As a nation with abundant natural resources but a relatively small population, Australia looks to foreign investment to underpin its economic growth.
There is a renewed focus on reducing barriers to foreign investment - particularly from China. Austrade Hong Kong's Dan Tebbutt, Deputy Consul General and Senior Trade Commissioner, presented a useful summary of Australia's growing investment connections with China at our joint seminar in Hong Kong on 15 January 2014.
However, there remain a number of challenges about which foreign investors are likely to need counsel and assistance. First among these, the subject of this background briefing, is Australia's foreign investment screening processes.
Business Acquisitions
Australia screens certain foreign investment proposals on a case-by-case basis to determine if they are in the national interest. The process generally is governed by:
• Foreign Acquisitions and Takeovers Acts 1975 (Cth) (FATA),
• Foreign Acquisitions and Takeovers Regulations 1989, and
• Commonwealth Treasurer's policy statements on foreign investment.
Under the FATA, the Treasurer (currently Joe Hockey MP) can examine foreign investment proposals that would result in a foreign person or corporation controlling or acquiring an Australian company. The presumption is that foreign investment will be permitted.
The Treasurer may:
• reject a proposal if it is considered contrary to the 'national interest',[1] or
• impose conditions on the investment proposal which are considered necessary to ameliorate national interest concerns.[2]
Although the Treasurer has significant discretion, successive Treasurers from both sides of politics have exercised considerable restraint when exercising their powers under FATA.
Rejections of investment proposals tend to be subject to extensive scrutiny in the media, which potentially guards against arbitrary decision-making.
Whilst ultimate decision-making power rests with the Treasurer, the Foreign Investment Review Board (FIRB), a non-statutory body, administers the process and makes recommendations to the Treasurer. Investors need to notify FIRB of a proposal, and be advised of the outcome of the review, prior to any transaction being made.[3]
Whether an investor needs to notify FIRB of their investment proposal will depend on the identity of the investor, and the size and nature of their investment. The screening system is less stringent for private investors, who do not need to notify FIRB of proposals unless: they are to acquire more than 15 per cent of, or gain control of, an Australia business valued above $248 million.[4] It is unnecessary to gain approval to start a new business.
By contrast, foreign government investors need to apply to FIRB for most investment proposals. Foreign government investors include entities in which a foreign government (or its agencies) have an interest of 15 per cent or more. This relevantly will include Chinese State-Owned Enterprises (SOEs).
A foreign government investor must notify FIRB of any proposal to:
• acquire an interest greater than 10 per cent in a business, irrespective of the value of that business;
• acquire a strategic stake in the target (for example, through special voting rights, the ability to appoint directors, etc); or
• start a new business.
There are also special restrictions that apply to ‘sensitive’ sectors of the economy, including:
• land (discussed in more detail below)
• media
• telecommunications
• transport
• supply of goods or services to the Australian Defence Forces
• manufacture of goods or services able to be used for military purposes.[5]
Legislation other than FATA may be relevant to some industries.[6] For example, when Singapore Exchange Ltd (SGX) proposed to acquire a substantial interest in the Australian Stock Exchange (ASX) in 2011, the Corporations Act 2001 (Cth) was engaged in addition to FATA.[7]
In addition, the Australian government may impose ad hoc policy restrictions on some foreign business interests in Australia in sensitive industries. In 2012, the Australian government preventing Chinese telecommunications company Huawei Technologies from tendering to be a supplier in the rollout of Australia's National Broadband Network (NBN) following advice from the Australian Security Intelligence Organisation (ASIO).
FIRB will assess proposals to determine if they are consistent with Australia’s ‘national interest’. National interest is not defined in FATA, and the Australian government has emphasised that it is a test to be applied on a case-by-case basis. When the definition of national interest has been challenged in Australian courts (in relation to other legislation using the phrase ‘national interest’, it has been consistently reiterated that the decision as to whether something is in the national interest is a matter for the relevant minister. (See Cathay Pacific Airways Ltd v Assistant Treasurer [2010] FCA 510 @BarnetJade). A minister’s decision, however, may be challenged on administrative law grounds, such as denial of procedural fairness or natural justice.
