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In late March, the Treasurer of Australia announced temporary changes to Australia's foreign investment review framework in response to the COVID-19 crisis. The new measures lowered the monetary screening thresholds for transactions that need to be notified to the Foreign Investment Review Board ("FIRB"), aiming to prevent the fire-sale of Australian assets to foreign investors which could harm economic security and the viability of critical sectors. Following the introduction of these measures, the Federal Government has recently blocked two inbound mining investments from proceeding on grounds of 'national interest'. The introduction of these new measures and the subsequent blocked investments indicate a potential shift by the Australian Government to a more protectionist approach to foreign investment regulation, at least in the short term and until the COVID-19 crisis eases.
- As of 29 March 2020:
- all foreign investments subject to the Foreign Acquisitions and Takeovers Act 1975 ("FATA") now require FIRB approval, regardless of monetary value (subject to certain exceptions under the FATA which continues to apply); and
- the statutory review period for assessing applications has been increased from 30 days to up to six months.
- The Treasurer has recently prohibited two proposed investments into Australian mining projects by foreign investors, both of Chinese origin.
- Outright rejections from FIRB are particularly unusual, highlighting the tough stance being taken by the Federal Government in protecting Australia's critical sectors from foreign ownership during the COVID-19 crisis.
Temporary measures to foreign investment framework in response to COVID-19
As of 29 March 2020, all monetary screening thresholds triggering the requirement for FIRB approval under FATA were lowered to $0. The effect of this change is that all foreign investments (other than those exempt by the FATA) will require FIRB approval, regardless of the value of the investment or the nature of the investor and that all foreign investors will effectively be treated as foreign government investors are already treated the purposes of requiring FIRB approval (i.e. a $0 threshold for an investment above an applicable proportionate ownership threshold).
This was a major change to the foreign investment regime, which normally applies monetary screening thresholds (up to $1,192 million, subject to the nature of the investment and the origin of the investor) to determine whether a particular investment by a foreign person requires FIRB approval. Investments with a monetary value above the requisite threshold must be assessed by FIRB to determine whether the nature of the investment, the type of asset being acquired and the identity of the foreign investor, are consistent with, and not contrary to, Australia's 'national interest' (which is not definitively defined, but is considered by reference to, for example: national security, competition, government policy, the impact on the economy and the community and the character of the investor).
The Federal Government has explained that the reasoning behind the new measures is to protect the 'national interest' by preventing foreign investment into distressed assets in critical sectors, which may pose a threat to the security and viability of such sectors in the Australian economy, without any government oversight. The underlying rationale being that, transactions that would otherwise have required screening by FIRB (i.e. be ordinarily of a higher value but for the COVID-19 crisis) may no longer trigger FIRB assessment due to the artificially low values attributed to such transactions primarily as a result of the COVID-19 crisis.
To create the capacity required by FIRB to assess the expected significant increase in foreign investment applications as a result of the lowering of the monetary screening thresholds, the statutory period for the review of applications and the rendering of a decision has been extended from 30 days to up to six months. Agreements entered into prior to the effective date of the new measures (being 29 March 2020) but which remain conditional (including those conditional on FIRB approval) are not affected by the new monetary thresholds; however, applicants may have their review periods extended by up to six months, on the proviso that priority will be given by FIRB to urgent applications for investments that protect and support Australian businesses and jobs. More routine transactions, such as the entering into a lease agreement for developed commercial land are expected to be appropriately prioritised.
The Federal Government has stated that these new measures are to remain in place for the duration of the current COVID-19 crisis, and no definitive time period for the lifting of the thresholds has been announced. It remains to be seen how long these measures may last and under what social and economic conditions the measures will be lifted.
Mining investments not approved
Two separate proposed investments into Australia's mining sector have now been halted by the Treasurer (noting that while FIRB assesses and makes recommendations to the Treasurer on foreign investment applications, it is the Treasurer that is the ultimate decision maker). While these decisions follow the introduction of the new measures, it is noted that both were being considered by FIRB prior to the implementation of the temporary changes.
On 20 April 2020, Northern Minerals Limited (ASX:NTU) ("Northern Minerals") – owner of the Browns Range project in East Kimberley, Western Australia – announced that a $20m investment by Chinese state-owned steel producer, Baogang Group Investment (Australia) Pty Ltd ("BGIA"), would not proceed after BGIA received an "order" from the Treasurer "prohibiting" the transaction. The transaction was first announced by Northern Minerals in August, 2019.
Following the BGIA decision, AVZ Minerals (ASX:AVZ) ("AVZ") announced on 24 April 2020 that Chinese lithium chemical producer, Yibin Tianyi Lithium Industry ("Yibin Tianyi"), had withdrawn a FIRB application relating to its $14.1m investment in AVZ. The announcement from AVZ stated that Yibin Tianyi had received advice from the Federal Government that its bid for an 11.8% stake in AVZ was "contrary to the national interest". In response to the withdrawal, AVZ stated that its intentions are to work with Yibin Tianyi to negotiate an "alternative method of investment" in order to advance AVZ's aspirations of being a producer of lithium products from its flagship Manono Lithium and Tin Project in the Democratic Republic of Congo. On 4 May 2020, AVZ announced an equity placement of $10.6m to Yibin Tianyi at a price of 4.5 cents per share. Upon completion, Yibin Tianyi will own a 9% stake in AVZ and unlike the previous proposed transaction, Yibin Tianyi will not take an AVZ Board seat. These new terms mean the investment is not subject to FIRB approval, though Yibin Tianyi will require Chinese Overseas Direct Investment approval.
