Australia still open for business, but greater certainty needed
On 16 October 2013, Treasurer Joe Hockey stated in a speech to the American Australian Association that “Australia is open for business, open for investment and is going for growth”1. Just over a month since making that bold statement, the Treasurer has created uncertainty over Australia’s foreign investment policy by blocking Archer Daniels Midland’s (ADM) proposed AUD$3.4 billion takeover of GrainCorp Limited (GrainCorp). This uncertainty is compounded by proposed changes to Australia’s foreign investment laws which have been announced and which have not yet been legislated.
While the Treasurer noted in the announcement of this decision that of the 131 significant foreign investment applications received for his approval, the bid by ADM was the only one which had not been approved, the decision has been criticised as being a purely political decision. The takeover bid, the political pressures that led up to the controversial decision and the reasons for blocking the bid which were referred to by the Treasurer, have given Australian businesses and international investors much food for thought.
ADM commenced its bid for GrainCorp over a year ago, acquiring a 10 per cent interest in GrainCorp in late October 2012. Between October 2012 to December 2012, ADM made 2 takeover offers which were rejected by the GrainCorp board. However, on 2 May 2013, ADM confirmed a new takeover bid for GrainCorp at $13.20 per share. Around the same time, ADM lodged its proposal with the Foreign Investment Review Board (FIRB). The offer was backed by the GrainCorp board and was approved by the Australian Competition and Consumer Commission on 27 June 2013.
Over the following months, ADM withdrew and re-submitted its application to FIRB a number of times against a backdrop of political criticism of the proposed takeover and strong opposition from the National Party (the junior partner in the current Australian conservative Government which has a strong farmer constituency), some sections of which expressed concern about control of the Australian grain industry being in foreign hands. Key players in the agribusiness industry were also vocal about the takeover, with grain growers arguing that the takeover would limit their access to grain silos.
On 4 October 2013 the Treasurer signed an interim order extending the time period for a decision on the bid to 17 December 2013. In the meantime, the industry stakeholders continued to voice their concerns about the takeover, including that the takeover would limit access for grain growers to grain infrastructure. In response, on 26 November 2013, ADM announced a package of additional commitments which were aimed at addressing these concerns. These commitments included an additional investment of AUD$200 million to strengthen Australian agricultural infrastructure, “price caps on grain handling charges at silos and ports2” and a commitment to an “open access” regime for port services. However, the sweetened offer failed to placate the stakeholders or came too late, and the Treasurer announced on 29 November 2013 that he had blocked the bid on the basis that it would be contrary to the national interest.
Australia’s foreign investment regulations
Foreign investment in Australia is primarily regulated under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Foreign Investment Policy (Policy). FIRB is the arm of the Australian Treasury which is responsible for reviewing foreign investment notifications. Decisions on whether to oppose foreign investment proposals are made by the Treasurer on advice from FIRB. If a foreign investment proposal falls within the scope of the FATA, the Treasurer (through FIRB) must be notified of the investment proposal. The Treasurer has a fixed time (30 days for consideration plus 10 days for notification) in which to consider the investment proposal. Unless the Treasurer decides to reject the proposal or to impose conditions and notice is given to the foreign investor to this effect, the proposed acquisition may proceed without any further notification or approval from the Treasurer. If the Treasurer requires more time to consider an investment proposal, the Treasurer can issue an interim order which prohibits the investment for a period of up to 90 days. Foreign investors will usually seek to withdraw and resubmit their investment proposal rather than have the Treasurer issue an interim order. If a proposal does not fall within the scope of the FATA but is within the scope of the Policy (for example, where the investment is made by an entity in which a foreign government has a substantial interest), the proposal must be approved by the Treasurer and there are no formal time limits which apply to consideration of the transaction.
Broadly, acquisitions of assets must be notified to the Treasurer (through FIRB) if the value of the target is valued at or above a specified monetary threshold (currently AUD$1.078 billion for New Zealand investors and US investors (where the target is not in a sensitive sector) and AUD$248 million for other foreign investors (as well as New Zealand and US investors where the target is in a sensitive sector)). Separate value thresholds apply for investment in Australian urban land, and investments of 5 per cent or more in the media sector must be notified regardless of value.
The overarching theme of the foreign investment approval process is whether the proposed investment is contrary to the national interest. There is no definition of what constitutes the “national interest”, however the Policy sets out certain factors typically considered when assessing whether a proposal is contrary to national interest. These factors are:
- national security – the extent to which the investment will affect Australia’s ability to protect its strategic and security interests;
- other Government policies;
- the impact of the investment on the general economy and the community; and
- the investor. In particular, whether the investor “operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision”.