The Statement on Australia’s Foreign Investment Policy describes the national interest test as a balancing of ‘potential sensitivities against the benefits of foreign investment.’ As guidance, the Policy Statement lists the following as factors that will be considered:
• national security,
• competition (with a preference for ‘diversity of ownership within Australian industries and sectors’);
• impact on other Australian government policies (including tax);
• impact on the economy and the community (with consideration given to ‘the interests of employees, creditors and other stakeholders’, and ensuring ‘a fair return for the Australian people’); and
• character of the investor (with consideration to ‘the extent to which the investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision’).
The policy indicates further factors that will be considered when foreign government investors (including Chinese SOEs) submit proposals for review. The national interest test:
'recognises the importance of Australia's market-based system, where companies are responsive to shareholders and where investment and sales decisions are driven by market forces rather than external strategic or non-commercial considerations'.
FIRB will consider:
• whether the governance arrangements could facilitate control by a foreign government;
• whether the investors are operating on a fully arm's length and commercial basis;
• the size, nature and composition of non-government interests (where a investor is not wholly government owned).
However, mitigating factors that assist in determining that proposals by foreign government investors are not contrary to the national interest include:
• the existence of external partners or shareholders governance arrangements
• arrangements to prevent non-commercial dealings listing of the target on the ASX or other exchange.
Conditions Imposed by Treasurer
As noted above, the Treasurer can impose conditions upon the approval of investment proposals. For example, on 20 December 2013, Treasurer Joe Hockey approved the application from State Grid Corporation of China, a state-owned enterprise, to acquire 19.9 per cent of SP AusNet and 60 per cent of SPI (Australia) Assets Pty Ltd and SPI (Australia) Trust (trading as Jemena) on the condition that at least 50 per cent of members appointed by State Grid to the board of both AusNetand Jemena are Australian citizens ordinarily resident in Australia. [14]
Some approvals have been subject to more extensive undertakings;
• In August 2012, the acquisition of 80 per cent of Cubbie Group Ltd by Chinese and Japanese company Shandong RuYi Scientific and Technology Group Co Ltd, in consortium with Australian company Lempriere Pty Ltd who acquired the remaining 20 per cent interest, was subject to undertakings including that RuYi: sell down their interest from 80 per cent to 51 percent within 3 years, with propositional board representation; offer employment to all existing Cubbie Group employees; have Cubbie Group managed and operated by a subsidiary of Lempriere; and comply with conditions on the composition of the board.
• In September 2009, the China Nonferrous Metal Mining group withdrew its bid for Lynas Corporation Ltd, citing onerous conditions imposed by FIRB including a reduction in proposed ownership to below 50 per cent and a corresponding minority representation on Lynas' board.
Recently, the Treasurer varied previously imposed restrictions on an investment. In announcing the lifting of restrictions (enabling Yanzhou to keep its stake in Yancoal at 78% rather than further reducing it to 70% as required by the 2009 conditions), Mr Hockey also said he was open to Yanzhou - which is owned by the Chinese govenrment - taking a 100% stake, noting that the government has "no in-principle objection to 100 percent foreign ownership of Australian companies where it is not contrary to the national interest" . He affirmed that he was "open to any such proposals from Yanzhou in the future". He also overturned a 50% cap on Yanzhou's interest in Yancaol's former Felix Resources coal mining asset and a 70% ceiling on the Syntech Resources and Premier Coal Mines. The Treasurer explained these decisions were justified at a time of slowing demand, declining coal prices and a number of mine closures.
Evaluation of the FIRB Process
The Australian foreign investment screening process has been subject to some criticism. From the perspective of foreign investors, the FIRB process adds to investment risk. There is a perception that the outcome of the review process is insufficiently predictable, given the vague and undefined notion of 'national interest' and the fact that the Treasurer possesses ultimate discretion over the outcome.
The Financial Services Institute of Australia (FINSIA), for example, recently criticised the 'laundry list of unlegislated policy considerations that are poorly defined or far removed from genuinely vital national interests' that FIRB considers, combined with the fact that conditions placed on undertakings have come to serve as an indirect arm of Australian domestic policy.