Senate Committee Inquiry into Foreign Investment Proposals
On 4 December 2019, the Senate of the Commonwealth of Australia referred an inquiry into foreign investment proposals to the Senate Economics References Committee for inquiry and report by 7 September 2020.
The first item on the agenda for the 15 May 2020 hearing of the Committee was a discussion of the failure of Alinta energy to comply with various undertakings given by its Chinese-owned company purchaser Chow Tai Fook to comply with the conditions attaching to the Treasurer's approval relating to that acquisition. Similar issues on compliance with FIRB conditions by Chinese-owned company, Moon Lake, in relation to its purchase of Van Dieman's Land Dairy, and Chinese-owned company, China Mengniu, in relation to its acquisition of Bellamys, were also raised at the hearing.
In this context, questions were raised by the Senate Committee as to the ability of FIRB to adequately review applications and manage compliance with conditions by those applicants whose applications were approved – in particular, having regard to the increased caseload arising from the reduced monetary threshold imposed due to COVID-19.1
Why are these decisions and actions significant?
Firstly, it is rare for the Treasurer to reject an application, with the effect that an investment is prohibited from proceeding. In 2018-19, out of a total of 8,725 decisions made by FIRB, only one application was rejected (as the BGIA application was), with 670 applications withdrawn prior to a decision being made (as the Yibin Tianyi application was).2 We note, however, that applications may be withdrawn for any number of reasons, and it is likely that a large number of applications were withdrawn because, for example, transactions did not proceed, or they were lodged by multiple bidders in an auction process (in which case all bidders would typically all seek FIRB approval up front). Therefore, the withdrawal statistics are not conclusive of decisions predicated on the basis that an application is against the 'national interest', such as in the Yibin Tianyi application.
Secondly, in relation to the withdrawal of Yibin Tianyi's application, the proposed investment was for a minority stake in AVZ, whose only material asset is its project in the DRC. Historically, investments (including majority investments and 100% acquisitions) in Australian incorporated legal entities whose sole assets are located in an overseas jurisdiction, were regarded as uncontentious and likely to receive approval as a matter of course. As such, the withdrawal of the application is possibly an indication of a material change in the view of what constitutes 'national interest' in instances where an Australian entity is a mere holding company, particularly in respect of certain EV-related mineral commodities where Chinese ownership is considered to be too concentrated.
The two decisions, being the withdrawal of the Yibin Tianyi application based on 'national interest' considerations, and the rejection by the Treasurer of the investment by BGIA in Northern Minerals at 6.2 cents per share, which subsequently resulted in Northern Minerals announcing a $22m placement to sophisticated investors at 2 cents per share, coupled with the introduction of the COVID-19 measures, are possibly indicative of a more protectionist approach the Federal Government is taking in regulating inbound investment into critical sectors at this time.
There is no doubt that there is a heightened degree of community concern about foreign investment, the extent of Australia's economic reliance on other jurisdictions, and the values at which assets may be sold during the COVID-19 crisis, and the sentiment that is influencing the decisions by the Federal Government is evident in the tone of the Senate Hearing and the reporting on it. However, balanced against this is a recognition that foreign capital is important for post COVID-19 recovery in Australia, and, therefore care needs to be taken by all parties in the messages being sent to foreign investors during this critical time.
How does this affect stakeholders needing FIRB approval?
For the reasons outlined above, the path to obtaining FIRB approval during the current COVID-19 crisis and potentially into the future – in particular, for foreign investments in certain sectors that touch on the national interest, such as mining, telecommunications and health – is likely to be more difficult, less certain and take longer.
While foreign investment is still welcome and will continue, albeit subject to the reduced monetary screening threshold above applicable proportionate ownership thresholds, where a transaction requires the Treasurer's approval, parties to the transaction should take account of the new temporary measures, the political sensitivities and the limited resources available to FIRB and anticipate delays in the FIRB application review timeframe. This includes ensuring that transaction documentation contemplates FIRB approval (given the lower thresholds) and the potential for an extended period of time before such approval is obtained, including, for example, an appropriate length of time for the satisfaction of conditions precedent, well-defined pre-completion undertakings and clear termination and material adverse change clauses. The use of deposits as indicia of purchaser commitment to the deal (refundable or nonrefundable), reverse break fees and interim financing arrangements for distressed targets, amongst others, are also likely to be up for negotiation in this context.
As noted above, parties with an application into FIRB prior to the introduction of the new temporary measures are effectively exposed to long extensions to the previously anticipated approval period, as they are actively being asked by FIRB to agree to extend the statutory review period for up to six months. FIRB has, however, noted that applications may be prioritised and assessed sooner than six months on the basis that there are urgent commercial reasons for doing so, or a particular investment protects and supports Australian businesses and jobs. Applicants are encouraged to liaise with FIRB as soon as possible to make such a request.
1 See "Swamped FIRB must be fit for purpose" Adele Ferguson, Australian Financial Review, May 18, 2020 – the transcript of the hearing on 15 May 2020 is yet to be released on the Parliament of Australia Public Hearings website.
2 Foreign Investment Review Board, Annual Report 2018-19, released 4 May 2020.
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