The regulation of acquisitions by ‘foreign persons’

Foreign acquisitions have been in the news again lately, with calls for the Australian government to re-nationalise Darwin Port, currently under long term lease to a Chinese owned company. The 99-year lease was granted in 2015, before the Foreign Investments Review Board (FIRB) was given greater legislative powers to review such acquisitions.

Although most foreign investments are approved (very few are rejected), the FIRB is increasingly seeking to impose conditions on foreign investment approvals, with 43.5% of approvals in 2017-18 being subject to conditions.[1]

In this edition of Corporate Insights, we set out the background of certain acquisitions by ‘foreign persons’, outline what transactions are regulated, and discuss the importance of early and effective engagement with the FIRB.

Background | Foreign Persons

Certain acquisitions by ‘foreign persons’ are regulated under the Foreign Acquisitions and Takeovers Act. Determining whether a person is ‘foreign’ for legal purposes is often a complex exercise, as is whether an acquisition is regulated.

Generally, a person (such as a company) is regarded as foreign if a single foreign person (and associates) have an interest in that person of at least 20%, or if two or more foreign persons (and associates) have an interest of 40% or more.

What transactions are regulated?

Transactions will generally be regulated if they are ‘notifiable’ or ‘significant’ actions.

‘Notifiable actions’ carry criminal penalties if FIRB approval is not obtained before proceeding. ‘Significant actions’ give the Treasurer broad powers to make orders if satisfied that the transaction would be contrary to the national interest.

Although FIRB has published voluminous guidelines, whether a transaction is approved is a discretionary matter for the Treasurer acting under advice from FIRB. In considering the ‘national interest’, FIRB will generally have regard to matters such as impact on the economy, community, national security, competition, taxation and the investor’s character.  FIRB will consult within government including with the ATO (tax), the ACCC (competition law) and others.

Some of the more common types of investments for which prior approval must be obtained include:

• Acquisitions by foreign government investors (FGI) and other FGI transactions (such as starting an Australian business) – generally a $0 threshold, regardless of the type of investment;
• Business acquisitions – the notification threshold ranges from $0 (for example, media acquisitions) to $1,154 million depending on the sector and the investor;
• Residential real estate – notification threshold of $0;
• Agricultural land – the notification threshold ranges from $15 million (cumulative) and $1,154 million depending on investor;
• Vacant commercial land – notification threshold of $0;
• Developed commercial land – the notification threshold varies between $58 million and $1,154 million depending on the type of land and investor;
• Mining – the notification threshold ranges from $0 to $1,154 million depending on the investor.

As above, particular care must be taken with acquisitions of Australian land (especially vacant commercial and residential land) as these have a $0 notification threshold.  Although lending money does not generally require notification (for example, property or business finance), the taking of a mortgage or other security interest in land is treated as acquiring an interest in land (although there are some exemptions for moneylending businesses).

Additionally, there is no exemption under the law for corporate reorganisations, so an intragroup asset or business transfer will also be subject to regulation depending on the transaction.

Engaging with FIRB

Regulated acquisitions must be notified to FIRB. Hence, developing an effective FIRB strategy can be critical to the success or otherwise for cross-border transactions. This can be particularly important where there are multiple bidders for an Australian asset or business. Because vendors will typically prefer unconditional bids, regulated foreign bidders (and/or the vendor) may need to engage with FIRB during the sale process to achieve unconditionality at final bid stage.

Although there is a decision period of 30 days (subject to extension), FIRB will preserve commercial in confidence and will also generally seek to support transaction timelines wherever possible.  However, extensions are not uncommon, particularly for large or sensitive transactions. Hence, early and effective engagement can be critical to the success or otherwise of bids.

[1] Foreign Investment Review Board, Annual Report 2017-18.