Focus: Revising Australia's foreign investment policy in the national interest
7 July 2010
In brief: In response to significant increases in foreign investment, Australia's foreign investment policy has been updated to clarify the rules that will be applied when reviewing investment proposals by foreign investors - especially those from foreign governments and their related entities. Partner Jeremy Low (view CV) and Lawyer Tim Cardiff report on the changes and their implications.
- Australia's foreign investment policy the key changes
- What does this mean for those involved in foreign investment?
How does it affect you?
- For the first time, the Australian Government has formally set out how it will apply the 'national interest' test. The application of this test will need to be considered in structuring transactions and anticipating any conditions to approval that the Foreign Investment Review Board (FIRB) may require.
- Foreign governments and their related entities should be aware that there is now a general 10 per cent direct investment threshold, subject to qualifications, for investment proposals that require notification under the policy.
- Foreign investors into Australia's 'media sector' should also be aware that the FIRB rules in relation to approval for these investments have been clarified.
On 30 June 2010, the Australian Government published its revised foreign investment policy and this follows on from important legislative changes to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA) as reported by us in February 2010.
The policy provides guidance to foreign investors to assist them in understanding the Australian Government's approach to administering the FATA. The policy also identifies a number of investment proposals that need to be notified to the Australian Government even if the FATA does not appear to apply.
While the policy continues to apply to investment proposals of all foreign investors, its publication has been driven by the Australian Government's need to clarify its foreign investment policy in respect of investments by foreign governments and their related entities in the face of significant foreign investment – particularly, in the Australian resources sector by Chinese state-owned enterprises.
In practice, FIRB has usually approved investments by the Chinese Government and its related entities. However, the perceived opaqueness of the FIRB decision-making process, particularly with respect to the imposition of conditions to its approvals, has drawn some criticism. Some of these concerns were raised by the Senate Economics Reference Committee in its report into Foreign investment by state-owned entities. One of the key recommendations of the committee was that FIRB develop a more effective communication strategy regarding risks and benefits of foreign investment, information on how decisions are made and information about emerging sovereign wealth funds and state-owned enterprises. The revised policy can be seen as a response to this.
While there are a number of changes to the policy, we set out below three key features.
The national interest test
The policy re-affirms the Australian Government's approach of reviewing foreign investment proposals on a case-by-case basis with national interest considerations given to a broad range of factors rather than 'hard and fast rules'. The 'national interest' factors that the Government typically considers when assessing foreign investment proposals are as follows:
- 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 and Consumer Commission, 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 Australian 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 investment 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.
Direct investment by foreign governments
The policy requires foreign governments and their related entities to seek FIRB approval for any direct investment in Australia regardless of the value of the investment. The policy considers an investment of 10 per cent or more to be a 'direct investment'.
Investments of less than 10 per cent would not need to be notified to FIRB, except in situations where a sub-10 per cent investment would provide a foreign government investor 'with influence or control over the target investment'. The policy states that these situations include:
- preferential, veto or special voting rights;
- the ability to appoint directors;
- contractual agreements including for, but not restricted to, loans, provision of services and off take agreements;
- investments preparatory to a takeover bid; and
- enforcing a security interest over assets or shares.
Foreign investment in the media sector
The policy continues the previous requirement for foreign investors to obtain approval to make investments of five per cent or more in the media sector. However, the policy now sets out a definition of 'media sector' which clarifies, among other things, the extent to which Internet sites are caught by the definition. The media sector is now defined to include 'daily newspapers, television and radio (including Internet sites that broadcast or represent these forms of media).'
Formal statement of decision-making principles and practices
The policy formalises a number of principles and practices that FIRB has adopted over the past 12-18 months particularly in response to significant foreign investment into Australia's resources sector by Chinese state-owned enterprises. One of the key principles is that while the Australian Government does not have a policy of prohibiting such investments, it will look carefully at proposals from foreign government entities that are not operating on a fully arm's length and commercial basis and may impose conditions to the way proposals are implemented to ensure they are not contrary to the national interest.
While the 'national interest' factors generally replicate the six issues set out in the previous policy under Attachment A: Guidelines for Foreign Government Investment Proposals, these factors will, strictly speaking, be applied to all applications, that is, not just by foreign governments and their related entities. Nevertheless, it would appear that the 'national interest' test will be more easily satisfied by a private sector investor.1 The types of conditions imposed under recent FIRB approvals would seem to be consistent with this approach.2
The policy also sets out a number of mitigating factors that may assist the Australian Government in determining that investment proposals by foreign governments and their related entities are not contrary to the 'national interest', which include:
- the existence of external partners or shareholders in the investment;
- the level of non-associated ownership interests;3
- governance arrangements;4
- ongoing arrangements to protect Australian interests from non-commercial dealings;5 and
- whether the target will be listed.6
Again, these factors appear consistent with FIRB's past practice of approvals.
Direct investment by foreign governments and their related entities
While it is helpful that the new policy has provided some guidance on what constitutes a direct investment by foreign governments and their related entities, there is a number of open issues.
