On 29 March 2020 the Australian Government announced temporary changes to the foreign investment review framework to protect Australian businesses and assets from foreign takeovers during the COVID-19 pandemic.
Until further notice, all foreign investments subject to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act), regardless of the size of the transaction or the nature of the foreign investor, will be subject to Foreign Investment Review Board (FIRB) review and approval and:
a. monetary thresholds for all foreign investment proposals is reduced to $0; and
b. the FIRB timeframe for review and processing is extended from 30 days to six months to ensure sufficient time for screening applications.
The government has not frozen foreign investments, stating that the intention is not to block foreign investments but rather to protect normally viable but now very vulnerable Australian businesses which would ordinarily be sold to foreign investors without any government oversight, which in turn presents risks to the national interest.
Some key considerations of the new law include:
a. urgent applications for investments which directly support and/or protect Australian businesses and jobs will be prioritised;
b. the temporary measures do not affect transactions that were already entered into prior to 29 March 2020 but have not yet completed; and
c. existing exemptions remain in place.
Notwithstanding these statements and while this new regulatory barrier may be temporary, the effects of such changes may be more far-reaching given the types of the investments that will now face FIRB scrutiny and the quantity of investments which previously did not require FIRB approval but now do.
What requires FIRB approval prior to 29 March 2020 and what has changed?
The Federal Treasurer has the power, under Australia’s foreign investment regime, to make orders with respect to foreign investment proposals that are considered by the government to be contrary to Australia’s national interest - these are known as ‘significant actions’. Not all significant actions are required to be notified to FIRB, however, certain significant actions, known as ‘notifiable actions’, must be notified to the Treasurer, and may only proceed on receipt of a statement of ‘no objection’ from the government.
New threshold or no change?
Set out in the table below are various forms of ‘notifiable actions’ and the changes in the monetary threshold amounts requiring FIRB approval:
These must obtain FIRB approval before proceeding
|An acquisition by a privately-owned foreign investor of 20% or more of an interest in an Australian entity regardless of the entity’s value.
||Previously the threshold was above A$275m, the threshold is now $0.
|An acquisition by a privately-owned foreign investor of 20% or more in an Australian entity in the agribusiness sector.
||Previously, the threshold was more than $60 million (based on the value of the consideration for the acquisition and the total value of other interests held by the foreign investor), the threshold is now $0.
|Transactions by a foreign person from free trade agreement partner countries including China, USA and New Zealand including for non-sensitive businesses and developed commercial land.
||Previously the threshold was $1,192 million, the threshold is now $0.
|An acquisition by a foreign person* of an interest in land
||Previously the threshold was between $0 to $275m (where the threshold depended on the kind of land and who the investor is), the threshold is now $0.
|Any transaction by a foreign person in the media sector
||Previously the threshold was $0, so nothing has changed.
|All transactions by foreign government investors of:
- an interest in an Australian entity or business;
- the starting of an Australian business; and
- the acquiring of a legal or equitable interest in mining and production tenements; or
- any interest in land.
Previously the threshold was $0, so nothing has changed.
* As defined under the Act.
Foreign entities which previously did not need FIRB approval but now do
In addition to the above ‘notifiable action’ transactions by foreign investors, now any other foreign investors who wish to make investments in Australia will also have to apply for FIRB review. Some examples of transactions which prior to 29 March 2020 would not have required FIRB approval include:
a. internal restructurings by multinational corporations involving a change of control in Australian subsidiaries (irrespective of the value of the Australian entity);
b. offshore takeovers which involve a change in control of an Australian entity (irrespective of the value of the Australian entity in the context of the transaction); and
c. long term leases (of more than five years, including renewals) as well as agreements for leases or proposed transactions involving a foreign owned entity seeking to acquire developed commercial land in Australia.
What impact will the changes have on foreign investments?
It is inevitable that due to the anticipated significant increase in the number of notifications made to FIRB, foreign investors will face prolonged delays in obtaining FIRB approvals but the wider implications of the new framework include:
a. indirect deterrence of foreign investment as foreign investors:
i. tend to look for M&A deals and other investment opportunities in countries that have limited red tape; and
ii. may be unfamiliar with FIRB approval requirements and grapple with the increase in obstacles they need to overcome as well as financial impediments;
b. additional delays for transactions which are currently on foot - if FIRB approval is a condition precedent to the transaction, amendments will have to be made to the acquisition agreements (including, for example, likely extensions of sunset dates); and
c. a negative impact on any new foreign investment - all acquisition agreements will need a FIRB approval condition precedent and a possible extended period between signing and completion (up to 6 months). This extended period will have significant impact on the purchase price mechanics - the value of a company can change significantly within 6 months.
Failure by foreign persons to meet their obligations under Australian foreign investment laws may be subject to a disposal order, civil penalty orders, and/or criminal prosecutions.
What other consequences will the changes bring?
At the same time, investments which require shorter lead times may be affected giving domestic investors an advantage. In addition, while it is likely that the changes will impact on commercial values of properties and owners of those properties looking to sell quickly may have to sell at lower prices, this may create opportunities for domestic investors.
When will we know more details about the new framework?
New administrative directives are expected to be released shortly which will provide further clarification as to whether there will be any changes to percentage thresholds that delineate notifiable transactions from significant transactions.
What is certain is that the government is tightening up on investment rules as it deals with the economic implications arising from the spread of the coronavirus in order to prevent predatory bids in a time of market weakness and the new rules apply to all overseas buyers.