The Japan-Australia Economic Partnership Agreement (JAEPA) commenced 15 January 2015. The Australian Government has proclaimed the JAEPA as the most ambitious free trade agreement Japan has concluded with another country. The JAEPA is anticipated to deliver substantial benefits for the Australian economy and tariff benefits for exporters, enhancing their competitive position in the Japanese market.
Significantly for Japanese investors, the JAEPA increases the monetary threshold for Australian Government approval of Japanese direct investments in Australian companies from AUD 252 million to AUD 1,094 million. This higher threshold applies where the actual investor is a Japanese enterprise. In this alert we outline the JAEPA foreign investment requirements.
Australian foreign investment laws
The Foreign Acquisitions and Takeovers Act 1975 (Cth) (theFATA) regulates the direct and indirect acquisition of Australian corporations and businesses by "foreign persons". Under the FATA, the general rule is that “foreign persons” require the prior approval of the Australian Treasurer on the advice of the Foreign Investment Review Board (FIRB) to undertake certain investments in Australia.
Foreign investment laws under JAEPA
In implementing the JAEPA, the FATA now includes a Japan exception to the general rules for investment.
From 15 January 2015, a Japanese enterprise is a "prescribed foreign investor". A Japanese enterprise will therefore require approval of the Australian Treasurer to undertake the following:
- an acquisition of a "substantial interest" in a corporation or control of an Australian business that is valued above AUD 1,094 million. (If a Japanese enterprise uses an Australian subsidiary or other Australian entity as the acquiring entity for a transaction (as opposed to a Japanese entity itself being the acquiring entity), then the transaction would be subject to the lower FIRB threshold of AUD 252 million).
- an acquisition of "substantial interest" in an offshore company whose Australian subsidiaries or gross assets are valued above AUD 1,094 million;
- an acquisition of an interest in residential real estate, vacant land or to buy shares or units in Australian urban land corporations or trusts; and
- an acquisition of an interest in developed commercial real estate that is valued above AUD 1,094 million.
However, Japanese investments in "prescribed sensitive sectors" will continue to be subject to the existing threshold of AUD 252 million. These prescribed sectors are:
- transport (including airports, port facilities, rail infrastructure, international and domestic aviation and shipping services provided within, or to and from, Australia);
- the supply of training or human resources, or the manufacture or supply of military goods or equipment or technology, to the Australian Defence Force or other defence forces;
- the manufacture or supply of goods, equipment or technology able to be used for a military purpose;
- the development, manufacture or supply of, or the provision of services relating to, encryption and security technologies and communications systems; and
- the extraction of (or the holding of rights to extract) uranium or plutonium or the operation of nuclear facilities.
Further, the Treasurer can decide that an entity is not a Japanese enterprise if it is:
- owned or controlled by a person of a country other than Japan, and Australia does not maintain diplomatic relations with that country or Australia adopts or maintains measures in relation to that country that have the effect of prohibiting transactions with the entity or branch; or
- owned or controlled by a person of a country other than Japan (including Australia) and the entity has no substantial business activities in Japan.
- The abovementioned exception also does not apply to a Japanese enterprise which is a "foreign government investor". A "foreign government investor" is:
- a body politic of a foreign country;
- an entity in which governments, their agencies or related entities from a single foreign country have an aggregate interest (direct or indirect) of 15% or more;
- an entity in which governments, their agencies or related entities from more than one foreign country have an aggregate interest (direct or indirect) of 40% or more; or
- an entity that are otherwise controlled by foreign governments, their agencies or related entities, and any associates, or could be controlled by them including as part of a controlling group.
A "foreign government investor" must obtain prior approval from the Australian Government before making any direct investment in Australia regardless of the value of the investment. Such investor must also obtain prior approval to start a new business or to acquire an interest in land, including any interest in a prospecting, exploration, mining or production tenement (except when buying land for diplomatic or consular requirements).
FIRB Approval Process
For acquisitions that require prior approval, the approval process generally takes about 6 weeks from the date of application to FIRB.
We would expect that it would only be in exceptional circumstances that foreign investment approval would not be given. In the history of the FATA, the Australian Government has only rejected a handful of transactions – the recent ones being ADM's acquisition of GrainCorp in 2013, the merger of Singapore Stock Exchange and ASX in 2011 and Shell's takeover bid of Woodside Petroleum in 2001.
While rejections are uncommon, the Australian Government has occasionally issued FIRB approvals subject to conditions, to address national interest concerns. For example:
- in 2013, the Treasurer approved State Grid Corporation of China's acquisition of a 19.9% holding in SP AusNet and 60% holding in Jamena on the condition that half of the members to be appointed by State Grid to the Boards of SP AusNet and Jemena are Australian citizens who are ordinarily resident in Australia;
- in the 2012 acquisition of Cubbie Station by Shandong Ruyi, the Treasurer required that one third of the board to be independent directors resident in Australia and that Ruyi sell down its interest in Cubbie Station from 80% to 51% to an independent third party within 3 years after the acquisition;
- in Yanzhou Coal Mining's 2009 takeover of Felix Resources, Yanzhou was required to operate its Australian mines through an Australian company, Yancoal Australia, with its CEO and CFO principally residing in Australia and to list Yancoal Australia on the ASX within 3 years, reducing Yanzhou's ownership to less than 70%;
- in the approval for the bid by Xstrata for WMC in 2005, the Treasurer required that the headquarters of the relevant divisions of Xstrata remain in Australia and that Xstrata continues with the exploration programs currently undertaken by WMC within its nickel and uranium businesses; and
- in the BHP/Billiton merger in 2001, the Treasurer required the head office and management to remain in Australia.
Effect of JAEPA FIRB changes
For transactions involving Japanese investment below the AUD 1,094 million threshold (outside sensitive sectors), the changes:
- remove an administrative burden for Japanese investors;
- take 6 weeks out of the timetable for an M&A transaction by a Japanese investor;
- level the playing field for Japanese bidders as compared with Australian bidders; and
- could increase the attractiveness to Japanese bidders of hostile takeover bids, making it easer for them to reach the 20% ownership threshold applicable under Australian takeover laws, rather than being bound by the 15% ownership threshold (before FIRB approval is required under current foreign investment rules).
Investors from other countries
Australia has previously entered into free trade agreements with the United States, New Zealand and Chile and the nationals and enterprises of these countries are "prescribed foreign investors".
In addition to the JAEPA, a free trade agreement with Korea recently commenced. In the free trade agreement with Korea, Australia granted the “most favoured nation” status to Korea in respect of foreign investment matters.
Accordingly, the investors from the abovementioned countries also have the benefit of the higher thresholds and exemptions for direct investments in Australia in the same manner as Japanese investors.
Free trade agreement negotiations with China have recently concluded. One of the key outcomes was that the investment threshold has been increased for Chinese enterprises. The text and implementing legislation for the China agreement is expected shortly.
Difficulties with the wording of the foreign investment legislation
The amendments to the FATA to implement the JAEPA produce potential surprises. In particular, an Australian subsidiary of a Japanese company does not qualify as a “prescribed foreign investor” and would be subject to the lower FIRB threshold of AUD 252 million if it is the acquirer.
As an example, consider a proposed acquisition of 100% of the
shares in an Australian company, operating in a non-sensitive sector. On application of the foreign investment legislation as amended for the JAEPA, the relevant FIRB approval threshold would be as follows:
Click here to view table.