The Foreign Acquisitions and Takeovers Amendment (Exemptions and Other Measures) Regulations 2017) (Amending Regulations) introduce a number of changes to the existing foreign investment framework, designed to address deficiencies in the existing legislation and cut red tape.
The main legislation containing Australia’s foreign investment include the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Foreign Acquisitions and Takeovers Regulation 2015 (FATR). Under these rules, the Treasurer has the power to make orders in relation to certain transactions (called significant actions) which he or she considers to be contrary to the national interest. Some significant actions (called notifiable actions) must be notified and cannot proceed until a statement of no objection is received. Other significant actions do not strictly speaking have to be notified, but doing so cuts off the Treasurer’s power.
The biggest change to these rules relates to the introduction of a new exemption certificate for business acquisitions (Business EC), which has particular relevance for the private equity (PE) industry. Currently, many PE funds (even domestically managed ones) are deemed to be foreign government investors due to passive upstream ownership by sovereign wealth funds and public pension funds. This means virtually all investments by those funds in Australia, as well as bolt on acquisitions by their portfolio companies in Australia, require FIRB approval regardless of value. This has meant that the government’s resources have been tied up reviewing high volume, low risk transactions.
The new regulation 42 allows a foreign person to cover multiple acquisitions in one approval. It is intentionally broad – it enables the Treasurer to grant a Business EC over any number of acquisitions, to be made by the applicant or another foreign person (including foreign government investors), of any dollar value, for any duration of time, if the Treasurer determines that to do so is not contrary to the national interest. While the Treasurer is given broad powers under this regulation, the more narrowly tailored the application in terms of entities, intended acquisitions and duration, the more likely a Business EC will be granted.
Some key features of the Business EC are as follows:
- Who can apply? There is no limit to who can apply, but it is intended for entities (including foreign government investors) who have a track record of compliance in Australia
- What kinds of transactions can be covered? Again, there is no limit as to the transactions that can in theory be covered, but in practice they will only be granted for low risk transactions (ie, that are unlikely to raise significant national interest issues). This will generally exclude businesses designated as ‘sensitive businesses’ under regulation 22 of FATR (media, telecommunications, transport, etc), critical infrastructure, public infrastructure, public utilities or businesses or assets in sectors likely to raise competition issues or where the applicant already has significant interest identified.
- What information must be provided? All of the information that must normally be supplied as noted on the business application checklist available on the FIRB website must be provided. In addition, the FIRB guidance note lists a variety of information that should be provided, including:
- information about the applicant. In the case of investment funds, this includes information about both the manager; the ownership of the fund, including the name and percentage interest of all persons who hold 5% of more of the fund and the name, jurisdiction and percentage interest of all persons who hold any interest in the fund that are foreign government investors; and information about fund governance to support the argument that the investors are passive);
- preferred duration of the certificate;
- statements about the character of the applicant;
- scope and value of the proposed investment;
- sufficient information about the sector/market they wish to acquire interests in, the size of the proposed acquisitions relative to their existing market share and/or the purpose of the investment (particularly where the investor is not already carrying on the same business);
- the maximum level of individual investment in monetary terms (i.e. maximum consideration to be paid for each proposed acquisition to be made under the certificate); a specified maximum percentage interest for each entity or asset acquired; and total maximum investment amount sought to be approved;
Much remains to be seen about how the Business EC regime will work in practice. The regime was designed in large part to enable investment funds that include low risk foreign government investors as passive investors (and who therefore have to notify a high volume or low risk transactions) to make multiple acquisitions below the normal thresholds, but it is not yet clear whether PE funds will be able to provide the level of specificity required for the Business EC to work well in practice. Applicants are encouraged to engage early (prior to lodging an application) in order to define an appropriate scope.
It is expected that the Business EC will in most cases only exempt transactions from being considered to be ‘notifiable actions’, meaning they will still be ‘significant actions’ over which the Treasurer retains powers (such as to order divestments) if no specific approval is sought. While this is not ideal, in practice, the Treasurer has not historically exercised these powers in relation to business acquisitions.
The application fee for a Business EC will be $35,000 for the 2017-18 financial year (indexed annually).
The current regulations provide that the offshore acquisition by a foreign government investor (including a PE fund) of another offshore entity, which results in the indirect acquisition of 10% or more (and in some cases less than 10%) of an Australian entity or business, must be notified unless the Australian gross assets of the target are less than $10m, constitute less than 1% of the global gross assets of the target and do not constitute the assets of a sensitive business. The new regulations increase these figures to $55m and 5%, respectively.
Aged care facilities and tertiary student accommodation
At present, acquisitions of aged care facilities and tertiary student accommodation are currently treated as acquisitions of residential land, which have a zero dollar threshold. The Amending Regulations introduce a new regulation 38(5), which has the effect of treating these acquisitions as if they were acquisitions of developed commercial land (which may have a $55m or $252m threshold). This will not apply to foreign government investors and so will not necessarily assist PE funds investing in this sector.
Other key highlights
The Amending Regulations make a number of other reforms to address inadvertent side effects of the substantial amendments to Australia’s foreign investments rules that came into effect in December 2015. These include:
- clarifying how land that is used for or that will be used for solar or wind farms is to be treated – in general, it should be more likely that these will be treated as commercial land, and for established solar and wind farms this will be treated as developed commercial land;
- removing ‘prescribed airspace’ from the definition of ‘sensitive land’ (which will have the effect of moving developed commercial land within the CBDs of the major Australian cities from ‘sensitive land’ attracting a $55m threshold to non-sensitive land attracting a $252m threshold);
- broadening an exemption for acquiring small interests in unlisted Australian land entities, by removing the requirement that there be at least 100 security holders in the entity;
- a number of amendments have been made to address practical issues with residential real estate applications.