On 1 July 2017, an array of changes to the Australian foreign investment regime took effect under an amendment to the Foreign Acquisition and Takeovers Regulation (Regulation). One of the most significant changes for private equity sponsors and other financial investors was the introduction of business exemption certificates which pre-approve a programme of business acquisitions.
Exemption certificates have historically only been available for the acquisition of Australian land under the Foreign Acquisitions and Takeovers Act (Cth) 1975 (FATA). Pre-approval for proposed multiple investments has not been available for business acquisitions or for foreign government investors in any sector. The new approach reflects a significant shift from the Government's previous position towards exemption certificates and its historic caution surrounding acquisitions by foreign government investors.
Since many private equity sponsors are considered foreign government investors under the FATA because their limited partners include government-related pension funds or other overseas investors with government ties, the change is potentially meaningful for private equity sponsors. Private equity sponsors may now be able to use exemption certificates to avoid the need for Foreign Investment Review Board (FIRB) approval of individual small acquisitions, removing some of the cost and delay of seeking FIRB approval and facilitating more agile investment decisions.
What is it?
The new business exemption certificate is a standing pre-approval from the Treasurer enabling the relevant foreign person to undertake one or more acquisitions of Australian business assets and/or securities over a specified period (up to 3 years) up to a set expenditure cap, including through the business of underwriting. Instead of having to notify the Treasurer before each separate acquisition, a foreign person simply needs to apply once prior to entering any acquisitions. A business exemption certificate is available to foreign government investors under the FATA. FIRB has indicated that applications will be reviewed on a case by case basis. No set limits have been proposed for either expenditure caps or transactions.
Business exemption certificates are separate and additional to the existing exemption certificates available for acquisitions of Australian land, however they replace the underwriter exemption certificate regime – which was not widely used.
A business exemption certificate is most likely to be suited to medium to large investment funds, particularly those with a not insignificant weighting of passive low risk foreign government investors who have a $0 screening threshold. As with land exemption certificates, applicants will be able to apply for a business exemption certificate that covers themselves as well as wholly owned subsidiary vehicles (possibly, a business exemption certificate could cover other controlled entities but the FIRB position on this point is not yet settled). The new process will also likely suit those fund investors who may not have identified a specific target when they seek approval but intend to make a series of investments in sectors or industries that are typically not considered sensitive from a national interest point of view.
Business exemption certificates will not be available for acquisitions in prescribed sensitive sectors. Those sectors are currently media, telecommunications, transport, military and defence related activities, encryption and security technologies, the extraction of uranium or plutonium and the operation of nuclear facilities.
How will applications be assessed?
Each application will be assessed on a case-by-case basis. Whether or not a proposed programme of investment is suitable for pre-approval under an exemption certificate will depend on the facts of each case. The particular combination of investor type, the nature and scale of the proposed investment (including a target business or industry) and the duration of the certificate sought will determine whether the proposed investment activity is appropriate for a business acquisition certificate, and the scope of any conditions which might attach to any approval.
Similar to all FIRB applications, each application will be assessed against a national interest test. This will account for factors such as the character of the investor and the nature of its Australian business, the purpose and scope of the proposed acquisitions, the applicant's acquisitions history and compliance standing (for example, meeting reporting requirements and complying with existing conditions) as well as any national security risks.
The following are some examples provided by FIRB of situations where the grant of a business exemption certificate is unlikely:
the programme of proposed acquisitions is not well defined by the applicant and the scope is very broad;
national interest factors cannot be adequately assessed at the time of application;
the programme of investment is not considered to be 'low risk' or 'low sensitivity'. That is, even outside of the prescribed sensitive sectors, there will be investments that the Government will prefer to continue to review individually without pre-approval. For example, some health sector or hi-tech investments, as well as agribusiness, may be regarded as too sensitive for pre-approval; or
the potential tax risks cannot be adequately assessed at the time of the application.
It is unlikely that a business exemption certificate will be granted to first time investors in Australia. The character of the investor is a key criterion in applying the national interest test, and this includes assessing the investor's track record in complying with Australian laws (e.g. tax and company laws as well as the foreign investment framework).
As with all FIRB applications, FIRB will consult relevant Government agencies and bodies when assessing whether to issue a business exemption certificate (eg. the ACCC). Where there are potential issues with other agencies this will likely impact timing for the issue of the requested certificate.
Filing fee considerations
The fee for exemption certificates has (unsurprisingly) been increased to $35,000. An assessment will need to be made as to whether it is more cost and time effective to individually notify FIRB of small acquisitions (with a $2,000 filing fee plus legal costs for acquisitions up to $10 million) or obtain an exemption certificate. High volume acquisitions will certainly benefit from the change, despite the fee increase.
How useful will be business exemption certificates be in practice?
The usefulness of a business exemption certificate will depend on a number of factors including the flexibility of the regime, FIRB's ability to process applications in a timely and sensible manner and the conditions which attach to certificates. We expect that similar to other types of exemption certificates, negotiations with FIRB will take time and patience, and applicants will benefit from having some 'runs on the board' with FIRB from previous investments. We also anticipate that certificates will prove most useful for private equity sponsors looking to undertake smaller non-sensitive acquisitions (either as new investments or as part of a "bolt on" strategy for one or more of their portfolio companies). Over time, as FIRB settles its approach to granting business exemption certificates we expect their utility should increase and cost and time savings should flow to applicants.