The NSW Department of Industry and Investment has introduced recent changes to the conditions of all new and renewed exploration licences. The conditions now require Ministerial approval of a change in the effective control, or a foreign acquisition of substantial control, of an exploration licence holder.
The NSW Department of Industry and Investment (Department) has introduced a requirement for Ministerial approval where there is a change of the effective control, or a foreign acquisition of substantial control, of an exploration licence holder.
The basis for the new conditions is the Minister’s broad legislative power under the Mining Act 1992 (NSW) (the Act) to impose conditions on the grant and renewal of exploration licences.
The mining industry has expressed concern about the impact that the changes will have on M&A and investment activity in NSW.
What requires the Ministerial seal of approval?
The new conditions apply to a licence holder who is a corporation or a trustee of a trust.
The Minister’s written approval is now required for:
- a change in ‘effective control’ of a licence holder, with effective control being defined as an ability to control at least 50% of the board composition, voting power or issued share capital of the licence holder, and
- a foreign acquisition of substantial control in a licence holder, which will occur where a ‘foreign’ person acquires or holds at least 15% of the voting power or issued share capital of the licence holder or the capacity to appoint at least 15% of the directors of the licence holder. A person will be ‘foreign’ for these purposes in broadly similar circumstances as under the Foreign Acquisitions and Takeovers Act 1975 (Cth).
The conditions are drafted broadly and capture transactions including divestments, internal restructures and upstream acquisitions of listed entities.
The story behind it all…
The imposition of these conditions in exploration licences represents a significant shift in policy and departure from prior practice, with no equivalent requirements currently applying in Australia’s other principal mining states of Queensland and Western Australia.
It is understood that the changes were recommended as part of a probity report conducted by O’Connor Marsden & Associates into the former government’s exercise of Ministerial powers relating to the grant of exploration licences.
The probity report highlighted the fact that the transfer of an exploration licence to another entity requires ministerial consent, whereas the acquisition of the shares in a licence holder does not. As the effects of a transfer and a change in control are essentially the same—the control of the exploration licence shifts to a party other than the entity to which it was initially granted—the report recommended that ministerial approval also be required for changes of control.
Judgment day – criteria and penalties#
Early indications are that it is intended that approval will only be refused in those limited situations where a transfer of a licence would not be approved.
Previous environmental or safety incidents, breaches of other exploration licences or mining titles or failure to disclose critical information to the Department are likely examples of the types of factors that may lead to the Minister refusing to approve a change of control.
It should be noted that the instances of transfers not being approved have historically been extremely few, and the Department has informally stated that it expects non-approval rates for changes in control to be similarly low.
Parties who fail to comply with the approval requirement will breach the conditions of their exploration licence, which may result in the Minister refusing to renew the licence upon its expiry or outright cancelling the licence.
Despite early indications that approval will only be refused in the limited instances outlined above, several elements of the new conditions give rise to some concern.
First, the foreign investment condition will in practice overlap with existing FIRB requirements, with transaction parties now needing to establish that foreign ownership above 15% is not contrary to the interests of both NSW and the Commonwealth.
Although the wording of the condition seeks to mirror the FIRB approval thresholds, unlike FIRB, there is no exemption for transactions below a minimum financial threshold, meaning that all foreign investments which are captured by the condition will require Ministerial approval.
Whilst it is likely that the interests of NSW and the Commonwealth will align in most cases, the potential for inconsistent outcomes, as well as the increased regulatory requirements, has led the mining industry to express concern that this may lead to investment uncertainty and a decrease in the attractiveness of investing in NSW. Further, concerns have been expressed that there is potential for NSW to cross into the Commonwealth’s domain of fostering Australia’s international relations where it purports to refuse applications on political grounds.
The conditions also do not specify the criteria against which applications will be assessed. Notwithstanding indications that applications will be assessed against similar criteria to transfer applications, the Minister can essentially deal with applications in his complete discretion. There is nothing to prevent the application criteria from being drastically changed in the future, or applied inconsistently as between applications.
What are the implications?
The conditions will be included in all new and renewed exploration licences going forward. The impact of these conditions will therefore need to be factored into M&A and investment activity, particularly where foreign parties are involved. New (or recently renewed) tenements will need to be checked for any Ministerial approval requirements and transactions made conditional where necessary on obtaining those approvals.