Australia’s Foreign Investment approval regime was overhauled late last year. Sadly, we can’t tell you that the new regime brings with it any sweeping changes that remove (or even meaningfully limit) the need for Foreign Investment Review Board (FIRB) clearance by most PE sponsors.
There are some changes that may improve aspects of the regime (e.g. the threshold for mandatory notifications has increased from 15% to 20%). Unfortunately, there are also aspects of the amended regime that are going to cause frustration and cost and that will no doubt irritate PE sponsors as they come to terms with what is now required.
A summary of the changed framework
FIRB clearance has been necessary for most PE sponsors (and, by extension, their portfolio companies) investing in Australia for many years now. Frustratingly, many domestic PE sponsors headquartered and managed in Australia (and their portfolio companies) were caught by the old FIRB regime because their limited partners included:
- an offshore constituency that exceeded the previous individual (15%) or aggregate (40%) thresholds; and / or
- one or more so called “foreign government investors”.
Broadly speaking, the recent amendments have not changed the fundamentals of the FIRB notification or approval framework for foreign acquisitions of Australian companies - the notable exception to this statement is the increase in the acquisition threshold from 15% to 20%. There have been more significant changes for agribusiness and land acquisitions.
Mandatory notification or approval, now called a “Notifiable Action”, is required for acquisition of:
- a substantial interest, being an interest of 20% or more, in an Australian corporation with a value of A$252 million or more. For foreign investors from prescribed countries (US, NZ, Japan, South Korea, Chile and, soon to be included, China) investing in “non-sensitive sectors” a threshold of A$1,094m applies;
- a direct investment by a “foreign government investor”, including establishing a new business;
- a 10% or greater interest in an agribusiness with a value of A$55m or more;
- any residential or vacant Australian land or any land for redevelopment (0% interest and $Nil threshold);
- a developed commercial property, which now has two categories – sensitive with a A$55m threshold and non-sensitive with a A$252m threshold. Land rich entities now also have thresholds reflecting their underlying land interests; and
- a media business (greater than 5% or any non-portfolio interest).
Up to A$15m of rural land can be acquired (on a cumulative basis) without mandatory notification or approval, however mandatory notification or approval is required above that threshold.
The acquisition by a foreign government investor of a purely passive investment interest of less than 10% in an entity (which must be an investment without any control elements) is not considered to be a direct investment requiring FIRB approval.
The Treasurer has retained the power to make orders in respect of certain material transactions, now called “significant actions”. Significant actions include the acquisition of the assets of an Australian business and offshore acquisitions and takeovers, in each case where the Australian component has gross assets of A$252m or more (or the consideration is based on Australian revenues of A$252m or more). Helpfully, foreign investors can still voluntarily notify such transactions for approval and thereby remove the risk of the Treasurer exercising his discretion post-completion.
Whilst significant actions are voluntarily notifiable by foreign investors generally, they must be notified by foreign government investors. Investments by a foreign government investor do not enjoy all of the exemptions prescribed under the Act, although some limited relief has been provided, including the 10% small interest exemption for interests in listed land rich entities.
Finally, a source of confusion for foreign investors has been the way in which Australia’s Foreign Investment Policy previously operated in tandem with the legislation. The new regime now incorporates the Policy requirements into the legislation itself, which should improve overall clarity and understanding.
20% foreigner threshold
As noted earlier, the previous 15% threshold for determining whether a foreign person has a substantial interest in an entity has been lifted to 20%. Similarly, the threshold for determining whether an entity is a foreign government related entity has gone from 15% to 20%.
An entity is now considered to have a substantial / controlling Interest held by foreign person if a single foreign person has a holding of 20% or more or 2 or more foreign persons have aggregate holdings in the entity of 40% or more, disregarding holdings of less than 5% (the so called “accidental foreigner rule”).
The move to a 20% threshold is a welcome increase and aligns the foreign person threshold with key thresholds in the Corporations Act. However, for many PE sponsors it is unlikely to be high enough to prevent them from being categorised as foreign persons or foreign government related.
