In a welcome positive decision for foreign investors looking to invest in Australia, Treasurer Joe Hockey has announced the removal of foreign investment conditions placed on Chinese state-owned enterprise Yanzhou Coal Mining Company (“Yanzhou”) in relation to its holding in Yancoal Australia Limited (“Yancoal”).
The conditions were imposed on Yanzhou in 2009 when it received approval to acquire 100% of Yancoal and required it to:
- reduce its ownership of Yancoal from 100 per cent to less than 70 per cent and to relist Yancoal;
- reduce its economic interest in Yancoal’s former Felix Resources coal mining assets to less than 50 per cent by the end of December 2013; and
- reduce its economic interest in two other coal mines, Syntech Resources and Premier Coal mines, to less than 70 per cent by the end of December 2014.
To date, Yanzhou had reduced its stake in Yancoal to 78 per cent, but due to changing circumstances sought the Treasurer’s approval to remove the conditions, allowing it to maintain its current level of ownership.
In making his decision to remove the conditions, the Treasurer took account of the changing nature of the Australian coal industry since the conditions were imposed on Yanzhou in 2009, stating that “significant challenges” have arisen in the sector. This shows the Government is listening to business.
The Treasurer removed the conditions in exchange for undertakings from Yanzhou. These undertakings required Yanzhou to:
- continue to support Yancoal’s Australian operations and maintain Yancoal’s position as a major regional employer
- provided its interests in Yancoal remain at least 51%:
- ensure Yancoal remains solvent; and
- support Yancoal’s plans to expand the Moolarben open cut mine.
The fresh undertakings provide the Treasurer with an alternative approach to ensure consistency with the current view of the national interest as it applies in the coal sector. Having this flexible approach allows for sensible outcomes that deal with changing circumstances.
The Treasurer also noted that the Government “has no in-principle objection” to a 100 per cent takeover of Yancoal by Yanzhou in the future.
What the decision means
The decision is in line with Australia’s continued welcoming of foreign investment, and is consistent with the Government’s catch cry that Australia is “open for business”. The decision is particularly welcome after the Treasurer’s recent rejection of the proposed GrainCorp Limited takeover by US company Archer Daniel Midland. These decisions affirm that each foreign investment application is considered on a case-by-case basis.
The GrainCorp and Yancoal decisions also demonstrate that Australia has a robust foreign investment regime which is able to deal with diverse and complex proposals and to assess applications on their merits and without discrimination.
The decision is a good indication that the Government can engage successfully with foreign government investors applying the national interest test. Whilst the Government will continue to undertake additional scrutiny of any foreign government investment (as has been the case since commencement of the regime in the 1970s), it is important that commercial proposals without strategic government objective, such as Yancoal’s operations, are not discriminated against on the basis that an investor is a foreign government investor.
The Treasurer also signalled that the Government may not be opposed in principal to a 100% holding in Yancoal by Yanzhou. Again, a welcome sign from the Treasurer that, provided a proposal is consistent with Australia’s national interest, full ownership may be achieved.This shows an acceptance of Australia having a mature and free market whilst allowing for appropriate scrutiny under the foreign investment regime.
Some media reports suggest that minority shareholders in Yancoal had invested on the basis of the conditions imposed on Yanzhou, with the expectation these would continue.However, as the Treasurer explained, these conditions were no longer appropriate following the broader changes in the coal industry. The media response to the decision emphasises the importance of broad stakeholder engagement by foreign investors for large scale or potentially sensitive investment proposals.
Ultimately, decisions such as the Yancoal decision and the earlier unconditional approval of Saputo Inc., to acquire Warrnambool Cheese & Butter Limited demonstrate that the Government is open to foreign investment and that the GrainCorp decision does not signify a broader trend in the regulation of foreign investment and should be considered on its merits alone.
Korea Australia Free Trade Agreement (“KAFTA”) and new thresholds in the agricultural sector
Another promising sign that Australia is “open for business” is the Government’s conclusion of a free trade agreement with the Republic of Korea (“RoK”) this week. The agreement means that RoK will be added as a ‘prescribed investor’ under the Foreign Acquisitions and Takeovers Act (“FATA”), joining the US and New Zealand.
Prescribed investors benefit from higher notification thresholds under the FATA. This means that investments in non-sensitive sectors by entities incorporated in RoK will not require FIRB approval unless they are valued at $1.078 billion or more. The investment threshold for foreign persons who are not ‘prescribed investors’ is $248 million. (Note that the thresholds are indexed annually with the next review in January 2014.)
Interestingly, some of the press reports surrounding the KAFTA have suggested that, unlike the position with the US and New Zealand, investments by RoK entities will be subject to a $15 million threshold for investments in rural land and a $53 million threshold for investments in agribusinesses.
These are the lower thresholds in the agricultural sector that the Coalition proposed for all foreign investors in its 2012 Discussion Paper on Foreign investment in Australian Agricultural Land and Agribusines. The changes have not been implemented and investments in agricultural land and agribusiness continue to be subject to thresholds of $248 million. However, these press reports serve as an important signal that these changes may be imminent. It is particularly important for foreign investors planning to invest in the agricultural sector to monitor any announcements regarding the lowering of these thresholds. Other countries seeking free trade agreements need to be on notice that Australia will likely be seeking the same restrictions in the agricultural sector.
The KAFTA still needs to be ratified by each nation and once the KAFTA is implemented domestically, the Foreign Acquisition and Takeovers Regulations will need to be amended to include RoK as a prescribed investor. This is likely to take some time. Implementation of the prescribed investor status for New Zealand took about 2 years from the conclusion of The Protocol on Investment to the Australia-New Zealand Closer Economic Relations Trade Agreement, which was signed by the Australian and New Zealand Prime Ministers in February 2011.
The Government is continuing to negotiate free trade agreements with both Japan and China. Trade Minister Andrew Robb has today confirmed that future trade agreements will include the same beneficial threshold.
Ultimately, the Yancoal decision and the KAFTA are signals that the Government will continue to encourage foreign investment into Australia and stronger trade ties in Asia.