Important amendments were recently made to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) which affect Chinese investors involved in past, current and future transactions in Australia.
These changes reflect the government’s foreign investment policy and represent the latest in a series of developments in this high profile area.
In this article, we will:
- examine the new changes to the FATA
- look back at the key developments in Australia’s foreign investment landscape in 2009, and
- forecast the likely developments in 2010.
Summary of the regulatory changes – how this affects you
In September 2009, we reported that the government introduced the Foreign Acquisitions and Takeovers Amendment Bill 2009 (Bill). The Bill followed an announcement by the Treasurer on 12 February 2009, in which he proposed to amend several provisions in the FATA.
The changes were to:
- clarify the operation of the foreign investment approval regime
- widen its scope so that it applies equally to all foreign investments, irrespective of the way they are structured, and
- ensure that any investment will be treated as equity, including where convertible notes are used.
The Bill (which had a number of minor technical amendments) received Royal Assent one year later on 12 February 2010.
The key amendments that foreign investors should be aware of are summarised below.
Sophisticated financing instruments / structures are covered
Foreign investment transactions that use sophisticated financing instruments and structures (eg options to take up unissued shares, convertible notes) and give overseas investors potential ‘equity upside’ or voting power, will be subject to compulsory notification and the Treasurer’s assessment.
Changes have retrospective effect
The changes to the FATA operate retrospectively from 12 February 2009. Therefore, foreign investors must notify of any proposed transaction entered into after 12 February 2009 if the transaction would have required notification, had the FATA been amended at that time.
For a detailed analysis of the FATA amendments, please see our previous article.1
- 12 February 2009 – in response to the complicated structure of Chinalco’s proposed investment in Rio Tinto, the Treasurer announces his intention to amend the FATA to regulate the use of complex financial instruments as well as investments by foreign SOEs.2
- 23 April 2009 – FIRB approves Minmetals’ bid for Oz Minerals subject to conditions on ownership, board representation and national interest. The decision sets the precedent for the use of conditional approvals for investments by foreign SOEs.3
- 20 August 2009 – the Foreign Acquisitions and Takeovers Amendment Bill 2009 is introduced and amends the acquisition of shares or voting power in Australian companies by foreign investors.4
- 22 September 2009 – Government simplifies and increases monetary thresholds in relation to the compulsory notification regime.5
- 24 September 2009 – FIRB Director, Patrick Colmer, comments that FIRB’s preference is for foreign SOE investments in major Australian resource companies to be less than fifteen per cent of their capital, and for investments in Greenfield projects to be below fifty per cent.6
- 10 December 2009 – Treasurer comments that there are three key factors that the Government will consider when a foreign investor proposes to invest in an Australian company: (i) influence over pricing; (ii) impact on ability to supply trading partners; and (iii) preference for companies to remain publicly listed.7
- 12 February 2010 – the Foreign Acquisitions and Takeovers Amendment Bill 2009 receives Royal Assent.
Outlook for 2010
More Chinese investment on the way
Australia has been a popular destination for foreign investment because of its transparent legal system, robust economy and stable government.
In 2009, we witnessed several high-profile proposals by foreign state-owned enterprises to acquire strategic or controlling interests in Australian companies. Indeed, as Freehills’ 2009 Public M&A Report8 showed, all seven M&A transaction over $1 billion in the 2009 financial year involved foreign investors.
We expect more of the same in 2010. Most notable among these acquisitions will be Chinese SOE investment in prominent Australian mining and energy companies. Such activity will generate further political sensitivity and push Australia to develop its foreign investment framework.
Additional guidance over foreign investment framework
While Australia’s official stance is that it welcomes foreign investment, FIRB has been criticised for its relative uncertainty surrounding its review processes and approval criteria—particularly in relation to investments involving foreign SOEs.
In response, it is clear that the recent FIRB decisions and regulatory developments indicate a deliberate attempt by the government to craft a policy that serves both commercial and national interests, with recent comments by the Treasurer and FIRB providing additional guidance on the factors that must be considered and the issues that must be resolved. It is expected that the government will continue to clarify the foreign investment regulations as China-based M&A ramps up in 2010.
Despite the uncertainty, foreign investors should remember that FIRB is relatively flexible and willing to work with the investor and their advisors to ensure that a proposed transaction is successfully executed.
Increased need for good advisors
Foreign investors should ensure that they understand the new changes to Australia’s foreign investment regime. Therefore, the importance of having excellent advisors to advise you is critical. In particular, you need advisors who have excellent relationships with FIRB to help lobby and successfully execute the deal.