The definition of a foreign government investor remains extremely broad and largely the same as under the previous Australian Foreign Investment Policy:
- a body politic of a foreign country;
- companies or other entities in which foreign governments, their agencies or related entities from a single country have more than an aggregate 20% interest;
- entities in which governments, their agencies or related entities from more than one foreign country have an aggregate interest (direct or indirect) of 40% or more; or
- companies or entities that are otherwise controlled by foreign governments, their agencies or related entities.
This unfortunately means that limited partners such as state government teachers and public service retirement funds, university endowments, town councils and government investment boards are still treated as government related, even though they may be investing on a purely commercial basis and are not able to exercise any day-to-day management or investment control over a PE sponsor’s activities. It follows that many PE sponsors are characterised as foreign government investors because of the characterisation of their limited partners.
FIRB may also consider an entity to be a foreign government related entity at a lower interest level if other control elements are present (e.g. right to appoint directors or veto powers). In either case, foreign ownership interests are traceable to the ultimate owners.
Aggregation of foreign government investors
Offsetting the helpful increase of the threshold for foreign government investors to 20% is the rather unhelpful (and curious) aggregation concept. Under the new regime, all foreign government investors from a single country are now deemed to be associates (regardless of whether they are indeed acting in concert with each other). The result is that the holdings of all investors from a single foreign country are aggregated for the purpose of determining whether FIRB needs to be notified. In our view, this new aggregation rule will significantly impact on PE sponsors (and other financial investors).
FIRB’s position is that the new aggregation rules codify current practice and that FIRB has always assessed applications on the basis that foreign government related investors from the same country are considered to be related. However, by deeming all foreign government investors from a single country as associates for the purpose of “notification”, it makes the blanket assumption that each state-backed entity acts in concert with each other. This is an inappropriate assumption for many foreign government entities and is inconsistent with views held by the Australian business community.
In addition, the new regime requires PE sponsors to identify specifically in their application any investor with a 5% or greater interest in their fund and the identity of those foreign government entities which result in the fund meeting the 20% and / or 40% thresholds for qualifying as a foreign government investor.
This may be problematic for some PE sponsors as their limited partnership agreements typically require the identity and other details of their limited partners be kept confidential. Going forward, PE sponsors raising new funds likely to invest in Australia will need to consider whether their fund documents give them sufficient flexibility to disclose the required information to FIRB.
It’s getting pricey
One of the biggest “stings” under the new regime is the new fee regime. For the first time fees have been introduced across the board (ranging from $5,000 to $100,000), including for business applications. The fee for most commercial deals will be $25,000. The fee structure is complex and, so far, no effective assistance has been proposed for multifaceted transactions. FIRB has however produced a guidance note to assist with understanding the fee to be paid on simple transactions. Unfortunately, it remains unclear whether being unsuccessful in a bid process is a ground for a waiver / refund of any required fee.
Investors need to be mindful that FIRB’s statutory review timeframe now only commences once the application fees have been paid. In the past, PE sponsors have typically approached FIRB early in a transaction process, even when securing the transaction was far from assured. Given there were previously no fees and FIRB applications were relatively simple and cheap to prepare, this was essentially a no lose situation and helped PE sponsors clear out unnecessary conditionality and delay that could otherwise have disadvantaged them in an acquisition process. Going forward and subject to seeing any new guidelines about how FIRB will handle refunds, if any, we expect PE sponsors may be more reticent to seek early FIRB clearance, particularly in auction processes where the chances of success may be lower.
Increasing communication between government departments
One trend worth flagging, albeit it does not arise from the amendments to Australia’s Foreign Investment approval regime, is the increasing interaction between FIRB and other government departments, most noticeably the ATO and the ACCC.
Whilst it has always been the case that FIRB has consulted with other government departments, in our experience FIRB is increasingly now waiting for the “all clear” from other government departments before approving applications. The FIRB clearance test is whether the proposal is “contrary to Australia’s national interest”. There is no definition of “national interest” - it is a subjective case-by-case application. This is a very broad mandate which allows FIRB to consider what some might argue are extraneous considerations and matters for other areas of government to enforce.
If other government bodies are likely to have an interest in an application, appropriate strategies need to be adopted both in the drafting of the initial application and in proactively and effectively engaging with FIRB through the process.