- Foreign investment laws proposed to be amended – to a greater extent than appreciated
- New requirement to notify acquisition of ‘potential voting power’
- Foreign – foreign transactions with Australian nexus now subject to mandatory notification
On 20 August, amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) were introduced into Parliament. These were to effect the changes to the foreign investment approval regime announced in February. 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.
As presently proposed, these amendments arguably go beyond effecting the announced changes. They also bring within the scope of the mandatory notification regime foreign-to-foreign takeovers involving an upstream change of control of Australian assets.
The need to notify of potential voting power
Very broadly, an acquisition by a ‘foreign person’ of 15 per cent or more (or 40 per cent in the case of two or more foreign persons) of an ‘Australian corporation’, or of a specified type of foreign corporation that holds Australian assets, may be blocked or unwound by the Treasurer if the acquisition is contrary to the national interest.
The Foreign Acquisitions and Takeovers Amendment Bill 2009 (Bill) seeks to implement the announced changes to the FATA by requiring notification of acquisitions of ‘potential voting power’ of 15 per cent.
Potential voting power is the notional maximum number of votes that might be cast at a general meeting of the corporation in question, including all votes that might be cast as a result of the exercise of a right (whether exercisable presently or in future, and whether on fulfilment of a condition or not).
This means that the FATA will require notification where a foreign person proposes to acquire convertible notes or options over unissued shares which would confer 15 per cent or more of the votes in an Australian corporation following the notional conversion or exercise of those instruments.
The forward-looking aspect of potential voting power gives rise to two issues that the Bill does not on its face resolve.
Firstly, the type of instruments that will count towards potential voting power commonly contain provisions to adjust the number of shares issued upon their conversion or exercise. For example, some instruments will provide for the issue of a fixed dollar amount of shares or for the adjustment of the number of shares to be issued if there is an intervening share issue or reconstruction. The Bill does not specify whether, in deciding if notification is required, a foreign acquirer of convertible notes or other rights will need to calculate the potential voting power that it controls based on the number of shares that would be issued to it if those instruments were exercised or converted at that time, or the greatest number of shares into which they could convert under their terms. In some cases, this latter number will not be able to be readily calculated and would require the making of some assumptions—for example, as to how low the issuer’s share price may feasibly be at the time of exercise or conversion.
Secondly, there is the prospect that a foreign acquirer of convertible notes or other rights that will now be covered by the FATA will have to notify the Treasurer twice—once upon acquisition of the instruments and then again before they are converted or exercised. This is because section 28 of the FATA (which provides that a notice that a foreign person proposes to acquire an option extends also to its exercise) is limited to options and to voluntary notifications under section 25. In any event, it is FIRB’s policy that an approval typically only lasts for 12 months, so a second notification would be required if the acquisition and exercise of those options occurs more than 12 months apart.
The need to notify upstream foreign acquisitions
In addition to implementing the announced changes, the Bill amends the FATA to require notification of upstream acquisitions which will be treated as giving rise to a downstream interest in Australian shares.
Presently, the foreign investment approval regime is administered on the basis that:
- a direct investment in shares of an Australian corporation to which the FATA applies must be notified to the Treasurer under section 26—failure to do so is a criminal offence, and
- an indirect investment in Australian assets (including shares in an Australian corporation) by a foreign person investing in a foreign entity that holds those assets may be notified to the Treasurer under section 25 if the foreign person wishes to protect themselves from the prospect of the Treasurer unwinding the transaction on national interest grounds.
Indirect foreign investment (through foreign-to-foreign transactions where the foreign target company has Australian assets) has, until now, fallen outside of the mandatory notification regime. This is due to the drafting of section 26 being limited to circumstances where the foreign person acquires a legal or equitable interest in the shares of the Australian corporation (that is, direct investment). The Bill proposes to replace part of this section so that it operates based on the broader concept of holding a ‘substantial interest’ in the corporation.
The key result of this change is that foreign-to-foreign transactions that have until now been subject only to voluntary notification will be subject to compulsory notification. Where the FATA applies, it will be an offence for any binding agreement for the sale of 15 per cent or more of the shares in the foreign parent company to be entered into before the Treasurer is advised of the transaction and either the 40-day waiting period lapses or approval is given for the transaction to proceed.
The practical implications of this change are significant. One key prospect is that a foreign company and its officers may theoretically be criminally liable if they pursue an acquisition of 15 per cent of another foreign company that has Australian assets or Australian subsidiaries of sufficient value to trigger the requirements of the FATA without first notifying the Treasurer. Advisers on large international transactions will need to ensure that acquirers are appraised of Australian foreign investment rules even if the value of Australian assets is insignificant in the context of the overall transaction.
Changes to value thresholds
The Treasurer recently announced that the various value thresholds that trigger the application of the FATA to a transaction will be harmonised. It is proposed that all thresholds below which the foreign investment approval regime does not apply will be set at $219 million. This new threshold will be subject to annual indexation. The corresponding regulations are due to be introduced shortly.