Earlier this year the Commonwealth Government announced a policy change to reduce the screening threshold for acquisitions of Australian agricultural land and businesses by foreign investors. Now, most non-government foreign investors must seek prior approval for a proposed acquisition of an interest in rural land where the cumulative value of rural land that the person holds exceeds A$15 million.
Different thresholds apply to US, New Zealand, Chilean, Singaporean and Thai non-government investors due to the application of the relevant free trade agreements (FTAs). However, the A$15 million threshold is likely to become the standard for acquisition of interest in Australian rural land going forward, as the latest FTAs signed with Japan, Korea and China all include provisions for Australia to impose the lower screening threshold.
This update discusses the application of the new Foreign Investment Review Board (FIRB) policy on agriculture-related acquisitions, the impact of the new FTAs and what it means for foreign investments in Australia in the future.
Acquisition of agricultural land and business
Rural land is defined as land used wholly and exclusively for the carrying on of a primary production business. However, this does not preclude rural land or its components having incidental other uses, such as the existence of a residential dwelling on a farm. An ‘interest in rural land’ includes interests acquired directly (e.g. acquisition of land), or indirectly if the foreign investor acquires a substantial interest in an entity where more than 50 per cent of its assets by value comprise rural land. This is akin to the tests used for urban land corporations under the previous FIRB policies.
Consistent with Australia’s FTA commitments, the cumulative A$15 million threshold does not apply to private investors from the United States, New Zealand, Chile, Singapore and Thailand. Instead, a different test of acquisition of substantial interest in a ‘primary production business’ applies for investors from those jurisdictions:
Click here to view table.
* The FIRB Policy has not been updated for the JAEPA, KAFTA and ChAFTA. The relevant thresholds are included as a guide based on the restrictions set out in the FTA (or, in the case of ChAFTA, as reported by the Australian Government as the full text of the ChAFTA is not yet available). **Investments below 10% may require FIRB approval if the foreign government investor is building a strategic stake in the target, or can use that investment to influence or control the target business.
Care should be taken in applying the higher thresholds for investors from those jurisdictions as they only apply if the investing entity is a foreign national, foreign company or a branch of a foreign company located in those jurisdictions. Given most foreign investments are made through a special purpose vehicle incorporated in Australia, such investment would not attract the benefit of the higher threshold listed above. The Policy does not ‘look through’ the investment vehicle in ascertaining the nationality of the foreign investor.
Free Trade Agreements
Over the past 12 months, the Australian government has entered into a powerful trifecta of FTAs with Australia’s top three exporters: Japan, Korea and China. It is expected that more than 85 per cent of Australian goods exports will be tariff free upon these FTAs taking effect, rising to more than 93 per cent in four years.
We set out below some of the key terms of these FTAs.
Click here to view table.
Is Australia still open for business?
Given the reduced screening threshold for acquiring interests in agricultural land and business, as well as the increased political and media scrutiny over the acquisition of agricultural businesses in Australia by foreigners (which led to the Treasurer’s decision to reject the proposed takeover of GrainCorp by a US entity in 2013), it is easy to form the conclusion that Australia is trending towards a more restrictive foreign investment policy. In truth, Australia’s record in approving foreign investments remains one of the best in developed nations: other than GrainCorp, there have only been two other significant business acquisition applications rejected by the Australian government since 2001, being the 2001 Shell takeover over Woodside Petroleum, and the Singapore Stock Exchange’s 2011 bid for the ASX.
Looking at the bigger picture, the number of foreign investment applications rejected under Australian foreign investment rules remains very small, well below 0.1 per cent per annum on average (and most of them relate to relatively small real-estate applications). The overwhelming majority of applications are uncontentious and approved. Nevertheless, special issues may arise when state-owned or related enterprises or sovereign wealth funds are potential foreign investors.
We set out below some statistics from the latest FIRB annual report for applications processed over the past three years:
Click here to view table.
Source: FIRB annual report 2013-2014
Of course, the ‘rejected’ statistic in the table above does not tell the whole story. Most foreign investors when faced with the possibility of rejection from the Australian Government may, instead of dealing with the publicity of a formal rejection, choose to withdraw the application instead (the most highprofile case being the withdrawal by Chinalco in respect of its application to acquire an 18 per cent interest in Rio Tinto back in 2009). But even accounting for the withdrawals, only three per cent of applications were rejected or withdrawn in 2013, and most of the withdrawals would have been procedural to extend the statutory deadline (so as to avoid an interim order from the Treasurer).
One trend worth noting is the increasing willingness of FIRB 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 (e.g. that the target board must retain a majority of Australian directors), 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. This means 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.
In our view, despite the changes in FIRB Policy with respect to acquisitions of agricultural land and businesses, we expect FIRB to continue to routinely approve most (if not all) of the investment applications in Australia. For investments that are more complex or sensitive (such as acquisitions by foreign government entities), there is a higher risk that FIRB may impose certain conditions in approving the investment proposal. In those circumstances, and at the risk of self-advertising, we recommend investors seek early professional advice to navigate through the potential FIRB issues and process.