When a transaction with a direct or indirect connection to Australia is proposed, foreign investors and their counsel should consider whether notification is required or advisable under Australia’s Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA).
The Australian Government assesses transactions proposed by foreign persons to determine whether they are contrary to Australia’s national interest. It does this through an FATA notification regime administered by Australia’s Foreign Investment Review Board (FIRB). Following FIRB’s review of a notification, Australia’s Treasurer (who is advised by FIRB) may issue a ‘no objection letter’ with or without conditions or (rarely) make an order prohibiting the whole or a part of the notified transaction.
In December 2015, the Australian Government made significant changes to FATA and related legislation, including introducing application fees and expanding the range of proposals that trigger mandatory or voluntary notification.
- Offshore M&A and capital markets transactions (including underwriting) may trigger notification if the target/issuer has Australian subsidiaries.
- Foreign government investors (a concept which covers many private equity funds, pension funds, hedge funds and portfolio investors) are subject to more onerous notification triggers than other foreign persons. Even quite minor indirect investments can trigger mandatory notification.
- Offshore financings (and secondary debt trading) may trigger notification if secured against Australian assets (including shares in Australian corporations). However, there is an exception for ordinary course financings.
Key concepts – foreign persons and foreign government investors
Acquisition and other transaction proposals of ‘foreign persons’ may trigger mandatory or voluntary notification under FATA. This term covers individuals not ordinarily resident in Australia, foreign government investors, and corporations, LLCs, trusts or LPs that are at least 20% owned by a foreign person and its associates or at least 40% owned by foreign persons and their associates in aggregate.
Many private-sector investors (particularly private equity funds, hedge funds and portfolio investors) are caught as foreign government investors because, in addition to covering obvious candidates such as federal, state/provincial and municipal governments and their agencies and corporations, the term also covers:
- quasi-governmental organisations such as state employee retirement systems/pension plans and the endowment funds of public universities; and
- corporations, LLCs, trusts and LPs whose aggregate ownership by other foreign government investors is at least 20% from the same country or 40% world-wide.
What types of proposals trigger mandatory notification under FATA?
Proposals involving the following targets may trigger mandatory notification:
- interests in Australian corporations and unit trusts;
- for foreign government investors, interests in foreign corporations, LLCs, some LPs and trusts, if the target holds interests (directly or indirectly) in Australian corporations or unit trusts;
- interests in assets of Australian agribusinesses;
- for foreign government investors, interests in assets of Australian businesses;
- interests in Australian land (including mining and production tenements); and
- for foreign government investors, starting an Australian business.
The concept of ‘interests’ is broadly defined. For example, it covers both legal and equitable interests in shares as well as convertible notes (if holder can elect conversion), stock options and warrants (if holder can elect physical settlement), and security interests granted over shares and other assets.
It is not just an acquisition that can trigger notification. For example, proposals involving an indirect increase in interests (e.g. as a result of share cancellations) may trigger mandatory notification.
What types of proposals trigger voluntary notification under FATA?
Proposals involving the following targets may trigger voluntary notification (unless they trigger mandatory notification):
- interests in foreign corporations, LLCs, some LPs and trusts if the target holds interests (directly or indirectly) in Australian corporations or unit trusts;
- interests in assets of Australian businesses;
- entry into agreements relating to the affairs of Australian corporations and unit trusts (or alterations to their constituent documents) if they oblige senior officers to act on directions of any foreign persons; and
- entry into or termination of agreements to use assets of Australian businesses or participate in the profits or central management and control of Australian businesses.
If a proposal triggers a voluntary notification, it means that the Treasurer is empowered to make orders prohibiting the relevant transaction, or if it has completed, disposal orders. The benefit of making a voluntary notification is that, after a no-objections letter is obtained, the Australian Treasurer ceases to have those powers.
Are materiality thresholds applied?
Yes, FATA applies materiality thresholds based on monetary amounts and percentage interests. As the rules are complex, you should consult Australian counsel as to their application. However, in broad terms the following materiality thresholds apply.
Key monetary thresholds (as at January 2016)
Click here to view the table.
Key interest thresholds
Click here to view the table.
One noteworthy problem with the interest thresholds is that they are tested based on the holdings of a foreign person and its associates. In the case of foreign government investors, a foreign government investor is deemed to be associated with every other foreign government investor from the same country.
The upshot is that even small portfolio investments by foreign government investors may inadvertently trigger mandatory notification because of their deemed association with other foreign government investors.
Are there any exceptions?
Some exceptions apply. In an offshore context, the most relevant are:
- moneylenders exception for ordinary course secured financings;
- custodians but not investors holding through them;
- some acquisitions from Australian federal, state or municipal governments;
- share acquisitions under rights issues (up to pro rata entitlement);
- in the case of securities underwritings, if an exemption certificate has been obtained; and
- for foreign government investors, offshore acquisitions if the Australian subsidiary’s total assets are less than A$10m and represent less than 1% of the total assets of the foreign target.
What are the consequences of failing to notify?
It is a criminal offence to enter into an agreement for a transaction that triggers mandatory notification before the notification is made and a no objection letter is obtained, unless relevant provisions are subject to a condition precedent.
While it is not an offence to enter into an agreement for a transaction that triggers voluntary notification, once a voluntary notification is made, it is an offence to proceed with the transaction before obtaining a no objection letter.
What application fees apply?
Typically A$25,000, or A$100,000 if consideration exceeds A$1 billion.
Lower fees apply for internal restructures (A$10,000). Different rates apply for notifications involving agricultural or residential land. Once a foreign person holds 50% or more of an entity, typically no application fee will apply to the notification of further acquisitions.
In complex transactions where multiple notifications may be triggered, Australian counsel can advise on how to structure documentation in order to minimise the incurrence of multiple application fees.
How does the notification process work?
Australian counsel can make a notification online with the notification accompanied by a supporting letter from them, corporate diagrams, recent financial information, and transaction agreements or term sheets (if available).
The fact that a notification has been made and its contents are both confidential. However, FIRB can share submissions with other government agencies.
Once a notification is made and the application fee paid, the Treasurer has an initial 30-day period in which to decide on a notification. However, FIRB can request an extension. If an applicant refuses an extension request, the Treasurer can impose a 90-day interim order preventing the transaction, at the end of which a decision must be made.
FIRB consults with the Australian Taxation Office and the Australian Competition and Consumer Commission on most notifications. Other relevant agencies may also be consulted (e.g. the Department of Defence on national security issues).
In most cases, allow for at least 35 days from when a notification is made to cover processing of the application fee and the review process. However, in some cases many months can elapse before a decision is made.
The actual time it takes to decide a notification depends on a range of factors including the size and sensitivity of the target, FIRB workloads, availability of decision makers and whether the transaction is subject to other governmental approvals. Australian Federal Elections (the next is due 2016) may add further delays for sensitive notifications or if it results in a change of government.
Are notifications ever rejected or conditions imposed?
Outside of transactions involving developed residential land, only four outright rejections have been announced since 2001.
There is a growing trend for the Treasurer to attach conditions to no objection letters. Typically these seek to address national interest concerns. For example, conditions may be imposed to address matters relating to national security, arm’s length pricing of commodities, and sensitive infrastructure and utilities or to impose foreign ownership caps (particularly for some Chinese investments). FIRB will consult with applicants before finalising conditions.
Recently, the Australian Treasurer announced that he would seek to impose standard tax conditions to ensure foreign investors comply with Australia’s tax laws. See this link for our more detailed discussion of this initiative.