Given the political sensitivity of foreign investment into Australian agriculture, the Policy also sets out certain factors which will be considered when assessing whether a proposed investment in Australia’s agricultural sector will be contrary to the national interest. In assessing foreign investment proposals for an agricultural investment, the Treasurer will consider the effect of the proposal on:
- the quality and availability of Australia’s agricultural resources, including water;
- land access and use;
- agricultural production and productivity;
- Australia’s capacity to remain a reliable supplier of agricultural production, both to the Australian community and our trading partners;
- biodiversity; and
- employment and prosperity in Australia’s local and regional communities.
The current Australian Government was elected during August 2013. In the lead up to its election, it announced a number of changes to Australia’s foreign investment laws, including lowering the monetary thresholds from AUD$248 million to AUD$15 million for certain acquisitions in the agricultural sector. Further, there have been calls for the introduction for a spatial threshold for agricultural land, similar to the five hectare threshold that applies in New Zealand, as well as the development of a national foreign ownership register for agricultural land (similar to the system which currently applies in the United States).
The Treasurer cited various reasons for his decision to block ADM’s takeover bid, including that the Australian grain industry is still in a transition phase following deregulation and the move away from the single wheat exports desk (which was abolished in 2008). The Treasurer noted the concerns of industry participants that the acquisition by ADM could reduce competition and hinder growers’ access to GrainCorp’s grain storage, logistics and distribution network, which handles approximately 85 per cent of eastern Australia’s bulk grain exports.
The Treasurer referred to the criticism of ADM’s proposed takeover from stakeholders and the broader community, and his resultant decision that allowing the takeover to proceed “could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally”3. The Treasurer further stated that such an outcome would not be in the national interest.
Still open for business but greater certainty needed
The decision to block ADM’s takeover bid has led to some commentators stating that the decision sends a message to foreign investors that Australia is not open for business. Interestingly, the US State Department has expressed its disappointment with the Treasurer’s decision to reject ADM’s proposed acquisition of GrainCorp, noting that the United States “is the largest foreign direct investor in Australia”.
In our view, foreign investors should not be concerned that Australia is closed for business. The decision needs to be interpreted in the context of its unique facts, in particular, the significant role played by GrainCorp in eastern Australia’s bulk grain exports. It also needs to be remembered that the Australian Treasurer only recently waved through the bid by Saputo, a Canadian dairy processor, to acquire a local dairy processor. This decision was made in the face of significant pressure from local counter bidders and within the initial 40 day review window. Accordingly, while there is greater sensitivity around agribusiness assets, foreign investors are not blocked from acquiring them.
The decision does however highlight the need for greater certainty in Australia’s foreign investment approval process, in particular, the matters that are likely to lead to the Treasurer forming the view that a proposed acquisition will not be in Australia’s national interest. The Government should also move quickly to legislate the changes to the foreign investment approval process relating to acquisitions in the
Minimising deal risk – FIRB approval no longer an afterthought
The decision also highlights how important it is for foreign investors to manage the foreign investment approval process to minimise deal risk. Foreign investment approval should not be considered to be a “rubber stamp” approval.
Norton Rose Fulbright has extensive experience in navigating the foreign investment regulatory landscape and in formulating and implementing strategic processes to obtain foreign investment approval.
Our approach to the foreign investment approval process recognises the need for:
- Early engagement: Engaging with FIRB as early as possible in the acquisition process. Foreign investors should not wait until due diligence and acquisition terms are well advanced before turning their attention to foreign investment approvals.
- Engagement with non-government stakeholders: Engaging with industry stakeholders as soon as possible so that industry and community concerns can be addressed earlier in the process. We are able to assist with this process given our networks and industry knowledge in the key sectors in which foreign investors are active.
- Fallback options: Formulating multiple fallback options at an early stage in the acquisition process in the event foreign investment approvals are unlikely to be forthcoming. This could include offering to spin-off those parts of the target’s Australian business that may result in the approvals being denied or teaming up with an Australian partner to acquire the target or parts of the target’s business.
- Collaborative approach: Ensuring that financial and legal advisers work closely with media and other consultants to address industry and community concerns. This includes formulating and offering undertakings to mitigate industry and community concerns, even if they are not legally required.