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Enhanced foreign investment scrutiny during COVID-19 crisis

01 April 2020

7 min read

#Corporate & Commercial Law, #COVID-19

Enhanced foreign investment scrutiny during COVID-19 crisis

On Sunday, 29 March 2020, the Federal Treasurer, Josh Frydenberg, announced important temporary changes to Australia’s foreign investment review framework to protect the national interest during the COVID-19 crisis.

All relevant foreign investment will now require FIRB approval

As of 10:30pm AEDT on Sunday, 29 March, the threshold amounts which apply in determining whether particular foreign investments are subject to Australia’s foreign investment framework are now $0. This means that, for the duration of the coronavirus crisis, all proposed foreign investments into Australia which are subject to the Foreign Acquisitions and Takeovers Act 1975 (Act) will require Foreign Investment Review Board (FIRB) approval, regardless of the value or the nature (or country of origin) of the foreign investor.

The new rules do not apply to agreements entered into before 10:30pm AEDT on 29 March 2020.

The Australian Government’s foreign investment policy is implemented through Commonwealth legislation, including the Act, the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth), the Register of Foreign Ownership of Water or Agricultural Land Act 2015 (Cth), as well as other applicable regulations, rules and policies.

The FIRB notification or approval framework is integral to Australia’s foreign investment regulatory regime. FIRB itself is a non-statutory body established in 1976 to provide advice to the Treasurer and the Government on foreign investment policy and administration, including foreign investment applications. The Board’s functions are advisory only, but foreign investment applications that relate to foreign investment in commercial land, agricultural land or an Australian business are made to and processed by FIRB through the FIRB Secretariat, which is within the Department of Treasury. Applications that relate to residential land are processed by the Australian Taxation Office (ATO).

Foreign investment applications consist of notifications or approvals. Mandatory notification or approval (called a ‘notifiable action’) is required for acquisition of:

  • a substantial interest, being an interest of 20 per cent or more, in a non-sensitive Australian corporation – before 29 March 2020, this applied only if the Australian corporation had a value of $275 million or more, and this threshold was $1,192 million for foreign investors from free trade agreement (FTA) partner countries or regions that had a higher threshold (e.g. the United States of America, New Zealand, Chile, Japan, the Republic of Korea, China, Singapore, a country (other than Australia) for which the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership, done at Santiago on 8 March 2018, is in force (CPTPP) [as at 1 January 2020, the CPTPP was in force for Canada, Japan, Mexico, New Zealand, Singapore and Vietnam], and the region of Hong Kong, China) any direct investment by a ‘foreign government investor’, including establishing a new business (a passive investment interest of less than 10 per cent) in an entity, which must be an investment without any control elements, is not considered to be a direct investment requiring FIRB approval)
  • a 10 per cent or greater interest in an agribusiness – before 29 March 2020, this applied only where the total of the consideration for the acquisition and the cumulative interests held by the foreign investor (and their associates) in the business was more than $60 million, and for foreign investors from Chile, NZ and US, a threshold of $1,192 million applied
  • rural land – before 29 March 2020, this applied only where the rural land was valued greater than $15 million (on a cumulative basis), and for Thailand, where land was used wholly and exclusively for a primary production business $50 million (otherwise the land was not agricultural land)
  • any residential or vacant Australian land or any land for redevelopment (0 per cent interest and $nil threshold)
  • a developed commercial property – before 29 March 2020, this applied in respect of two categories: (i) sensitive with a $60 million threshold; and (ii) non-sensitive with a $275 million threshold. For foreign investors from FTA partner countries or regions that had a higher threshold, a threshold of $1,192 million applied. Land rich entities also had thresholds reflecting their underlying land interests
  • a media business (greater than 5 per cent or any non-portfolio interest).

Further, the Treasurer has the power to make orders in respect of certain material transactions, which are called ‘significant actions’. Broadly, a significant action is an action of a foreign person acquiring interests in securities, assets or Australian land, or otherwise taking action in relation to entities (being corporations and unit trusts) and businesses that have a connection to Australia, subject to the action satisfying the prescribed threshold test. In addition, for an action to be a significant action, the action must itself result in a change in control involving a foreign person or being taken by a foreign person.

Significant actions include the acquisition of the assets of an Australian business and offshore acquisitions and takeovers. Before 29 March 2020, the prescribed threshold test that applied to a signification action (business acquisition) where the Australian component had gross assets of $275 million or more (or the consideration was based on Australian revenues of $275 million or more). This amount is now reduced to $0.

Significant actions must now be notified by foreign government investors, irrespective of the value of the investment or the target business.

New timeframe for FIRB review

To ensure sufficient time for screening applications, FIRB will work with existing and new applicants to extend timeframes for reviewing applications from 30 days to up to six months from the date that the application fee is paid.

The Government has stated that it will prioritise urgent applications for investments that directly protect and support Australian businesses and Australian jobs, taking account of any commercial deadlines related to those proposed investments.

Not an investment freeze

When announcing the new FIRB regime, the Treasurer explained, “This is not an investment freeze. Australia is open for business and recognises investment at this time can be beneficial if in the national interest. However, these measures are necessary to safeguard the national interest as the coronavirus outbreak puts intense pressure on the Australian economy and Australian businesses.”

Mr Frydenberg has the power as Treasurer to accept or reject a foreign acquisition after gaining advice from FIRB, which he is not bound to follow. The Treasurer and his delegates will continue to review foreign investment proposals against the national interest on a case-by-case basis. Where appropriate, conditions will be applied proportionately to address identified risks on a non-discriminatory basis.

Consideration of ‘national interest'

Generally, Mr Frydenberg has the power as Treasurer to examine any factors that he considers appropriate in determining whether a transaction is contrary to the national interest.

These factors typically include the impact of the foreign investment proposal on:

  • national security
  • competition (noting the applicable test is different to the one applied by the Australian Competition and Consumer Commission in examining merger clearances)
  • the economy and the community, such as the investor’s plans to restructure the business in Australia after the acquisition
  • other government policies such as those relating to tax and the environment
  • the character of the investor
  • the nature of funding of the acquisition
  • the level of Australian participation in the enterprise post-completion of the foreign investment
  • Australia’s ability to remain a reliable supplier to all customers in the future.

In addition to the above-described factors, the Treasurer takes into consideration more specific and/or additional concerns when examining certain kinds of foreign investment proposals. Such proposals involve investments in the area of agricultural, residential real estate or sensitive businesses (including media, telecommunications, transport, defence and military related industries and activities, encryption and securities technologies and communications systems, and the extraction of uranium or plutonium or the operation of nuclear facilities) or where the investor is a foreign government investor.

Foreign persons who fail to meet their obligations under Australia’s foreign investment legislation may be ordered to dispose of their investment, receive a civil penalty, and/or be subject to criminal prosecution.

A Q&A on the temporary changes to Australia’s foreign investment framework can be found here.

If you are concerned about the impact of these changes on a proposed investment in Australia, please contact us.

Authors: Carl Hinze & Linda Lau

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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