Foreign investors seeking to invest in Australia need to consider recent amendments to Australia’s foreign investment framework, in particular, the recent amendments to the monetary thresholds, and proposed changes to the scope of the Foreign Investment Review Board’s (FIRB) review process.

Recent threshold changes

In his announcement on 4 August 2009, the Treasurer proposed reforms to Australia’s foreign investment framework (see PLN article). The reforms relate to the threshold amounts applicable to foreign entities seeking to invest in Australia, as prescribed by the Foreign Acquisitions and Takeovers Regulations 1989 (Regulations).

The following changes commenced on 22 September 2009, when the Foreign Acquisitions and Takeovers Amendment Regulations 2009 (No.1) 2009 (Amending Regulations) and the Treasury’s revised Foreign Investment Policy came into effect:

1. A single threshold of 15% in a business worth A$219 million applies to private business investments.
2. The new unified threshold will be indexed on 1 January every year to keep pace with inflation and to prevent foreign investment screening from becoming more restrictive over time.
3. The requirement that private investors notify the Government when establishing a new business in Australia, valued above A$10 million, is abolished.

As a result, private foreign investment in Australian businesses (including Australian corporations, off-shore corporations which own Australian assets, and non-corporate Australian businesses) below A$219 million can now proceed without FIRB review, saving valuable time and compliance costs.

Proposed changes to the scope of FIRB review process

In contrast to the Regulations, the recent Foreign Acquisitions and Takeovers Amendment Bill 2009 (Bill), introduced following the Treasurer’s announcement on 12 February 2009, proposes to extend the foreign investment screening process to a wider range of foreign investment structures by redefining the notion of foreign control in the context of Australian corporations.

Currently, under section 26 of the Foreign Acquisitions and Takeovers Act 1975 (FATA), foreign investors are required to notify the Treasurer of their intention to acquire a substantial shareholding in an Australian corporation. Section 18 of the FATA empowers the Treasurer to block, or impose conditions upon, those proposals that involve a foreign person (or persons) obtaining control of an Australian corporation, that would be contrary to the national interest. The notion of control is based on the ability to determine the policy of the corporation - the Bill extends the notion to include the policy of the corporation “on all matters.”

Under the FATA, compulsory notification requirements apply, and the Treasurer’s powers are activated, where a person (or persons) proposes to acquire a substantial interest (or aggregate substantial interest) of either:

1. the voting power; or
2. issued shares, of an Australian corporation valued at A$219 million (as per the amended Regulations) or more.

Acknowledging that ownership and controlling interest can be held in forms other than shares and voting power, such as complex financing arrangements involving a component of control or influence, the Bill extends the definition of ‘substantial interest’ (15%) and ‘aggregate substantial interest’ (40%) to include potential voting power and interests that arise from a right under an instrument, agreement, or arrangement.

As such, the Bill amends the compulsory notification provisions in section 26 to explicitly require foreign investors to notify the Treasurer where there is a possibility that the proposed investment will deliver future influence or control over the target Australian corporation.

While the Bill contemplates complex financing arrangements it expressly excludes interests held as security pursuant to genuine money-lending agreements. Nevertheless, where money-lending agreements include quasi-equity characteristics (such as options to purchase shares or potential voting rights) the compulsory notification requirements under section 26 apply.

If the Bill is passed by Parliament, foreign investors seeking to invest in Australian corporations will need to give particular consideration to whether the proposed investment structure will give rise to potential voting power or future rights in shares in Australian corporations.

This article has been prepared for the general information of clients and contacts of PLN Lawyers Sydney and the affiliated firms of the Pacific Legal Network. While it deals with and comments on the law in specific areas it is not intended nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

PLN News December 2009