The Government has released an exposure draft of the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (Exposure Draft), which will amend the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). The Exposure Draft contains a number of technical issues and remains a work in progress. While the Exposure Draft substantially overhauls Australia’s existing foreign investment framework in ways that will impact administration of and compliance with the regime going forward, and it fixes a number of technical defects with the existing legislation, there is little practical impact in terms of which transactions are notifiable (whether in a voluntary or mandatory sense) aside from the incorporation of changes that have been announced over the past several months. This alert provides a brief overview of key changes and considers the extent to which items highlighted in our last alert have been addressed.
At present, Australia’s foreign investment rules consist of a mixture of law and policy, under which there are broadly three kinds of transactions:
- Those transactions that must be notified to the Treasurer through FIRB – failure to notify is an offence under the law, and the Treasurer generally has the power to block or unwind these proposals if he or she deems them to be contrary to the national interest.
- Those transactions where failure to notify is not an offence under the law, but the Treasurer still has the power to block or unwind these proposals if he or she deems them to be contrary to the national interest.
- Those transactions that fall under the policy only – failure to notify is not an offence under the law, and the Treasurer has no statutory powers in relation to them, but foreign persons are expected to apply for a statement of no objection before proceeding with such transactions.
What will change?
Although we do expect a number of technical fixes to be made to the Exposure Draft, there are many notable changes to the regime.
- ‘Notifiable actions’ and ‘significant actions’: Transactions will be divided into ‘notifiable actions’ (transactions which must be notified, with failure to do so being an offence) (analogous to the first dot point above) and ‘significant actions’ (these technically speaking do not have to be notified, but the Treasurer has the power to block or unwind them unless they are notified and a statement of no objection is received) (analogous to the second dot point above).
In practice, applicants and their advisers have in the past treated these two categories the same, lodging applications in order to ensure the Treasurer does not exercise his or her powers. It remains to be seen what effect the high fees (discussed below) will have on this behaviour. Common transactions that are notifiable either as ‘notifiable actions’ or ‘significant actions’ include:
- acquisitions of 20% or more in Australian entities valued above the current monetary thresholds (currently $252 million for most investors, and $1094 million for investors investing directly from certain treaty countries in non-sensitive sectors);
- acquisitions of ‘direct interests’ in Australian agribusinesses above the current monetary thresholds (currently $55 million investment value) except for acquisitions by investors from certain treaty countries (the definition of ‘direct interest’ may change, but presently is proposed to capture interests of 10% or more, or each 1% increase in any 12 month period over 5%, among other things);
- acquisitions of interests in Australian land above the current monetary thresholds (which differ depending on the type of land and the nature of the acquirer, and can be nil);
- former ‘policy only’ notifications described below.
As with the current regime, overseas transactions can be notifiable as ‘significant actions’ if there is a sufficient connection to Australia.
- ‘Policy-based notifications. All Policy based notifications under the current regime will be both notifiable actions and significant actions under the new regime. These include:
- acquisitions of ‘direct interests’ by foreign government investors in Australian entities or businesses (the definition of ‘direct interest’ may change, but presently is proposed to capture interests of 10% or more, or each 1% increase in any 12 month period over 5%, among other things);
- the establishment of a new Australian business by a foreign government investor;
- all acquisitions of land by foreign government investors; and
- acquisitions by any foreign person of 5% or more in an entity or business that wholly or partly carries on an Australian media business.
While most foreign persons comply with the policy under the current regime, at least in relation to major transactions, failure to do so will carry substantial penalties under the Exposure Draft.
- Fees. As we discussed in our previous alert, applications will now attract substantial fees, generally ranging from $5,000 to $100,000 depending on the nature of the application. We remain concerned about the level of fees, as these are very high by international standards, and the burden of this will fall particularly severely on a range of high volume applicants, including any person that has 15% or more upstream foreign government investor ownership (including many private equity funds), as well as agribusinesses that already own $15 million worth of rural land. These kinds of applicants will be subject to cumulative fees that are potentially well out of proportion with the level of investment made and well out of proportion with other costs they will incur in making the acquisitions. We are concerned that the power of the Treasurer to exempt persons from these provisions on a case by case basis will not be sufficient to address the high cost of doing business in Australia for these applicants.
- Flexibility. A key feature of the Exposure Draft is the extent to which flexibility has been built into the proposed legislation for changes to be made through regulation. That is, the Government may by regulation provide that the Act or specified provisions of the Act do not apply to certain kinds of acquisitions, interests, businesses or persons. The Treasurer also has power to grant exemption certificates to a particular person specifying that an interest does not give rise to a ‘significant action’ or ‘notifiable action’. At present, these powers are limited, but the legislation contemplates that the regulations may give the Treasurer the power to issue additional kinds of exemption certificates. Finally, the Treasurer has the power to grant relief from application fees in exceptional circumstances. There is no guidance as to when these exemptions or relief will be granted, so it is not clear that this in practice is going to provide relief from the fees in the kinds of circumstances described above.
- Relaxation around definitions of ‘substantial interest’ and ‘aggregate substantial interest’. The concepts of ‘substantial interest’ and ‘aggregate substantial interest’ are important ones in FATA, as they are used to determine whether a person is a foreign person and to determine whether an acquisition of an Australian entity is a significant action or a notifiable action. The threshold for a ‘substantial interest’ in securities has increased from 15% to 20%. Although the idea behind this was to bring foreign investment laws in line with the Corporations Act takeovers provisions, in practice there will still be misalignment because:
- there are many limbs to the foreign investment rules, only some of which rely on the concept of ‘substantial interest’; and
- the definition of ‘interest’ in the Exposure Draft is different to the definition of ‘relevant interest’ under the Corporations Act.
Nevertheless, this is a welcome change to the extent it reduces the number of applications that are required to be made.
While the concept of ‘aggregate substantial interest’ (cumulative 40% interests by foreign persons) has been retained, there is some proposed relief in the draft regulations for listed companies to assist them to control from day to day whether they are ‘foreign’ by disregarding certain small shareholdings.
- Agricultural land. The promised new definition of ‘agricultural land’ has been included, which in addition to land used in primary production (similar to the current definition of ‘rural land’) also includes land that could reasonably be used for primary production. This definition is problematic, when combined with the cumulative $15 million threshold, as investors will have to make a judgement call as to whether land is agricultural land or not, and from there make a determination as to whether they will exceed the threshold and need to make an application. While there is guidance in the Explanatory Memorandum as to what factors would make land ‘reasonably able’ to be used for primary production, this is guidance only. There will be pressure to ‘overestimate’ what constitutes agricultural land to avoid breaching the act (despite every application attracting fees).