Before jumping to conclusions about what will be only the 4th prohibition of a foreign investment proposal since 2000, it is important to consider what the Kidman decision means for foreign investment in Australia, and the circumstances in which that particular decision has been made.
The Treasurer, Scott Morrison, reiterates in his release what has been the Australian Government’s foreign investment policy position for many years:
“Foreign investment has underpinned the development of our nation and we must continue to attract the strong inflows of foreign capital that our economy requires. Without foreign capital and investment, Australia's output, employment and standard of living would all be lower.
Foreign investment rules facilitate such investment while giving assurance to the community that the investment is being made in a way which ensures that Australia's national interest is protected.”
So why all the fuss?
The Treasurer has followed his predecessor in stating that public confidence in the foreign investment regime is a key component of the national interest test applicable to the assessment of foreign investment proposals. At this time, with a Federal election almost upon us, it appears that public confidence is more about winning votes than assessing business impact.
The Treasurer’s decision is unusual and noteworthy for a number of reasons:
- it is expressed to be a “preliminary” decision. That has not been done before;
- it relies on an external review instead of the advice of the Foreign Investment Review Board (FIRB) when assessing the national interest;
- it suggests that Australian investors do not have the wherewithal to participate in large transactions; and
- it provides no guidance on how proposals involving large Australian assets or businesses are to be dealt with going forward by vendors.
We do not think that Kidman is intended to set any precedent. And importantly, the Treasurer’s decision does not appear to be about the bidder. In our view, this decision should not be taken to be an indication of any concern with Chinese, or Asian, investment. Remember, the Treasurer recently approved a Chinese proposal to acquire the Van Diemen’s Land Company in Tasmania, and emphasised that the Government does not choose winners - that is for the vendor through their sale process.
Rather, Kidman’s size is unique in the agricultural sector – it comprises rural land assets representing approximately 1% of Australia and 3% of Australia’s arable land – and in that context, the Treasurer is also concerned about the potential for Australian participation in the transaction.
The Treasurer has relied on the independent Samuel review of the Kidman sale to form a view that Australians could not participate given the sheer size and that then grounds a national interest concern. Whilst that may sound protective of the national interest, the Treasurer has left a number of questions unanswered. What is a “large” property? Do “large” properties need to be divided up on sale? Will the concept of Australian participation apply to other sectors where “the size of the asset makes it difficult for any single Australian group to acquire the entire operation”?
It is regrettable that the FIRB review of the Kidman sale process has played out publicly – firstly with Anna Creek being removed and then the broader size factor. We consider that where size is a factor, it will be important for a vendor to engage early with FIRB to address issues in the sale process, rather that have the issue appear to arise very late in the process.
To avoid later disappointment, we also consider that a proposed purchaser should engage early with FIRB, not only on their investment proposal and intentions, but also to confirm the sale process is one that FIRB and the Treasurer are comfortable with.
More generally, we have previously commented about the 1 December 2015 rewrite of the foreign investment rules – see our previous article, Changes to Australia’s FATLA Bill and the implications for foreign government investors. More recently, some poorly thought through tax bolt-on conditions to FIRB approvals announced in February 2016 have added additional complexity.
There is a risk that the Treasurer’s Kidman decision will make investing in Australia appear more challenging for offshore investors – in terms of understanding the regime, the prospects for receiving approvals, and the costs involved including the FIRB filing fees.
Looking to the future, what saves the Australian foreign investment review system is that the “national interest” is not defined. This allows for some flexibility in approach and each matter is assessed on a case by case basis. Nevertheless, it would be useful for some objective criteria or guidance to be given that will assist investors to better understand what criteria they need to meet, following decisions such as Kidman.