of the foreign investment screening regime;
- ensure that the FATA applies equally to all foreign investments irrespective of the way they are structured; and
- ensure that any investment, including through instruments such as convertible notes, will be treated as equity for the purposes of the FATA.
The prevailing view is that the issue of convertible notes to foreign persons investing in Australian companies did not of itself trigger a Foreign Investment Review Board (FIRB) review or notification requirement under the FATA or FIRB policy (although the actual conversion of such notes to shares would have triggered such a requirement where the relevant thresholds were reached). The FIRB subsequently expanded its policy to require prior approval and notification for 'proposals where any doubt exists as to whether they are notifiable'. That is, funding arrangements that included debt instruments having quasi-equity characteristics may well have been notifiable under FIRB policy and assessed under the Australian Government's foreign investment guidelines.
In short, the issue of convertible notes of itself was not considered to require FIRB approval or notification, unless the notes had 'quasi equity' characteristics, with the requirement being triggered instead upon actual conversion to shares. However, the proposed amendments to the FATA will ensure that the issue of convertible notes will require upfront FIRB approval and notification if the relevant thresholds or conditions are reached. So, for example, the Industrea Limited convertible bond transaction (on which Allens advised in 2008) would have required an additional prior approval before the deal went ahead if this legislation had been in place. This is something that will now need to be factored into convertible bond deal timetables.
The clarification of the foreign investment screening regime may be understood, in part, in the context of high commercial interest in investments in Australia by foreign governments and their entities such as sovereign wealth funds (SWFs) or government-backed investment funds. The Treasurer notes that 'even in the face of a global economic recession, investors recognise the underlying strengths of the Australian economy, and there is still a strong interest in investments in the Australian resource sector'.
On 17 February 2008, the Treasurer had announced that in determining whether an investment proposal by a foreign government or its agencies is consistent with Australia's national interest (in accordance with the FATA), the Government will typically have regard to six principles, which are additional factors that need to be considered over and above those that apply to normal private sector proposals. We had noted (See Allens: Focus M&A – March 2008) that that announcement had been made, coincidentally or otherwise, when foreign state-owned or state-controlled enterprises and SWFs had been actively investing in iconic global corporations.
Relevantly, a recent significant proposed investment is that involving the state-controlled Aluminium Corporation of China (known as Chinalco), which agreed on 12 February 2009 to invest US$19.5 billion in the mining group Rio Tinto. Chinalco is proposing to buy US$7.2 billion worth of bonds convertible into Rio Tinto stock and pay US$12.3 billion in cash for stakes in Rio Tinto's aluminum, iron ore and copper assets in the United States, Australia and Chile. Allens is advising Rio Tinto in relation to all aspects of the transaction with Chinalco.
In explaining the new amendments to the FATA, the Treasurer stated that in light of the growing use of more complex investment structures, the purpose of the amendments is to clarify the operation of the foreign investment screening regime and ensure that the FATA applies equally to all foreign investments irrespective of the way they are structured. In particular, the amendments will ensure that any investment, including through instruments such as convertible notes, will be treated as equity for the purposes of the FATA.
Nonetheless, the amendments do not pre-empt any final decision on any current or future investment proposal. All applications before FIRB are examined on a case-by-case basis against the national interest.
Foreign state-owned or state-controlled enterprises such as SWFs or government-backed investment funds seeking to invest in Australia will need to be cognisant of the fact that their investments will be scrutinised by FIRB regardless of how they are structured.
The amendments are also relevant to issuers and investors in convertible notes, investment banks, underwriters and financial advisers. For example, investors in convertible notes will need to consider whether FIRB approval should be a condition precedent, and factor in the approval period (comprising of a statutory 30-day examination period and additional 10-day notification period applicable to FIRB proposals once formally lodged). The timeframes referred to above can be extended by the FIRB.
We will keep you updated on further developments in this area including details of the nature and scope of the proposed legislative amendments. If you have any questions, please feel free to contact us.
- Ewen Crouch AMConsultant,
Ph: +61 2 9230 4958
- Jon WebsterConsultant,
Ph: +61 3 9613 8832
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