Key Points:

Revisions to Guidance Note 23 address some practical issues and uncertainties concerning the application of Australia's revised foreign investment laws to foreign government investors.

The amendments to the Foreign Acquisitions and Takeovers Act 1975and Regulations made in late 2015 extend to "direct investments" in Australia by foreign government investors. The recent amendments to Guidance Note 23 issued by the Foreign investments Review Board (FIRB) clarify how the Act applies to direct investments by “associates” of foreign government investors, and to offshore investments by foreign government investors.

Who is a foreign government investor?

For the purposes of the Act, a "foreign government investor" is defined broadly to include:

  1. a foreign government or separate government entity (including many sovereign wealth funds and state sponsored pension funds);
  2. an entity in which a foreign government or separate government entity (alone or together with one or more "associates") holds an interest of 20%; or
  3. an entity in which foreign governments or separate government entities from more than one foreign country (alone or together with one or more "associates") have an aggregate interest of 40% or more.

What is a "direct interest"?

Subject to certain limited exceptions, the acquisition of a "direct interest"' by a foreign government investor in an Australian entity or business must be notified to FIRB. A "direct interest" is an interest of at least 10%; or 5% if the person has entered a legal arrangement relating to the businesses; or any percentage if the person who has acquired the interest is in a position to control or influence the entity or business.

How do the tracing rules apply to foreign government investors?

Section 19 of the Act contains tracing provisions, so that offshore investments in upstream members of a corporate group are covered by the Act. These tracing provisions expressly do not apply for the purposes of determining whether an offshore transaction by a non-government investor is a notifiable transaction under the Act (although they may still be significant actions).

However, the wording of the Act and the Regulations are not clear as to how the tracing provisions are intended to apply to offshore investments by foreign government investors.

The amended Guidance Note makes it clear that in FIRB's view the tracing provisions do apply to offshore investments by foreign government investors so that, for example, the following transactions would prima facie need to be notified to FIRB:

  1. the acquisition of a 20% interest in an offshore parent of an Australian entity or business (of any size) by a foreign government investor; and
  2. for a chain of entities that holds a direct interest in an Australian entity or business, so long as each lower entity in the chain below the foreign government investor’s acquisition of a direct interest in an offshore entity holds a direct interest in the next level lower entity, the offshore acquisition results in the foreign government investor acquiring a direct interest in an Australian entity or Australian business.

When will foreign government investors be "associates"?

Under the Act, the interests of a foreign government investor and its "associates" are aggregated for the purposes of determining whether the foreign government investor has acquired a "direct interest" in an Australian entity or business. Further, the Act provides that foreign government investors of the same country are deemed to be "associates" of each other. These provisions have caused practical difficulties for foreign government investors who may not know about the interests of other foreign government investors from the same country.

The amended Guidance Note 23 clarifies that FIRB will not impose fines or pursue penalties or offences for breaches where "it is not reasonable for a foreign government investor to know that one or more other foreign government investors from the same country already hold, or are concurrently acquiring, interests in the target entity". The following are examples of where it would not be considered reasonable to expect a foreign government investor to know about the interests of other foreign government investors:

  • where public regulatory disclosures in relation to the target entity do not disclose any such holdings (for example, through a substantial holder notice or a list of the target entity’s major shareholders in the target entity’s latest financial report) and the foreign government investor is not privy to information on such holdings; or
  • where the holding in the target entity is disclosed, but it is not on its face identifiable as being held by another foreign government investor, and the foreign government investor is not privy to information that would identify the holding as being held by another foreign government investor.

Conclusion

The amendments to the Act in late 2015 introduced significant changes to operation of the law for foreign government investors. The amendments to Guidance Note 23 provide some practical relief and some additional clarity regarding compliance with those changes.

Be aware of FIRB's policy regarding the extremely wide application of the Act to offshore investments by foreign government investors ‒ such that offshore investments by foreign government investors in companies or trusts of only 10% (or even less) may require FIRB notification and approval, even if the value of those assets is relatively small and the ownership level in the interposed companies is only 10% (or less).