This can be particularly frustrating for Chinese investors, given that their own system for screening foreign investment, while restrictive in particular sectors, relies on detailed, clearly defined and written guidelines, rather than ministerial discretion.[8]
The concerns over the process are compounded by the fact that there is no requirement to publish the recommendations provided by FIRB to the Treasurer, and that the procedure can take up to 90 days. (However, a Minister will ordinarily issue a media release upon making a foreign investment decision.)
These perceptions are fuelled by high-profile instances of transactions which have collapsed or been blocked in part because of the FIRB screening process.
One example is the collapse in 2009 of Chinalco's bid of $19.5 billion to acquire an 18 per cent interest in Rio Tinto. A factor contributing to Rio Tinto's withdrawal from the deal was the order issued by FIRB extending the length of the review process by 90 days.[9] (It is important also to acknowledge, however, that commercial considerations played an important, if not determinative, role in Rio Tinto's decision to walk away from the deal.)
More recently, the decision to reject US company Archer Daniels Midland's (ADM) $3.4 billion bid for the takeover of GrainCorp, Australia's largest grain handler, has prompted criticism that the screening process is too restrictive. This decision was the first rejection of a foreign investment proposal under the newly-elected Abbott government. Treasurer Hockey noted concerns that there would be less competition in the industry, and impeded access to grain storage and distribution network for smaller Australian grain producers (although the takeover had been approved by the Australian Competition and Consumer Commission (ACCC)).
Need for a Reality Check?
The perception that FIRB contributes significantly to investment risk or is a stringent process is not borne out in reality. As the FIRB Annual Report 2011-12 indicates:
• Rejections of an investment process are extremely rare.
• Of the 11,420 applications received by FIRB in the 2011-12 period, only 13 proposals were rejected, all of which related to real estate.[10]
• $51.7bn of proposed investment in mineral exploration and development was approved, with no rejections.
• 5,803 applications were approved subject to conditions, but all but one of these applications related to real estate purchases[11]
• Over 95 per cent of proposals were decided within 30 days, with the primary cause of delays being that insufficient information about the proposals was provided by the parties.
The flexible nature of Australia's foreign investment screening process could be viewed as an opportunity for investors. Rather than being constricted by a prescriptive or over-regulated regime, the case-by-case process may be seen to allow significant opportunity for investors to negotiate and restructure their investments to meet the national interest test. (This highlights the advantages to investors of consulting with an Australian legal practitioner who is familiar with the process and the aware of local considerations likely to impact the Treasurer's decision, throughout the process of structuring proposed investment.)
Real Estate
The foreign investment screening process governed by FATA also applies when foreign investors choose to invest in Australia by purchasing real estate. The same procedure applies as described above. However, there are different thresholds for when investors must notify FIRB of their proposed investment, which vary according to whether the land is residential, commercial or rural.
Residential Land
In the area of residential property development, Australia is currently facing a huge shortage of dwelling construction, and this has resulted in pressure on the housing sector and significant opportunities for residential property development.
The Australia's foreign investment policy is directed to increasing Australia’s housing stock. Most foreign persons cannot buy established residential dwellings (i.e. second hand housing), but rather must purchase new dwellings or vacant land (with an intention to build) in Australia.
There are some exceptions to this position, including that:
• temporary residents may buy established dwellings to use as their residence in Australia;
• non-residents that operate business in Australia may apply to buy established dwellings for their Australian based staff;
• foreign persons can buy established dwellings for the purpose of redevelopment that will increase Australia’s housing stock.
All investors, whether foreign government owned or private, need to notify FIRB of a proposal to take an interest residential real estate, regardless of the value of the investment.
There is great investment potential in the residential real estate industry.
• In December 2013 Chinese investor Greenland Holding Group Co. opened sales to a new building development in Sydney’s central business district, and at open sold 241 of 250 apartments, amounting to over $275 million of sales. Greenland has indicated that they will expanding their construction operations in Australia.
