The decision to approve or deny a foreign investment application is ultimately made by the Treasurer of Australia, based on an assessment of whether the investment would be contrary to the national interest.
When making its decision, the Treasurer is advised by the Foreign Investment Review Board (FIRB), which examines foreign investment proposals, consults with other relevant Australian Government agencies as required and advises on the national interest implications. Australia's foreign investment policy framework comprises the Foreign Acquisitions and Takeovers Act 1975 ("the Act"), the Act's related regulations, Australia's Foreign Investment Policy ("the Policy") and a number of guidance notes.
Given the extended review timeframes arising from the COVID-19 interim measures, foreign persons should be particularly cognizant of the need to engage with FIRB early in a deal timeline.
A foreign person or entity making an acquisition that requires approval under the Act must apply to FIRB for a notification that the Treasurer has no objection to the acquisition before completion of the acquisition, and any agreement to make the acquisition must be subject to receiving FIRB approval.
An application includes a filing fee that varies according to the type of deal and the deal value.
TYPES OF DEALS REVIEWED
FIRB approval is required for a range of acquisitions by foreign persons, including:
- A "substantial interest" in an Australian entity: An acquisition of an interest of 20 percent or more in an Australian entity valued at more than AUD 266 million (approximately US$180 million). This monetary threshold has been temporarily removed as part of the COVID-19 interim measures (see further below)
- Australian land and land-rich entities: Various acquisitions of interests in Australian land are regulated with varying monetary thresholds, including in respect of residential land, vacant commercial land, developed commercial land and an entity where the value of its interests in Australian land exceeds 50 percent of the value of its total assets
- Agricultural land and agribusinesses: Acquisitions of interests in agricultural land and agribusinesses are regulated separately in the Act. In addition, a register of foreign ownership of agricultural land is maintained by the Australian taxation authority
Certain types of investors receive differing treatment for their deals:
- Free trade agreement investors: Consistent with Australia's free trade agreement (FTA) commitments, higher monetary thresholds apply to certain acquisitions made by investors from Chile, Japan, South Korea, China, Singapore, New Zealand, the US and countries for which the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP) is in force. For example, an acquisition of an Australian entity by an FTA country investor will only require FIRB approval if the entity is valued at more than AUD 1.154 billion (approximately US$780 million), unless the investment relates to a "sensitive business" such as media, telecommunications, transport, defense and military-related industries (to which a lower threshold applies) or the investor is a foreign government investor. However, as part of the COVID-19 interim measures (see further below), all monetary thresholds have been temporarily removed, including for FTA country investors
- Foreign government investors: Stricter rules apply to foreign government investors, which can include domestic or offshore entities where a foreign government and its associates hold a direct or upstream interest of 20 percent or more, or foreign governments of more than one foreign country and their associates hold an aggregate interest of 40 percent or more. In general, foreign government investors must obtain FIRB approval before acquiring a direct interest (generally, at least a 10 percent holding or the ability to influence, participate in or control) in any Australian asset or entity, starting a new business or acquiring mining, production or exploration interests
TEMPORARY MEASURES IN RESPONSE TO COVID-19
Prior to March 29, 2020, actions were only notifiable if they met specific monetary thresholds as outlined above. In response to the COVID-19 pandemic, to protect against the perceived risk of large numbers of financially distressed Australian businesses being acquired by foreign persons, the Australian government has modified the approval regime, so that all of the above monetary thresholds are reduced to US$0 (provided that the action otherwise is notifiable). As such, provided the acquisition meets the substantive criteria, the value of the transaction is irrelevant and must be submitted for approval. These interim measures have also resulted in increased review periods.
SCOPE OF THE REVIEW
The Treasurer may prohibit an investment if he or she believes it would be contrary to the national interest. In making this decision, while the concept of "national interest" is not defined in the legislation, the Treasurer will broadly consider:
- The impact on national security (with advice from the Critical Infrastructure Centre on national security risks to critical infrastructure)
- The impact on competition
- The effects of other Australian government laws and policies (including tax and revenue laws)
- The impact on the economy and the community
- The character of the investor
TRENDS IN THE REVIEW PROCESS
Historically, there have been few rejections by the Treasurer on the grounds of national interest. From 2018 through 2019, only one non-residential land application was formally rejected. In the same period, 670 applications (approximately 85 percent of which related to residential land acquisitions) were withdrawn before a decision was made. The reasons for withdrawal are not publicized.
However, some significant investment proposals have been rejected on national security grounds in recent years, including:
- Hong Kong–based CKI's proposed acquisition of APA Group and its energy network in 2018
- The New South Wales government's proposed sale of the Ausgrid electricity network to Chinese and Hong Kong investors in 2016
- The proposed acquisition of the S Kidman agricultural land holdings by Chinese investors in 2015
The publicized grounds upon which these acquisitions were rejected included excessive concentration of market power, proximity of land holdings to defense sites, as well as general concerns regarding foreign ownership of critical infrastructure assets.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Foreign persons should file an application in advance of any transaction or make the transaction conditional on FIRB approval, and a transaction should not proceed to completion until the Treasurer advises on the outcome of its review. For a more sensitive application (e.g., a transaction involving the power, ports, water, telecommunications, banking or media sectors), foreign investors should consider the government's invitation in the Policy to engage with FIRB before filing an application for a significant investment. Given the extended review timeframes arising from the COVID-19 interim measures, foreign persons should be particularly cognizant of the need to engage with FIRB early in a deal timeline.
