On 4 March 2013, the Foreign Investment Review Board (FIRB) released its updated foreign investment policy.
- changes to the meaning of a ‘direct investment’ which will impact on the circumstances when foreign government investors are required to obtain FIRB approval;
- changes that affect foreign government owned lenders (including a new money lending exemption for foreign government owned ADIs who are regulated by APRA); and
- confirmation of the higher monetary notification thresholds for New Zealand investors which are in line with the higher thresholds available to US investors.
Direct investments by foreign government investors
What hasn’t changed?
- Foreign government investors must obtain FIRB approval before making a ‘direct investment’ in Australia, regardless of value.
- Investments of 10% or more are regarded as direct investments.
- There are certain investments that FIRB will deem to be direct investments (regardless of the 10% rule).
What has changed?
FIRB has made some adjustments to the category of deemed direct investments, being those investments of less than 10% which FIRB considers to be a direct investment and therefore requiring approval.
Do ‘portfolio investments’ below 10% need approval?
Although not written into the policy it has long been understood that a direct investment can be distinguished from a ‘portfolio investment’ which does not give the investor any control over, or create any strategic relationship with, the target. In our experience with FIRB, a portfolio investment of less than 10% which does not otherwise fit within the definition of a direct investment has not required FIRB approval.
Based on comments from senior FIRB and Treasury officials following State-owned Etihad Airways’ decision to not seek FIRB approval when it initially took a 3.96% stake in Virgin Australia last year,1 there were some concerns that FIRB was going to update its policy to require that any investment by foreign government investors would require approval. Thankfully, this has not been the approach in these policy amendments. The door remains open for foreign government investors to undertake pure portfolio investments without first seeking FIRB approval (provided the investments do not trigger other FIRB approval requirements such as the real estate approval requirements).
Changes to address the Etihad and Virgin transaction
Under the new policy, an investment of less than 10% will now be deemed to be a direct investment if the investment builds or maintains a strategic or long-term relationship with the target (as opposed to establishing a strategic or long-term relationship under the previous policy). This shift in policy can be seen as a direct response by FIRB to a perceived ambiguity in its previous policy highlighted in the Etihad and Virgin transaction. In that case, Etihad already had a 10 year strategic relationship with Virgin through a codeshare agreement at the time it acquired the 3.96% stake, so Etihad argued (under the previous policy) that it was not acquiring a direct investment as it had already ‘established’ a strategic interest. The amended definition of ‘direct investment’ would capture such a transaction as one which builds a strategic or long-term relationship.
FIRB has also deleted the requirement that any ‘investments preparatory to a takeover bid’ (i.e. pre-bid acquisitions) are deemed to be direct investments. However, this has effectively been replaced by a new rule that deems an investor to be acquiring a direct investment where it is ‘building a strategic stake in the target’ which will catch any pre-bid acquisitions. Whilst FIRB has not provided any guidance on what transactions will involve ‘building a strategic stake’, it is possible that it may cover more than just pre-bid acquisitions and extend to any investments that give the foreign government investor influence or control, or are otherwise acquired with ‘strategic’ objectives in mind, such as blocking stakes to prevent others from making successful takeover bids or to otherwise protect its interests as a minority shareholder.
Relaxation of the policy for foreign government owned lenders
Under the previous policy, a foreign government investor was required to obtain FIRB approval to enforce a security over an entity’s Australian business or assets. Our experience has been that in practice, foreign government owned lenders have preferred to seek upfront approval for both the grant and enforcement of the security to mitigate the risk of committing funds to the borrower but potentially not being able to enforce the security if FIRB approval was not obtained at the time of enforcement. Our experience has been that FIRB was generally willing to grant approval in these circumstances notwithstanding its general policy that transactions (in this case, the enforcement of the security) must occur within 12 months of the grant of its approval.
The new policy now includes a money lending exemption which provides that foreign government investors who are regulated by the Australian Prudential Regulation Authority (APRA) as Authorised Deposit Taking Institutions (ADIs)2 do not need to obtain FIRB approval when they take or seek to enforce a security over an asset as part of a ‘lending agreement’3. However, approval will be required where the security is enforced and the ADI gains control over an asset the subject of the security and retains it for more than 12 months.
Whilst on its face this provides some relief for the foreign government related banks, building societies and credit unions which have opened branches in Australia,, it is yet to be seen whether the 12 months’ time limit will provide sufficient comfort to the relevant foreign government APRA regulated ADIs or whether they will still seek upfront approval to mitigate the risk that they cannot dispose the asset within 12 months of enforcement or if it is possible that they may wish to retain an equity interest in the asset (through a debt to equity swap) as part of their enforcement strategy. More importantly, it will be interesting to see whether FIRB will still be willing to consider applications for the approval of the enforcement of the security upfront. If FIRB is not willing to do this, then the new money lending exemption may in fact have an adverse impact on foreign government lenders that want certainty around how it can enforce its security.
For foreign government lenders which are not APRA regulated ADIs there has also been a relaxation of the policy so that FIRB approval is now only required where the lender retains an interest of 10% or more following the enforcement of the security (as discussed above, previously approval was required for any enforcement). As is the case with the approach that APRA regulated ADIs may take to the money lending exemption, it is possible that foreign government investors who are non-APRA regulated ADIs may still want to seek upfront FIRB approval for the enforcement of the security to mitigate any risk of being prevented from enforcing the security in the manner they may wish, given that the circumstances surrounding an enforcement (including what equity share the lender may ultimately hold following an enforcement) is relatively uncertain at the time of providing funding.
Changes to the definition of foreign government investor
The definition of a ‘foreign government investor’ has been clarified so that an entity is now considered a foreign government investor if governments, their agencies or related entities:
- from a single foreign country have an aggregate interest (directly or indirectly) of 15% or more; or
- from more than one foreign country have an aggregate interest (directly or indirectly) of 40% or more; or
- otherwise controls or could control the entity, including control through an associate of such government, agency or related entity.
This is now more closely aligned to the definition of a ‘foreign person’ which applies to private investors under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act). It also removes previous doubt under the policy that an entity could be a foreign government investor if it had government owned shareholders from several different countries holding an aggregate stake of greater than 15% in circumstances where no individual foreign government shareholder holds more than a 15% interest.
As was the case under the old policy, an entity will be a foreign government investor if it is otherwise ‘controlled’ by foreign governments and their agencies. The new policy now extends this test to entities that could be controlled by associates of foreign governments and their agencies, including entities controlled as part of a controlling group. ‘Associate’ is defined in the Act. Based on that definition, the new ‘foreign government investor’ definition now includes any entity which is not related to a foreign government but is accustomed or obliged to act in accordance with the direction of that foreign government’s agency or related entities (whether formally or informally).
For those entities caught by the expanded definition of ‘foreign government investor’ it is worth noting that the policy’s guidance on the factors relevant to a review of the proposals by foreign government investors remains substantially the same. For entities not wholly owned by foreign government, the Treasurer will continue to take into consideration the size, nature and composition of any non-government interests in the ownership. Factors such as the existence of external partners or shareholders and the commercial basis of the proposal will continue to be the focus in reviewing whether the proposal is contrary to the national interest.
No changes to the national interest test
Against the backdrop of the Senate Standing Committee on Rural and Regional Affairs and Transport still conducting its inquiry into FIRB’s national interest test (with its report due by 15 March 2013) it is not surprising that there has been no change to the matters that FIRB consider when assessing the national interest.
Higher thresholds for New Zealand investors
From 1 March 2013, New Zealand investors will be treated in the same way as US investors and will receive the benefit of the higher thresholds before notification and approval is required.