This article was written by Malcolm Brennan and Alex Elser.
On 29 March 2020, the Australian Treasurer announced significant, but temporary, changes to the foreign investment approval regime in Australia, reducing the monetary threshold for all foreign investment in Australia to zero and extending the processing times for applications.
Most international private equity firms and other financial sponsors have long been classified as government investors for the purposes of the FIRB legislation and, as a result, were already subject to a zero dollar threshold for Australian direct investments. However, the temporary changes do have important implications for financial sponsors.
Here is what you need to know:
1. The changes are not a freeze on foreign investment into Australia
There has been no fundamental change to the general basis on which FIRB considers foreign investment applications. FIRB will be taking into account the same national interest considerations, and consulting with the same government agencies, as they did before the changes. We only expect to see additional FIRB scrutiny if there are significant sales of distressed assets, or first-time applicants who are obviously capitalising on the COVID-19 situation to acquire assets at an undervalue.
2. FIRB is operating on bifurcated timelines
Since the emergence of the COVID-19 situation, FIRB has been reviewing and approving urgent applications by existing investors which are being made to enable equity injections, and thereby sustain portfolio investments through the current economic crisis and preserve business continuity and Australian jobs, on a highly expedited basis. We have successfully obtained such urgent equity funding approvals for some of our financial sponsor clients in as little as 3 days. This pragmatic willingness on the part of FIRB to consider urgent equity funding applications is not impacted by the temporary changes.
3. It will take longer for acquisition-related approvals to be approved - but probably not 6 months
The Australian Government’s 29 March announcement foreshadowed an extension of application processing times to up to 6 months - an ominous-sounding timetable for many financial sponsors. However, 6 months appears unduly pessimistic in the majority of cases.
With the priority being given to urgent applications and an increasing volume of applications resulting from the temporary zero dollar threshold for all foreign investors, it is inevitable that ordinary applications for acquisitions will take longer to be considered by FIRB. But the review of most non-sensitive applications will probably take a lot less than 6 months. Our current expectation is that we will see ordinary acquisition-related applications by financial sponsors who have an existing track record of investment in Australia processed within 3 to 4 months.
Importantly, FIRB also remains willing to consider any genuine commercial imperatives for prioritising the review of an acquisition-related application. Where an acquisition ultimately leads to the preservation of Australian business and jobs, we expect to see FIRB applications being processed in timeframes much closer to those that currently exist.
4. Other aspects of the FIRB regime, including the exemptions, remain unchanged
The only changes to the FIRB regime are the suspension of all previous monetary thresholds and the increase in application processing timeframes. There are existing mechanisms in the FIRB regime which financial sponsors can utilise to facilitate investment, without FIRB approval.
All specific exemptions from the requirement to obtain FIRB approval are still in place and unaffected. The most important exemptions for financial sponsors to be aware of are:
- Pro rata rights issues: A pro rata rights issue in which all shareholders are offered their pro rata ownership percentage of the securities offered does not require FIRB approval.
- Money-lending exemption: An interest acquired by virtue of a security granted solely in connection with debt finance or other money lending also does not require FIRB approval.
The usual proportionate ownership thresholds have also not been impacted. It remains the case that a privately-owned foreign investor acquiring less than 20% in a non-land rich entity (including listed entities), a privately-owned foreign investor acquiring a less than 10% interest in a land rich entity, or a foreign government investor acquiring a portfolio interest of up to 10% in an Australian company, does not need to apply for FIRB approval. This means that financial sponsors who are classified as government investors can acquire non-controlling stakes of up to 10% in ASX-listed companies.
Existing exemption certificates held by financial sponsors or their portfolio companies remain valid.
5. Existing avenues for funding outside of the FIRB regime are available
Unsecured loans - importantly, including those by existing shareholders and loans which are repayable by the issue of shares or other equity securities subject to FIRB approval being granted to the issuance - have never required upfront FIRB approval, and that continues to be the case. This is an important avenue for existing investors to be aware of if an exemption or urgent equity funding application cannot be utilised.
Another structure we have seen adopted in recent weeks to enable a foreign cornerstone investor to participate in a COVID-19 related capital raising by an ASX listed company - and get funds into the hands of the listed company without waiting out the FIRB approval period - is using a warehousing arrangement for the cornerstone investor’s shares.
A word of caution however - expert advice needs to be sought by financial sponsors who are considering more exotic structures in an attempt to side-step the temporary changes. It remains the case that the FIRB legislation considers all convertible securities to have been converted into shares (or the other equity securities into which they are convertible) at the time the convertible security is issued, not when it converts. The result is that the use of convertible securities does not avoid the need for upfront FIRB approval.
6. Signed transactions are not affected
The temporary zero dollar threshold does not apply to any transaction in relation to which a binding and definitive acquisition agreement was signed before 10.30pm on 29 March 2020.
This grandfathering exception does not apply if the parties were only at term sheet stage as at that time or if there are significant amendments to the structure of the transaction after that time (for example, moving from an all cash transaction to a mixture of cash and scrip consideration). Other amendments to existing transaction agreements after that time which do not go to the fundamentals of the transaction will likely not prejudice the transaction’s grandfathered status for the purpose of the temporary FIRB changes, but financial sponsors should seek advice if they have a transaction which falls within that category.