National interest is the key concept underpinning Australian foreign investment laws and policies. As such, the Australian Government imposes more stringent notification and approval requirements on investment by foreign governments and their related entities. The reasons given to justify this differential treatment usually relate to the Australian Government’s concern that foreign governments could use their investments in Australia to pursue sovereign policy objectives which may be inconsistent with Australia’s national interest.
Under Australia’s Foreign Investment Policy (Policy), ‘foreign government investor’ (FGI) is defined broadly to include:
- a body politic of a foreign country
- entities (such as) companies, trusts and partnerships in which governments, their agencies or related entities from a single foreign country have an aggregate interest (direct or indirect) of 15 per cent or more
- entities in which governments, their agencies or related entities from more than one foreign country have an aggregate interest (direct or indirect) of 40 per cent or more, or
- entities that are otherwise controlled by foreign governments, their agencies or related entities, and any associates, or could be controlled by them including as part of a controlling group.
In our experience, this definition extends to entities such as government-run superannuation funds, certain banks that were ‘nationalised’ following the global financial crisis and foreign municipal councils.
Most Australian companies, especially listed Australian companies, may not see themselves as an FGI. However, the chance of an Australian company being treated as an FGI by the Foreign Investment Review Board (FIRB) is probably higher than most would expect.
In order to determine the level of direct or indirect interest held by foreign governments, it is necessary to trace through the ownership of the relevant entity. This can often lead to unexpected and surprising results. An example is set out in the following diagram:
Click here to see the diagram
In this example, Company A (a foreign government or its agency or related entity) holds 15% of voting shares in Company B, which in turn holds 15% of voting shares in a listed Australian Company C. Both Company B and Company C will be characterised as FGIs as defined under the Policy. This is despite the fact that the ultimate interest of Company A (the foreign government or its agency or related entity) in Company C is only 2.25%.
It is difficult to understand why FIRB takes this view as it is completely unrealistic to suggest that, in the example above, Company A would be able to exert such pressure or influence over Company C as to compel it to pursue the sovereign interests of the foreign government rather than its own commercial interests. It may also be extremely difficult for Company C to identify the fact that it falls within the definition of an FGI, as there will generally be no way for it to compel Company B to disclose the identity or nature of its shareholders.
The conclusion that Company C is an FGI, imposes a significant additional compliance burden on Company C and puts it at a substantial competitive disadvantage when compared to its competitors. This is because the Policy requires any FGI to notify FIRB and get prior approval before making any direct investment in Australia, regardless of the value of the investment. This would put Company C at a disadvantage in a competitive bid process as compared to non FGIs who may be able to move quickly to offer unconditional terms on potential acquisitions.
None of the standard exemptions, such as the $248 million threshold which applies to private foreign investment in shares and business assets, are available for investment by an FGI.
Until or unless FIRB changes its position, Australian companies, especially listed companies, need to be vigilant in gaining an understanding of their ownership structures in order to minimise the chance of inadvertently breaching the Policy.