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When a transaction with a direct or indirect connection to Australia is proposed, foreign investors and their counsel should consider whether notification is required or advisable under Australia’s Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA).
The Australian Government assesses transactions proposed by foreign persons to determine whether they are contrary to Australia’s national interest. It does this through an FATA notification regime administered by Australia’s Foreign Investment Review Board (FIRB). Following FIRB’s review of a notification, Australia’s Treasurer (who is advised by FIRB) may issue a ‘no objection letter’ with or without conditions or (rarely) make an order prohibiting the whole or a part of the notified transaction.
In December 2015, the Australian Government made significant changes to FATA and related legislation, including introducing application fees and expanding the range of proposals that trigger mandatory or voluntary notification.
Acquisition and other transaction proposals of ‘foreign persons’ may trigger mandatory or voluntary notification under FATA. This term covers individuals not ordinarily resident in Australia, foreign government investors, and corporations, LLCs, trusts or LPs that are at least 20% owned by a foreign person and its associates or at least 40% owned by foreign persons and their associates in aggregate.
Many private-sector investors (particularly private equity funds, hedge funds and portfolio investors) are caught as foreign government investors because, in addition to covering obvious candidates such as federal, state/provincial and municipal governments and their agencies and corporations, the term also covers:
Proposals involving the following targets may trigger mandatory notification:
The concept of ‘interests’ is broadly defined. For example, it covers both legal and equitable interests in shares as well as convertible notes (if holder can elect conversion), stock options and warrants (if holder can elect physical settlement), and security interests granted over shares and other assets.
It is not just an acquisition that can trigger notification. For example, proposals involving an indirect increase in interests (e.g. as a result of share cancellations) may trigger mandatory notification.
Proposals involving the following targets may trigger voluntary notification (unless they trigger mandatory notification):
If a proposal triggers a voluntary notification, it means that the Treasurer is empowered to make orders prohibiting the relevant transaction, or if it has completed, disposal orders. The benefit of making a voluntary notification is that, after a no-objections letter is obtained, the Australian Treasurer ceases to have those powers.
Yes, FATA applies materiality thresholds based on monetary amounts and percentage interests. As the rules are complex, you should consult Australian counsel as to their application. However, in broad terms the following materiality thresholds apply.
Certain free-trade treaty investors* (excluding their Australian or other foreign subsidiaries, foreign government investors and investments in sensitive sectors).
* Chile, Mainland China, Japan, New Zealand, South Korea and USA.
Standard threshold (excluding foreign government investors).
Agribusiness#or sensitive commercial land+(including some land-rich entities).
Agricultural land#(including some land rich entities). Tested cumulatively.
Foreign government investors; residential or vacant land (including some land-rich entities).
# A$1,094m threshold applies to some treaty investors (i.e. Chile, New Zealand & USA) who are not foreign government investors.
+ A$1,094m threshold will apply to all treaty investors who are not foreign government investors.
Aggregate substantial interest—may trigger voluntary notification even if foreign persons are not associated.
Substantial interest—standard trigger for mandatory notification.
Direct interest*—standard trigger for agribusiness and foreign government investors.
Direct interest*—if a legal arrangement relating to its business is in place, e.g. an offtake agreement.
Direct interest*—if investor is in a position to influence or participate in central management and control or influence or determine policy.
Most land rich entities (i.e. more than 50% of assets comprise interests in Australian land).
* 20% threshold will apply to some treaty investors (i.e. Chile, New Zealand and USA) who are not foreign government investors.
Note: after an interest threshold triggers mandatory notification, each additional acquisition will trigger a new mandatory notification.
One noteworthy problem with the interest thresholds is that they are tested based on the holdings of a foreign person and its associates. In the case of foreign government investors, a foreign government investor is deemed to be associated with every other foreign government investor from the same country.
The upshot is that even small portfolio investments by foreign government investors may inadvertently trigger mandatory notification because of their deemed association with other foreign government investors.
Some exceptions apply. In an offshore context, the most relevant are:
It is a criminal offence to enter into an agreement for a transaction that triggers mandatory notification before the notification is made and a no objection letter is obtained, unless relevant provisions are subject to a condition precedent.
While it is not an offence to enter into an agreement for a transaction that triggers voluntary notification, once a voluntary notification is made, it is an offence to proceed with the transaction before obtaining a no objection letter.
Typically A$25,000, or A$100,000 if consideration exceeds A$1 billion.
Lower fees apply for internal restructures (A$10,000). Different rates apply for notifications involving agricultural or residential land. Once a foreign person holds 50% or more of an entity, typically no application fee will apply to the notification of further acquisitions.
In complex transactions where multiple notifications may be triggered, Australian counsel can advise on how to structure documentation in order to minimise the incurrence of multiple application fees.
Australian counsel can make a notification online with the notification accompanied by a supporting letter from them, corporate diagrams, recent financial information, and transaction agreements or term sheets (if available).
The fact that a notification has been made and its contents are both confidential. However, FIRB can share submissions with other government agencies.
Once a notification is made and the application fee paid, the Treasurer has an initial 30-day period in which to decide on a notification. However, FIRB can request an extension. If an applicant refuses an extension request, the Treasurer can impose a 90-day interim order preventing the transaction, at the end of which a decision must be made.
FIRB consults with the Australian Taxation Office and the Australian Competition and Consumer Commission on most notifications. Other relevant agencies may also be consulted (e.g. the Department of Defence on national security issues).
In most cases, allow for at least 35 days from when a notification is made to cover processing of the application fee and the review process. However, in some cases many months can elapse before a decision is made.
The actual time it takes to decide a notification depends on a range of factors including the size and sensitivity of the target, FIRB workloads, availability of decision makers and whether the transaction is subject to other governmental approvals. Australian Federal Elections (the next is due 2016) may add further delays for sensitive notifications or if it results in a change of government.
Outside of transactions involving developed residential land, only four outright rejections have been announced since 2001.
There is a growing trend for the Treasurer to attach conditions to no objection letters. Typically these seek to address national interest concerns. For example, conditions may be imposed to address matters relating to national security, arm’s length pricing of commodities, and sensitive infrastructure and utilities or to impose foreign ownership caps (particularly for some Chinese investments). FIRB will consult with applicants before finalising conditions.
Recently, the Australian Treasurer announced that he would seek to impose standard tax conditions to ensure foreign investors comply with Australia’s tax laws. See this link for our more detailed discussion of this initiative.
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