Key points:
- The Federal Treasurer recently announced that the Commonwealth Government would be seeking urgent amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) to deal with the growing use of more complex investment structures for foreign investments into Australia.
- Proposals to acquire strategic or controlling interests in distressed Australian assets and enterprises are shaping as somewhat of a litmus test for the new government’s approach to investment proposals by foreign state-owned enterprises.
- Defining the ‘national interest’ and ensuring appropriate mechanisms are in place to protect it (including the use of conditions attaching to foreign investment approvals) remains a delicate balancing act.
The Federal Treasurer, Mr Wayne Swan, recently announced that the Commonwealth Government would be seeking urgent amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act) to deal with the growing use of more complex investment structures for foreign investments into Australia. While the proposed amendments are intended to clarify the existing provisions (insofar as they relate to the use of convertible notes and similar debt instruments) rather than substantially amend them, the timing of these amendments has led some commentators to speculate that it signifies a change in the government’s approach to the review of foreign investment in Australia’s mining and resources industry.
Speculation of a change in the government’s approach to its review and assessment of foreign investment is largely driven by expectations that lower commodity prices and deflated asset and share values will see a rise in the number of opportunistic acquisitions in Australia’s mining industry, particular by foreign state-owned enterprises. Already in 2009 we have witnessed two high-profile proposals by foreign state-owned enterprises to acquire strategic or controlling interests in distressed Australian assets and enterprises (refer to the China Minmetals/Oz Minerals and Chinalco/Rio Tinto proposals). Suggestions are that more will emerge throughout the year as cash-strapped miners look offshore for injections of capital.
The proposed deal between Rio Tinto and Chinalco to allow Chinalco to increase its stake in Rio to 18 per cent has generated enormous political and media interest. The assessment of this proposal by FIRB is shaping as somewhat of a litmus test for the new government’s approach to investment proposals by foreign governments and their agencies.
It is important to note that under Australia’s foreign investment laws, decisions are made by reference to the ‘national interest’ test. This concept is not defined in the relevant legislation and its meaning is not clearly understood.
The Summary of Australia’s Foreign Investment Policy (April 2008) provides that ‘the Government determines what is ‘contrary to the national interest’ by having regard to the widely held community concerns of Australians.’ In addition, the Foreign Investment Review Board—Annual Report 2006–2007 states that a proposal would be considered contrary to the national interest if it was inconsistent with:
- existing government policy and law
- national security interests, and
- economic development.
It is arguably the last of these concerns thatwill be at the forefront of the Treasurer’s deliberations given the acute and parochial concerns being raised regarding the preservation of Australia’s abundant mineral resources. The task of the Treasurer will be to weigh these concerns against the economic realties of today, where cash is king and, in the case of a growing number of mining companies in Australia, finding enough of it to pay down debt is key to their survival.
Another key aspect of FIRB’s assessment of the proposals currently before it will be the extent of any conditions imposed on the acquisitions. Many readers will recall the Federal Government’s controversial decision in 2001 prohibiting Shell from acquiring a substantial shareholding in Woodside. In making the decision to refuse to allow the acquisition to proceed the Treasurer, Mr Peter Costello, rejected recommendations from FIRB that enforceable conditions could be placed on the acquisition which would serve to protect Australia’s national interest in the ongoing operation of the North West Shelf gas project.
While the Shell proposal is in many respects quite unlike those currently before FIRB, it is expected that similar concerns regarding the need for, and nature of, any conditions attaching to foreign investment approvals will again be raised. Whether the government decides to impose such conditions and, if so, the nature and extent of such conditions, remains to be seen.
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