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Focus: Important changes to Australia's foreign investment rules

4 February 2010

Chinese language version (PDF)
Japanese language version (PDF)

In brief: The Foreign Acquisitions and Takeovers Act 1975 (Cth) has been amended so that transactions that result in foreign investors gaining, whether now or in the future, influence or control over an Australian company are now subject to Australia's foreign investment rules. In addition, there have been several other developments in foreign investment regulation, as Partners Alex Ding and Phillip Cornwell (view CV) and Lawyer Tim Cardiff report.

How does it affect you?

The amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA) mean that parties involved in past, current and future foreign investment transactions should be aware that:

  • foreign investment transactions by way of options to take up unissued shares, convertible notes, and other more sophisticated financing instruments or structures giving overseas financiers potential 'equity upside' or voting power, will be subject to:
    • the Treasurer's powers to assess, impose conditions on, and prohibit such transactions; and
    • the FATA's compulsory notification regime; and
  • the amendments operate retrospectively from 12 February 2009, so that foreign investors must notify the Treasurer, within 30 days of the FATA amendments receiving Royal Assent, of any proposal entered into after 12 February 2009 that would have required compulsory notification under the FATA had it been amended at the time of entering into the proposal (unless the Treasurer was previously notified under the voluntary notification regime).

The FATA

Amendments to the Bill

Since we reported on the proposed changes to the FATA as introduced by the Government in the Foreign Acquisitions and Takeovers Amendment Bill 2009 (the Bill), a number of minor amendments have been made to the Bill to clarify the operation of certain provisions. These amendments are of a technical nature and do not entail a change in the Government's policy intent for the Bill.

One notable amendment to the Bill, however, may affect the way in which foreign investors will be defined. As originally drafted, the Bill would have widened the scope for entities to be considered foreign investors by including those entities whose own security holders held the expanded types of rights or interests (ie 'potential voting power' or 'rights to interests in shares') that are now subject to the FATA. It is not the Government's intention that these new types of rights or interests form part of the defining characteristic of foreign investors, given the difficulty that such entities will face in identifying all such security holders at any point in time.

Accordingly, the FATA as amended will permit the Government to make regulations so that such rights or interests are disregarded in determining whether an entity is a foreign person. The Government is in the process of drafting those regulations.

The FATA: key amendments
'Substantial interest' and 'aggregate substantial interest'

'Substantial interest' and 'aggregate substantial interest' are the key concepts underpinning the reach of the FATA's application to the acquisition of shares in Australian companies by foreign investors.

A substantial interest in a company is where a person, alone or together with any associates, is in a position to control at least 15 per cent of the voting power of a company or holds interests in at least 15 per cent of the issued shares in a corporation. An aggregate substantial interest is where two or more persons together, including with any associates, hold at least 40 per cent of the voting power or interests in issued shares.

Under the FATA as amended, substantial interest is a broader concept, which now includes 'potential voting power' and 'rights that, if exercised, might result in the holding of an interest in issued shares':

  • 'potential voting power' is a new definition in the FATA, which includes any voting power in an Australian corporation that may come into existence in the future and that might be exercised at a general meeting of the Australian corporation; and
  • 'rights that, if exercised, might result in the holding of an interest in issued shares' is not defined in the FATA, but is a new concept in the FATA that requires all rights, whether exercisable presently or in the future and whether conditional or not, to any interests in shares in an Australian corporation to be counted when determining whether a foreign investor has a substantial interest in that Australian corporation.
Compulsory notification

The compulsory notification regime under section 26 of the FATA requires a foreign investor to notify the Treasurer, in the prescribed form:

  • when the foreign investor begins to hold a substantial interest or aggregate substantial interest in an Australian corporation; and
  • when the foreign investor, if it already holds a substantial interest or aggregate substantial interest in an Australian corporation, increases its substantial interest or aggregate substantial interest.

The compulsory notification regime now also applies to foreign investors who hold 'potential voting power' and/or 'rights that, if exercised, might result in the holding of an interest in issued shares'.

Interests in Australian urban land

While there have been no express amendments to the provisions of the FATA dealing with Australian urban land, it should be recognised that the concepts of 'potential voting power' and 'rights that, if exercised, might result in the holding of an interest in issued shares' apply to interests in Australian urban land comprising shares in corporations that are subject to those provisions of the FATA.

Other recent developments in foreign investment regulation

Change in monetary thresholds

On 22 September 2009, the Government changed the monetary thresholds that apply to exempt certain Australian corporations from:

  • the Treasurer's power to assess, impose conditions on, and prohibit foreign investors acquiring shares in such corporations; and
  • the FATA's compulsory notification regime.

