This article was written by Malcolm Brennan and Intan Eow.
The Foreign Investment Regime continues to be the centre of attention. The reform package is currently before the Federal Parliament and is expected to commence 1 December. The package is very much about the Good, the Bad and the Ugly.
A lot of the publicity has been about strengthening the regime with fees and penalties, however, the reform package does provide a range of practical benefits and delivers some fixes to longstanding issues.
Most welcome is the increase in the substantial interest threshold from 15% to 20% across the board. The definitions of foreign person and foreign government investor are impacted with the result that fewer entities will be captured by the regime. The change in the substantial interest threshold sensibly (and finally) matches up with the Corporations Act takeovers threshold.
The accidental foreigner fix will be deployed which will resolve the difficulties faced by otherwise Australian entities being caught by the regime as foreign persons. When ascertaining if they meet the aggregate 40% foreign person threshold, Australian listed entities will be able to disregard interests held by less than 5% holders (unassociated). This will remove the burden of the regime from several Australian entities.
A pro rata exception for interests in trusts will be introduced to match the pro rata exception that has always been available for corporations. The draft regulations need some work in this regard, but the intent is welcome.
An underwriter’s exemption will also be available on application, which is a sensible reduction in red tape that will assist underwritten proposals.
One area that has been a source of great confusion for foreign investors has been the way in which Australia’s Foreign Investment Policy has operated in addition to the legislation. The Policy requirements will now be brought into the Foreign Acquisitions and Takeovers Act 1975 and the regulations.
The current frustrating and confusing process of withdrawal and lodgement of fresh notices engaged in when a decision appears unlikely to issue in the 30 day statutory time frame will become a thing of the past. A more sensible approach will be undertaken under the new regime with a negotiated timeframe to be set with the FIRB officers.
It appears that a range of exemption certificates will also be available from 1 December 2015 and will provide broader flexibility for multiple transactions over varying periods.
Whilst there are some real positives in the package, there are some failures.
The ongoing sensitivity to foreign government investment in the agricultural sector has resulted in a difficult approach to ascertaining whether an acquisition is notifiable.
Whilst the general substantial interest threshold goes to 20%, the proportionate threshold for agribusiness investment drops to 10% (and lower in some cases e.g. where there is control or influence). The Government is giving foreign persons that invest in agribusiness the same sensitivity as that given to foreign government investors. This is difficult to justify when the Government has been very keen to attract investment to the sector.
Whilst there is finally a definition of “agribusiness”, an operation need only have 25% of its assets or earnings before interest and tax made up of primary production activities (defined with respect to the Australian and New Zealand Industrial Classification Codes) to be an agribusiness. There will be practical difficulties when ascertaining whether this threshold is met – most businesses do not report such a break up of activities. With agribusiness having a lower threshold (currently $55 million) and with the higher penalties for non-compliance, investors will need to be careful when making acquisitions in targets that have agri sector connections.
A surprising change in the legislation that has not been addressed satisfactorily in the regulations is the association of foreign government investors from a single country. Whilst the regulations remove associations through limited partnerships, there is no change to the requirement under the Act that foreign government investors will be regarded as associated if they are from the same country. This will be particularly difficult for investors in listed entities that will have no knowledge of interests held by others. As foreign government investors have a 10% threshold it will unfortunately be all too easy for them to unwittingly breach the notification requirements of the Act.
The deemed association applies not only to wholly state owned enterprises but also to entities in which only a 20% interest is held by a foreign government investor. Whilst FIRB may assess proposals on the basis that foreign government investors from the same country are associated, it is a very different proposition to now require applications be lodged on the basis of an association. This could potentially have a chilling effect on otherwise good investment in to Australia. (We are issuing a separate alert discussing this important change and its potential impact.)
The ugly of course are the fees that must be paid from 1 December 2015. No surprises here, as these have been foreshadowed for some time. Whilst there have been calls for fees to be limited to residential property applications, fees will be introduced across the board including for business applications, ranging from $5,000 to $100,000. The fee for most commercial deals will be $25,000. Investors will need to be mindful, particularly in competitive bids, that the fee will be required to be paid up front before the FIRB review process commences. The fees will have an impact on the timing for investors going to FIRB.
So far, the regulations have been disappointing in providing relief from fees and at this stage no effective assistance for complex transactions has been proposed. FIRB is expected to produce guidance notes to assist with understanding the fee to be paid on a transaction.
The new Act and its regulations are quite simply ugly. The legislation is overly complex and difficult to navigate. Many provisions use double negatives and are not drafted in a way that make it easier to comprehend the law or the process. The intent was to modernise and clarify the regime, but unfortunately that has not been achieved. The new regulations give some assistance, however, extensive guidance notes will be required to explain the process; a clear indication that what has been developed is too complex.
This is a missed opportunity to make more significant changes to ensure that the regulatory regime incentivises foreign investments. While a lot of effort has been put into the drafting of the new Act, many of the basic concepts have remained the same and have simply been re-named. For example, transactions that are compulsorily notifiable under the existing Act are called notifiable actions under the new Act; transactions that are voluntarily notifiable under the existing Act are called significant actions under the new Act.
In times of fierce competition for foreign capital, Australia must ensure that it remains competitive. The foreign investment regime needs to balance the need for scrutiny with the need for investment. The good changes are welcome, however the bad and ugly changes need to be managed carefully to ensure that foreign investment is not forced to look to other countries.