Navigating Australia's foreign investment regime is a critical part of any deal execution by a foreign investor in the resources sector.
There are a number of common pitfalls of which foreign investors should be aware.
Australian mining and resources corporations are complex and can result in an unexpected requirement to seek FIRB approval.
Foreign investors should obtain legal advice early to ensure that they can implement a successful FIRB strategy.
The ins and outs of whether buying shares in Australian mining companies requires FIRB approval
In the context of acquisitions in the resources sector, a transaction will typically be structured as either an asset purchase or purchase of shares in a corporation that conducts mining businesses in Australia (Australian Mining Corporation). While the FIRB rules relating to the direct acquisition of mining assets (that is, directly acquiring tenements) are generally well understood, the rules relating to the acquisition of shares in an Australian Mining Corporation are more complex and can be difficult to apply in practice.
Investors should be mindful of the common pitfalls when acquiring shares in Australian Mining Corporations to minimise the risk of delays, or compliance exposure, and ensure that investments proceed as smoothly and efficiently as possible. Below we summarise some of the key risk areas for investors when assessing whether FIRB approval is required for their acquisition of shares in an Australian Mining Corporation.
Difficulties associated with determining whether an Australian Mining Company is an 'Australian land corporation'
An Australian Mining Corporation will be an 'Australian land corporation' under the Foreign Acquisitions and Takeover Act 1975 (Cth) (FATA) where the value of its interests in Australian land exceeds 50% of its total assets. This requires a foreign investor to make a reasonable assessment of the value of the Australian land assets of the Australian Mining Corporation (generally based on its most recent financial statements).
This may not be easily ascertainable where the accounts of the Australian Mining Company do not clearly delineate the different classes of 'Australian Land Assets' to which the FATA applies. For example, accounts are not normally created in a way that clearly delineates the value of mining tenements (which do constitute 'Australian Land') and exploration tenements (which do not constitute Australian Land).
In circumstances where the value of the Australian land assets of the Australian Mining Corporation cannot be clearly ascertained from its financial statements, a foreign investor should operate on the assumption that it is an 'Australian land corporation' unless it can reasonably rule this out. If the Australian Mining Corporation is an 'Australian land corporation, the acquisition of shares in the Australian Mining Corporation will amount to an acquisition of an interest in Australian land under the FATA.
Difficulties assessing the proportion of 'vacant commercial land' held by an Australian land corporation
The implication of an Australian Mining Corporation being an Australian land corporation is that a different set of monetary threshold tests will apply to the acquisition, depending on the proportion of different land types (generally, vacant commercial land) comprised in the assets of that entity.
For example, if the total value of the interests held by the Australian Mining Corporation in vacant commercial land is:
- less than 10% of the value of its total assets, a $58 million threshold will apply to acquisitions of shares (i.e. acquisitions of shares for $58 million or more); and
- 10% or more of the value of its total assets, a $0 threshold will apply to acquisitions of shares in the target, which can mean that even small acquisitions may require FIRB approval.
In practice it can be extremely difficult to assess the proportion of 'vacant commercial land' held by a target. Based on FIRB guidance, vacant commercial land is commercial land where there is 'no substantive permanent building on the land that can be lawfully occupied by persons, goods or livestock'.
This guidance is not applied easily to an exploration or mining operation. For instance, temporary accommodation for mine workers would be unlikely to qualify as a 'permanent' building, but a more established accommodation 'camp' with fixed buildings and amenities may well be (though this may then mean the land is considered residential land for FIRB purposes). Similarly, it is not clear that a processing plant that crushes and processes ore but does not store products would constitute a building that is 'occupied' by those goods. Further, a mining lease with a substantial open-pit mining operation could potentially be considered 'vacant land' simply because the buildings relating to the operations are housed on a different tenement.
These questions are highly fact specific, and an investor without an extremely detailed understanding of the value of each target asset would have difficulty confidently assessing the proportion of the target's asset value comprising 'vacant commercial land', and consequently, whether FIRB approval is required.
Certain FIRB exceptions will not apply if an investor can appoint a board nominee
Considering that acquisitions of shares in Australian mining corporations can have a $0 threshold, many investors rely on FIRB approval exemptions for investments in companies of less than 10% for listed companies or 5% for unlisted companies.
However, where a strategic investment in mining companies is accompanied by rights to appoint a board nominee or otherwise to influence or participate in the central management, control or decision-making of the company (as is often the case), these exceptions will cease to apply. With this in mind, investors need to consider carefully whether it is appropriate to rely on these exceptions.