The end of the financial year revealed a number of changes in Government policy including the Federal Treasury revising its Foreign Investment Policy (New Framework). Following amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) in February 2010, the Government has replaced the 2009 Framework (Previous Framework), reflecting a number of key changes which impact on foreign investment in the resources sector. Investors should carefully evaluate any new FIRB submission against the New Framework and seek further advice as necessary.
Summary of key changes
While the foundation of the New Framework strongly resembles its predecessor, the New Framework contains a number of important and potentially substantive changes, particularly in relation to entities owned by Foreign Governments seeking to invest in Australia.
In summary the key changes involve:
- new definitions for:
- “Direct Investment” and
- “Foreign Governments and their Related Entities”.
- replacement of the “six principles”, which the Treasury used to have regard to in deciding whether foreign investment approval should be granted, with five national interest considerations which the Foreign Investment Review Board (FIRB) will now use to consider whether proposals are in the national interest.
- clarification of the definition urban land and the position of operational mines.
Definition of “Direct Investment” - 10 per cent threshold for notification
Under the New Framework, all Foreign Governments and their Related Entities must notify the Australian Government and gain approval prior to undertaking a “direct investment” in an Australian enterprise, regardless of the value of the investment.
A “direct investment” has been defined as an investment which:
- is preparatory to a takeover bid, or
- acquiring an interest of 10 per cent or more in an enterprise
- acquiring an interest of less than 10 per cent in an enterprise where that interest can be used to influence or control the company (for example, Foreign Government investors must notify FIRB where they acquire preferential voting rights, the right to appoint directors, or enter into certain contractual agreements such as loans, services agreements or off take agreements), or
- the enforcement of a security interest over a business’ assets or shares.
The New Framework states that a direct investment must have the objective of establishing a lasting interest in, and a strategic long term relationship with, the target enterprise.
The position under the New Framework appears to be a relaxation of the Previous Framework, which required Foreign Governments and their agencies to notify FIRB prior to any investment in Australia, irrespective of the percentage of that investment. However, as to how the FIRB will apply these changes in practice is yet to be established.
Definition of “Foreign Governments and their Related Entities”
As stated above, the New Framework also includes a definition of what constitutes a Foreign Government or a Related Entity, specifically incorporating:
- a body politic of a foreign country
- companies or other entities in which Foreign Governments, their agencies or Related Entities have more than a 15 per cent interest, or
- companies or entities that are otherwise controlled by Foreign Governments, their agencies or Related Entities.
Notably, the Previous Framework made no mention of these thresholds; however, in practice the FIRB generally treated companies or other entities in which a Foreign Government had more than a 15 per cent interest and a company or other entity controlled by a Foreign Government as a Foreign Government investor.
Removal of the “six principles” and creation of the five national interest considerations
The guidelines to be applied in assessing whether proposed investments by Foreign Governments or their agencies in Australia were contrary to Australia’s national interest, issued by the Treasury on 17 February 2008, known as the “six principles” have been removed from the New Framework and replaced with five national interest considerations.
The New Framework sets out five factors that the Australian Government will consider in relation to whether a foreign investment proposal will be in the national interest, including:
- national security
- the application of other Australian Government policies (including taxation)
- the potential impact on the economy and Australian community
- the character of the investor.
When evaluating the character of the investor, the FIRB will consider, whether the investment is transparent and commercial in nature, and if the investment will be subject to adequate and transparent regulation and supervision, as well as the corporate governance practices of the foreign investors.
Foreign Governments and their Related Entities have additional requirements to those outlined above. Where a proposal involves Foreign Governments or a Related Entity the Australian Government will:
- consider whether the investment is commercial in nature or if the investor may be pursuing broader political or strategic objectives that may be contrary to Australia’s national interest, and
- assess whether prospective investor governance arrangements could facilitate actual or potential control by a Foreign Government.
Foreign Governments and Related Entities that are able to demonstrate commercial independence and conduct their business on an arm’s length basis are less likely to raise national interest concerns. Where the investor is partly privatised, FIRB will consider the size, nature and composition of any non-government interests and any restrictions on the exercise of their rights as interest holders.
Factors that are likely to assist investors who fall within the definition of a Foreign Government or Related Entity in gaining FIRB approval are:
- the existence of external partners or shareholders in the investment
- a high level of non-associated ownership interests
- strong independent governance arrangements for the investment
- ongoing arrangements to protect Australian interests from non-commercial dealings, and
- the target company remaining publicly listed on the ASX or another recognised exchange.
The Previous Framework provided no guidance as to limitations of the wide reaching definition of urban land, which was defined ‘as any land that is not rural land’. The New Framework provides more guidance expressly stating that urban land includes the seabed within Australia’s Exclusive Economic Zone removing the uncertainty that previously existed surrounding the FIRB's applicability to offshore areas.
Developed commercial property
The New Framework also specifies that where a mining tenement is developed into an operational mine it will be considered a developed commercial property (DCP) and rules pertaining to DCP’s will apply, consequently Foreign Persons will need to apply for FIRB approval to buy or take an interest in an operational mine, valued at $50 million or more ($1004 million or more for US investors).
Concerns for investors and how Norton Rose can help
Foreign investors need to be aware of how the New Framework will affect their investments into Australia. With over 1800 lawyers in 30 offices around the world, Norton Rose has the resources and experience to assist clients from all jurisdictions in their investments into Australia.
We have a strong working relationship with the FIRB, and have acted for international clients on some of the largest investment deals in Australian history.
We have a deep understanding of Australia’s foreign investment law and policy, having acted on a number of inbound foreign investment transactions ensuring that Norton Rose Australia has the experience necessary to know what to include in a FIRB application to avoid unnecessary delay.