The new monetary thresholds are as follows:

Mandatory notification irrespective of value of transaction
  • all vacant non-residential land;
  • all residential real estate (some exemptions apply);
  • all shares or units in Australian urban land corporations or trust estates; and
  • all direct investments by foreign governments or their agencies, including proposals to establish new businesses.
Applicable to non-US investors
$5 million developed non-residential commercial real estate, where the property is subject to heritage listing
$50 million developed non-residential commercial real estate, where the property is not subject to heritage listing
$231 million1
  • an interest in an Australian business; or
  • an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at/above the threshold.
Applicable to US investors

$231 million1

involving Australia/US Free Trade Agreement-prescribed sensitive sectors such as media:
  • an interest in an Australian business; or
  • an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at/above the threshold.

$1004 million2

not involving prescribed sensitive sectors:
  • an interest in an Australian business; or
  • an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at/above the threshold.

These thresholds do not apply to investments by foreign governments and their agencies, which continue to be subject to the Government's policy to require all direct investments by foreign governments or their agencies (whether directly or through a company that is owned 15 per cent or more by a foreign government or agency) to be approved in advance by the Treasurer.

Senate report: foreign investment by state-owned entities

On 17 September 2009, the Senate Economics Committee (the Committee) handed down its report into Foreign Investment by State-Owned Entities. The Committee's terms of reference were to inquire into the international and the Australian experience of investment by sovereign wealth funds and state-owned entities.

The recommendations of the Committee majority were:

  • Recommendation 1 – that the Foreign Investment Review Board (FIRB) develop a more effective communication strategy to improve public understanding of the benefits of foreign investment to Australia. This strategy should also provide additional information about how foreign investment decisions are made and provide information about the emergence of sovereign wealth funds and state-owned entities internationally;
  • Recommendation 2 – that the Minister require FIRB to be more assiduous in producing a timely annual report; and
  • Recommendation 3 – that the Government tighten the FATA legislation to deal with complex acquisitions where takeovers of smaller strategic assets may be masked by an application that, in total, does not represent more than 15 per cent and, therefore, does not trigger review. The committee would like FIRB to give adequate consideration to the interaction between the various components of an acquisition.
Policy changes?

In a speech delivered on 24 September 2009, FIRB director Patrick Colmer, explaining the decision to reject the proposed recapitalisation of rare earths producer Lynas Corp by China Non-Ferrous Metals, made the following points about investment by foreign government-owned agencies in Australian companies in the resources sector:

  • the Federal Government/FIRB is not keen to see control of companies pass to consumers of its products (China Non-Ferrous Metals' investment, if successful, would have resulted in it owning 51.6 per cent of Lynas) – this comment may extend beyond sovereign investors;
  • with respect to smaller companies, the Federal Government/FIRB would prefer in any case to keep foreign ownership in general below the 50 per cent level; and
  • with respect to larger companies, a foreign ownership limit of just 15 per cent would be preferred.

This message was reiterated by Federal Treasury Deputy Secretary Jim Murphy in another speech, reported on 4 November 2009, but these indications have no official status and they have not been strictly adhered to in practice. For example, Yanzhou's purchase of 100 per cent of Felix Resources was approved on the basis of future sell down undertakings and a view on foreign ownership of the whole resource (Felix was a joint venturer). Mr Murphy pointed out that the Rudd Government had, since November 2007, approved some 110 Chinese investment applications with a total value of more than $39 billion, with no formal rejections and only five approvals subject to conditions, amendments or undertakings.

The Treasurer clarified the Government's policy position in a speech of 10 December 2009 stating three key elements of its approach to considering foreign investment proposals across all industry sectors:

one – that we will carefully consider cases where a proposed investor is also a buyer of the resource – in particular, where the proposal involves potential control over pricing and production;

two – that foreign investment in a resources company must enable Australia to remain a reliable supplier in the future to all current and potential trading partners; and

three – that business transparency and shareholder discipline is important in promoting and maintaining sound business practices. Essentially, that we prefer to see major companies maintain their listing on stock exchanges.

Conclusion

Parties involved in transactions subject to the FATA should ensure that they quickly come up to speed on Australia's expanded foreign investment regime and also be aware of other recent developments in foreign investment regulation and policy discussion.

Footnotes
  1. This threshold is subject to a yearly indexation adjustment and has been increased from $219 million as announced in 2009 to $231 million for the 2010 calendar year.
  2. This threshold is subject to a yearly indexation adjustment and has been increased from $953 million as announced in 2009 to $1004 million for the 2010 calendar year.

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