- Still no asset value threshold. This means that foreign governments and their related entities will still need to get FIRB approval for low value investments just because they are acquiring more than 10 per cent, even when it is clear that national interest considerations will not apply. However, the policy does state that 'investments in enterprises that are large employers or that have significant market share may raise more sensitivities than investments in smaller enterprises.' Nevertheless, the policy does not specify what would constitute a 'smaller enterprise'.7
- Source of funding to be considered. The policy states that consideration will also be given to an investor's funding arrangements in assessing whether they could facilitate 'actual or potential control' by a foreign government. This statement would appear to be targeting funding of investments by state-controlled banks, particularly, the taking of security and negative pledges. In other words, these banks may also need to seek FIRB approval in order to enter into funding arrangements. Given the nationalisation of a number of European and US banks in connection with the global financial crisis, this is clearly not just an issue for Chinese state-owned enterprises.
Focus on policy
Compared to its previous iterations, this policy has more of an emphasis on notifications required under FIRB policy (whether or not required under FATA), rather than the legal application of FATA. This seems to have resulted in some broad drafting in the policy. For example, the policy states that 'The FATA allows the Treasurer or his delegate usually the Assistant Treasurer to review investment proposals to decide if they are contrary to Australia's national interest. The Treasurer can block proposals that are contrary to the national interest or apply conditions to the way proposals are implemented to ensure they are not contrary to the national interest.' This statement is not strictly accurate as the Treasurer (or his delegate) is only empowered under the FATA to review and block transactions above certain thresholds and, in those circumstances, to exercise certain remedies which may include a divestment order.8 In fact, there is still no explanation of the consequences of failing to seek FIRB approval for applications made under the policy (but not required under the FATA) and hence the legal basis for having to make such an application in the first place.
Furthermore, applications made solely under the revised policy are not subject to time limits. Contrast this to an application made under the FATA which is subject to a statutory timeframe.9 This is confirmed in the revised policy although it does state that the Government also aims to consider these proposals within 30 days, where possible.
- The policy states that 'The national interest test also recognises the importance of Australia's market-based system, where companies are responsive to shareholders and where investment and sales decisions are driven by market forces rather than external strategic or non-commercial considerations.'
- For example:
National security concerns China Minmetals' first proposal to invest in OZ Minerals (February 2009) was rejected by FIRB on national security grounds because it included the Prominent Hill site, which is located in the Woomera Prohibited Area. However, a revised investment proposal (April 2009) was approved after the Prominent Hill site was excluded from the transaction.
Competition concerns Yanzhou Coal's investment in Felix Resources was approved in October 2009 on condition that, among other things, Yanzhou market and sell coal produced from its Australian mines by reference to prevailing international benchmarks and in line with market practices.
General economic and community concerns China Minmetals' investment in OZ Minerals (April 2009) included conditions that China Minmetals' support Indigenous Australian communities and continue to operate and pursue growth at certain mine sites.
- For example, FIRB approval for the Shell/PetroChina bid for Arrow Energy (April 2010) has been obtained, apparently without conditions.
- For example, Yanzhou Coal's investment in Felix Resources (October 2009) was approved on condition that 1) Yanzhou operate its Australian mines through an Australian company, headquartered and managed in Australia, with its CEO and CFO principally residing in Australia; and 2) the Australian operating company have at least two directors principally residing in Australia, one of whom must be independent.
- For example, Hunan Valin's investment in Fortescue Metals was approved subject to Hunan Valin undertaking that its nominee directors will comply with 1) Fortescue's Directors' Code of Conduct, and 2) the information segregation arrangements agreed between Fortescue and Hunan Valin.
- For example, Yanzhou Coal's investment in Felix Resources (October 2009) was approved on condition that the Australian operating company list on the Australian Securities Exchange by the end of 2012 and by that time Yanzhou to have reduced its ownership level to 70 per cent.
- The policy also does not mention a number of the informal FIRB policy positions volunteered by various parties during the second half of 2009 in relation to investment by foreign governments and their related entities, as we reported in February 2010. For example, as we reported in that article, a statement by FIRB director, Mr Colmer, that FIRB would prefer to keep foreign government ownership of smaller companies in general below 50 per cent and to limit foreign government ownership of larger companies to just 15 per cent. This is not included in the policy.
- For example, in the case of non-US investors, acquisition by foreign persons of an interest of 15 per cent or more in an Australian business or corporation which has a gross value in excess of $231 million.
- The FATA provides a 30-day statutory period for a decision to be made on proposals lodged under the FATA, with up to a further 10 days to advise the applicant parties of the decision. FATA also provides for the issue of an Interim Order, which extends the available examination period and prohibits the proposal for up to 90 days.
- Jeremy LowPartner, Sector Leader, Healthcare,
Ph: +61 2 9230 4041
- Guy AlexanderPartner, Head of M&A,
Ph: +61 2 9230 4874
- Jon WebsterConsultant,
Ph: +61 3 9613 8832
- Phillip CornwellSenior Finance Counsel,
Ph: +61 2 9230 4748
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