These discussions may help foreign investors understand national interest concerns the government may hold about a particular proposal and the conditions the Treasurer may impose upon approvals.
These discussions can also help with structuring a transaction in order to reduce the likelihood of rejection. Such discussions should be held at an early stage in order to provide enough time to satisfy all FIRB queries. Where there is a competitive bid process for the acquisition, a foreign investor that does not actively engage with FIRB early in the bidding process may be placed at a competitive disadvantage to other bidders who do. Foreign investors should be prepared to discuss in detail any conditions and undertakings that may be requested by FIRB, especially for acquisitions that are likely to attract greater political or media scrutiny.
Investors should be aware of the sensitivity in relation to the investment structures used by foreign investors, profit shifting and payment of Australian tax. Early on, foreign investors should work with their tax advisors to ensure their investment structures do not fall outside the spectrum of what is acceptable to the Australian Tax Office (ATO) as the ATO is consulted in all approval processes. Investors should also work with their advisors to determine a level of transparency of upstream ownership, to avoid further enquiry from FIRB and possible delays later.
REVIEW PROCESS TIMELINE
Under the Act, the Treasurer typically has 30 days to consider an application and make a decision. However, pursuant to the interim COVID-19 measures, timelines for reviews have been revised to six months. While this does not mean that the review will take this long, investors should be prepared to factor a six-month review period into acquisition timelines. The timeframe for making a decision will not start until the correct application fee has been paid in full. If the Treasurer requests further information from the investor, the review period will be on hold until the request has been satisfied.
Typically, if FIRB requires further time, it will request the applicant to voluntarily extend the approval deadline. As the Treasurer is also entitled to unilaterally impose a 90-day extension under statute, applicants are generally incentivized to "voluntarily" request the proposed deadline extensions. This makes it difficult to specify with certainty how long a review process will take.
2020 UPDATE HIGHLIGHTS AND REFORMS
- Compliance: The Australian government has indicated an increased focus on compliance activities and audits, particularly with respect to tax conditions imposed by the Australian Taxation Office on FIRB approvals
- Reforms: In addition to introducing the interim COVID-19 measures discussed above, the Australian government has announced significant reforms to Australia's foreign investment approval regime, which are expected to be effective from January 1, 2021. The reform package includes:
- A new "national security test" created for foreign investors proposing to acquire a direct interest in a "sensitive national security business." Consistent with the interim COVID-19 measures, the Treasurer may impose conditions or block any investment on national security grounds, regardless of value
- Mandatory notification of any proposed foreign investment into a "sensitive national security business." The definition of "sensitive national security business" is subject to further consultation, but the Treasurer has indicated it will capture telecommunications, critical infrastructure, defense, businesses storing sensitive data and any business or land situated near defense or national security operations
- A new "call in" power that allows the Treasurer to screen any investment that would not ordinarily require notification on national security grounds (including during or after the investment)
- Private equity investors are no longer treated as foreign government investors purely by virtue of passive upstream investors who are foreign government entities
- Expansion of the exemption certificate regime with ability for the Treasurer to grant investor-specific exemption certificates
- Stronger and more flexible enforcement options, including powers to impose or vary conditions to approvals or, as a last resort, require divestment of previously approved investments where national security risks emerge (compliance with approval conditions is receiving more attention as the government has received criticism for failing to allocate sufficient resources to this area)
- Increased monitoring and investigative powers and materially higher civil and criminal penalties
- Data: FIRB has increasingly emphasized that, as part of its national interest assessment, it will have particular regard to the protection of sensitive Australian data. For example, this has been a particular focus with respect to proposed investments in Australian healthcare groups and data centers
- Generally, the Treasurer approves the vast majority of applications
- FIRB has been increasingly willing to use conditions and undertakings as a mechanism to increase the government's oversight of more complex or sensitive investments. Undertakings required from FIRB may include matters relating to governance, location of senior management, listing requirements, market competition and pricing of goods and services (e.g., that all off-take arrangements must be on arm's-length terms) and other industry-specific matters. FIRB has also issued a set of standard tax conditions that apply to those foreign investments that pose a risk to Australia's revenue and make clear the requirements and expectations for investors
- The Treasurer has wide divestiture powers, and criminal prosecution and civil penalties can apply for serious breaches of Australia's foreign investment laws and for those facilitating such breaches such as professional advisors. The standard practice is to seek approval where there is any doubt as to whether approval is required
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2020 White & Case LLP