Key points
- FIRB has recently approved investments by Chinese state owned entities in two prominent Australian resources companies, OZ Minerals and Fortescue.
- The approvals were granted on a conditional basis. The state owned entities were required to provide undertakings directed at, in the case of OZ Minerals, ensuring the Australian businesses acquired are operated in accordance with commercial objectives and that pricing of output is on arm’s length terms and, in the case of Fortescue, managing conflicts arising from appointments to the Fortescue board.
- These approvals demonstrate FIRB’s willingness to use undertakings to manage any specific national interest concerns arising from a proposal, while ensuring Australia continues to benefit from foreign investment.
|
Recent falls in commodity prices and the resulting decline in valuations of Australian based resource companies has coincided with increasing investment in the sector by Chinese state owned entities. This topic, and the Foreign Investment Review Board’s handling of it, has received significant media attention recently. In the past few months the Treasurer has considered a number of Chinese investments under the Foreign Acquisitions and Takeovers Act 1975 (Cth) and the principles guiding foreign government investment in Australia (released in February 2008).
The Treasurer has provided conditional approval for acquisitions by Chinese state owned entities of a significant part of the assets of OZ Minerals Limited and for an equity investment in Fortescue Metals Group.
Minmetals’ acquisition of OZ Minerals
In February 2009, China Minmetals Non-ferrous Metals Co. Ltd (Minmetals) entered an agreement with OZ Minerals under which Minmetals proposed to acquire OZ Minerals through a scheme of arrangement. On 27 February 2009, the Treasurer announced that he would not approve the acquisition due to concerns over Australia’s national security interest associated with Prominent Hill, which is located within the Woomera Prohibited Area.
Minmetals then revised its proposal so that it would acquire all of OZ Minerals’ assets other than Prominent Hill and certain other assets. On 23 April 2009, the Treasurer approved Minmetals’ assets acquisition proposal, conditional on Minmetals providing legally enforceable undertakings.1
In summary, the undertakings required Minmetals to:
- operate the mines as a separate business with commercial objectives, using Australian companies headquartered and managed locally
- ensure pricing occurs on an arm’s-length basis and in line with market practice, by a sales team headquartered in Australia
- maintain or increase production and employment at the Century, Rosebery and Golden Grove mines, pursue growth in Century and Rosebery mines, reopen the Avebury mine in Tasmania and develop Dugald River, subject to economic conditions
- comply with Australian industrial relations laws and honour employee entitlements, and
- maintain and increase levels of Indigenous employment in its local operations and honour agreements with Indigenous Australian communities.
Hunan Valin’s investment in Fortescue
At around the time the initial proposal by Minmetals in respect of OZ Minerals was blocked on national interest grounds, the Treasurer gave conditional approval to the proposed acquisition of 17.55 per cent of Fortescue by Hunan Valin Iron and Steel Group.
Hunan Valin was required to give undertakings that:
- any person nominated by Hunan Valin to Fortescue’s board will comply with Fortescue’s directors code of conduct, as well as submit a standing notice of their potential conflict of interest relating to Fortescue’s marketing, sales, customer profiles, price setting and cost structures for pricing and shipping, and
- Hunan Valin, and any person nominated by it to Fortescue’s board, will comply with the information segregation arrangements agreed between Fortescue and Hunan Valin.
According to the Treasurer, these conditions guaranteed the separation of Fortescue’s commercial operations and customer interests (whilst supporting the market-based development of Australia’s resources), in order that the directors of Hunan Valin appointed to Fortescue’s board could not use pricing information against the company in iron ore contract negotiations.
Reportedly, the conditional approval provided to Hunan Valin caused officials of China’s National Development and Reform Commission, which provides approvals for outbound investment by Chinese state owned enterprises, to worry that the undertakings required would set an unfavourable precedent that may impede other Chinese investments. The Chinese media reported that the NDRC would not approve the deal amid concerns that FIRB had imposed overly onerous conditions. However, NDRC approval was eventually provided three weeks after FIRB’s conditional approval was given.
Future policy direction
These conditional approvals show that the FIRB policy guidelines, in particular with respect to Australia’s national interest and security and the commercial operation of state owned entities operating in Australia, will be strictly applied.
However, FIRB’s decisions demonstrate that the government considers that undertakings from state owned entities can be used as a mechanism to ensure that investment by them occurs in a manner that is in Australia’s national interest and that they operate in a commercial manner, while at the same time ensuring that Australia continues to benefit from foreign investment.
In addition, the use of undertakings and the fact that the Treasurer approved an amended proposal from Minmetals to overcome the national security issues associated with Minmetals’ original proposal indicates FIRB may be willing to work with applicants in order to overcome any concerns FIRB may have.
This article was written by Paul Branston, Senior Associate and Rory Maguire, Solicitor, Melbourne.
Endnotes
1. Freehills is acting for OZ Minerals in relation to the acquisition by Minmetals.
More information
For information regarding possible implications for your business, contact a member of the Mergers & Acquisitions team.