• Lend Lease Group sold all 159 waterfront apartments in their Barangaroo development within 3.5 hours of release, including the sale of a $10.5 million penthouse.
Commercial Land
Unlike residential land, there are few restrictions on whether foreign investors are able to purchase commercial land. Commercial land is land which is not used for residential purposes and is not rural land. This includes:
• offices
• factories
• warehouses
• hotels
• shops
• mining operations.
However, there are still requirements to notify FIRB in some circumstances. Foreign government investors need to notify FIRB of any proposal to acquire an interest in Australian commercial land.
By contrast, private investors need to notify FIRB when acquiring:
• vacant commercial lands – such purchases are normally approved subject to conditions that the foreign investor develop the land;
• developed commercial property valued at over $54 million dollars; and
• an interest in prospecting, exploration, mining or production tenements (in some circumstances).
Rural Land
In agriculture, there are longer-term opportunities to secure food and water assets as well as to expand exports of processed food to China as the tastes of the emerging middle Chinese middle class demand more variety and more protein based foodstuffs.
All foreign government investors are required to notify FIRB and receive approval before acquiring an interest in rural land. Rural land is land used wholly or exclusively for carrying on a business of primary production, being:
• animal husbandry
• farming
• horticulture
• fishing
• forestry
• viticulture
• dairy farming.
Foreign persons only need approval where the total assets of the business exceed $248 million.
At present, Chinese investment in agricultural comprises only 3 per cent of total Chinese investment in Australia.[12] However there are longer-term opportunities to invest in Australia as a means of maintaining food security in China, and catering to the emerging tastes of the Chinese middle class.
Changes are expected in 2014 in relation to investment in rural land and agribusiness. When Abbott’s new coalition government was elected, it announced its intention to increase scrutiny of foreign ownership of Australian rural land. The current basis for the proposed changes is the Senate’s Rural and Regional Affairs and Transport References Committee Report on Australia’s foreign investment framework in June 2013. That report recommended: a
• serious reduction of the monetary threshold for FIRB scrutiny of investment in agricultural land from $248 million to $15 million; and
• FIRB approval be required when a foreign investor had cumulative purchases of agricultural land amounting to $15 million.
The Government has also indicated that it will introduce a register of agricultural land interests to monitor ownership of rural land, with no minimum threshold for reporting on the register.
20 January 2014
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This blog does not constitute personal legal advice. My thanks to my research assistants, Kathleen Heath and Hannah Ryan, for their assistance in preparation of this background briefing.
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Endnotes
[1] Sections 18, 19, 20, 21, 21A.
[4] A new monetary level is announced in January.
[6] See, for example, Banking Act 1959 (Cth); Financial Sector (Shareholdings) Act 1998 (Cth); Qantas Sale Act 1992 (Cth) s 7; Airports Act 1996 (Cth) s 40; Telstra Corporation Act 1991 (Cth) s 8BG.
[7] The Corporations Act limits ownership by a person in the ASX to 15 per cent unless a regulation is passed to permit a person to hold a higher interest: Corporations Act 2001, s 850B
[8] Vivienne Bath, “Foreign Investment, the National Interest and National Security – Foreign Direct Investment in Australia and China” (2012) 34(5) Sydney Law Review5, 5; Professor Zha Daojiong, “Chinese FDI in Australia: drivers and perceptions” (Speech delivered at the Lowy Institute for International Policy, Sydney, 24 July 2013), 16.
[9] FINSIA, “The Finsia Foreign Investment Roundtable: Information Brief”, 15 November 2012.
[10] There were also 534 withdrawals of applications. However, this number is artificially high because withdrawals were often the result of investors in real estate submitting concurrent applications for all properties which they wished to bid at auction, business proposals that were withdrawn and subsequently resubmitted after amendment, or investment proposals withdrawn for independent commercial reasons.
[11] ‘Real estate conditions ordinarily imposed at that time include those relating to the period during which development must commence, requiring temporary residents to reside in and then sell established dwellings when they cease to reside in them, and reporting requirements.’
[12] As of 2012: KPMG and The University of Sydney China Studies Centre, Demystifying Chinese Investment in Australia (update October 2013), 1.