Foreign Investment Policy amendments: further clarity and scope for non-notifiable investment

Written on the 16th of July 2010 by Glenn Vassallo

On 30 June 2010, the Foreign Investment Review Board (FIRB) published the Australian Government’s revised Foreign Investment Policy (New Policy). The New Policy is the result of a sharp increase in investment proposals by foreign investors, mainly driven by significant investment in the resources industry by Chinese owned entities.

Whilst the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) provides the legislative framework for FIRB’s screening of foreign investment proposals which may be against the ‘national interest’, the New Policy provides:

• guidance to foreign investors and Australian companies wishing to obtain foreign investment;
• assists in understanding the government’s approach to administering FATA; and
• helps investors and entities alike facilitate ‘workable’ investment proposals.

The key features of the New Policy are highlighted below.

What is in the ‘national interest’?

Under the New Policy, all investment proposals by foreign investors will be considered on a case by case basis with a view to determining whether the proposal is in Australia’s ‘national interest’, taking into account:

• Natural security - the extent to which the investment will affect Australia’s ability to protect its strategic and security interests, relying on advice from the relevant national security agencies for assessments as to whether the investment raises national security issues.
• Competition - the diversity of ownership within the relevant Australian industry/sector to promote healthy competition and whether the proposed investment may result in the investor gaining control over market pricing and production of a good or service.
• Other Australian Government policies (including tax) - the impact on Australian tax revenues and consistency with the government’s objectives in relation to such matters as environmental impact.
• The impact on the economy and the community - the impact on the general economy, any plans to restructure an Australian enterprise following an acquisition, the nature of funding of the acquisition and the level of Australian participation in the enterprise post the foreign investment.
• The character of the foreign investor - the extent to which the investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision, including corporate governance practices.
• Whilst it is acknowledged that these factors were included in the superseded policy, we highlight that under the New Policy they will now be applied to all investment proposals by foreign investors, not just foreign government owned investors (FGOIs) as was previously the case.

What is a ‘direct investment’ by a FGOI?

Previously, FGOIs and their related entities were required to seek FIRB approval for each and every investment in Australia (regardless of value or volume). The New Policy however, introduces a helpful framework, including benchmark by which FGOIs can now manoeuvre investment and generally (noting the exception below) remove the instant notification trigger.

‘Direct investment’ by a FGOI will now only require notification to and consequent approval by FIRB if any proposed investment is 10% or greater. Importantly, this is not a ‘hard and fast’ rule and caution must be taken when purposely structuring an investment deal to fall below this threshold, that the proposed investment does not provide the investor with ‘influence or control over the target investment’. As in this event the investment, regardless of whether or not the benchmark 10% threshold is breached, will be considered ‘direct’ and consequently notifiable. ‘Influence or control over the target investment’ will be deemed where the proposed investment includes any of the following:

• preferential, special or veto voting rights;
• the ability to appoint directors;
• contractual agreements, such as loans, provision of services and off take agreements;
• investments preparatory to a takeover bid; and/or
• enforcing a security interest over assets or shares.

Hynes Lawyers industry focus: foreign investment in the mining and resources sector

The definition of ‘Urban land’ has been extended to include all seabed within Australia’s Exclusive Economic Zone (EEZ) (an area extending up to 200 nautical miles from the territorial sea baseline). As a result, it appears that FIRB approval must now be obtained for foreign investment in all offshore petroleum production licences and other offshore petroleum tenements within the EEZ.

Finally, the New Policy also extends the definition of ‘developed commercial property’ to include where a mining tenement is developed to an operational mine. The impact being, that foreign investment in any such entity will not be notifiable unless the $50 million threshold (or $1,004 million for US investors) is breached.

Hynes Lawyers welcomes these changes and considers that they are an excellent move towards promoting the continued recovery and future growth of the Australian economy through foreign investment in Australian entities. Further, that the changes strike an even balance between the government’s desire to keep the regulation of foreign investment broad and flexible whilst protecting the ‘national interest’, against providing investors and entities with parameters in which to structure deals with greater certainty of compliance with their obligations under FATA.

For further information and any corporate enquiries please do not hesitate to contact Glenn Vassallo or Scott Standen.