Recent FIRB developments

The Foreign Investment Review Board’s approach to regulating foreign investment in Australia continues to develop rapidly. As discussed in our September M&A Newsletter, a number of amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) were introduced into Parliament in August with the aim of broadening the operation of FATA to acquisitions through equity-like instruments, such as convertible bonds. The relevant Bill is currently going through the legislative process.

Separately, on 22 September 2009, the Foreign Acquisitions and Takeovers Regulations 1989 were amended to increase the monetary threshold applying to foreign investment in Australia from $100 million to $219 million. The effect of the increased thresholds is that investments valuing the target company at less than the new thresholds are exempt from notification to FIRB and the screening process.

More recently:

• a senior FIRB official has made public statements providing further insight into FIRB’s decision making process, and
• FIRB has made a number of important decisions regarding proposed acquisitions by Chinese state-owned entities that illustrate how FIRB applies its policy in practice.

These developments are of particular interest to potential foreign acquirers of Australian resources assets.

Informal guidance for foreign investment in Australia’s resources sector

In late September 2009, FIRB director Patrick Colmer publicly discussed guidelines for foreign investment in the Australian resources sector. Mr Colmer was speaking to the Australia China Business Council in Sydney and his comments provided a rare insight from a senior FIRB official.

It was reported in the press that Mr Colmer indicated that the government’s preference was for investments in major Australian resource companies to be less than 15 per cent of their capital, for investment in greenfields projects to be below 50 per cent and for the Australian companies to remain listed.

Mr Colmer also highlighted FIRB’s willingness to work with foreign investors in the early stages of their proposal and encouraged foreign investors to hold discussions with FIRB prior to a transaction being announced.

FIRB’s published policy documents do not refer expressly to the informal guidelines discussed by Mr Colmer. Despite the media attention on Mr Colmer’s comments, FIRB’s level of support for them remains somewhat unclear as FIRB has not made a transcript of his speech available and has not overtly adopted his comments.

The guidelines discussed by Mr Colmer raise a number of issues for foreign companies considering acquisitions in the Australian resources sector:

• they would appear to essentially rule out foreign ownership of major Australian resources companies by a single foreign investor (noting that a number of Australian resources companies already have foreign dominated registers), though it is understood the comments were directed at state-owned enterprises
• what is a ‘major’ Australian resources company? BHP Billiton and Rio Tinto are obvious examples, but where is the line drawn?
• would a state-owned foreign investor be prepared to hold less than 15 per cent of a major Australian resources company, effectively limiting them to being a passive equity investor? Can a stake of that level provide the level of control a foreign investor requires to justify its investment? and
• how can a foreign acquirer structure their acquisition so that the Australian company remains listed? Would the acquisition of a diversified mining company be permitted if the acquirer undertook to spin-off certain divisions and list them within a specified period after the acquisition?

Recent FIRB decisions involving proposed acquisitions by Chinese state-owned entities

The Australian Government’s scrutiny of Chinese investments in the Australian resources sector has continued in recent months, with two proposed Chinese investments being blocked and one proposal being approved subject to conditions.

Lynas decision

In September, China Nonferrous Metal Mining Co abandoned a $500 million financing transaction with local rare earths company Lynas Corporation because FIRB required China Nonferrous to limit its proposed shareholding in Lynas to less than 50 per cent.

The Lynas decision is interesting because:

• it is a further example of FIRB using conditional approvals in proposals involving Chinese state-owned entities. We discussed other examples in our May 2009 newsletter
• the condition that China Nonferrous acquire less than 50 per cent of Lynas imposed by FIRB is consistent with the public statements of Mr Colmer discussed above, and
• it goes some way to explaining what FIRB will consider to be a significant enough acquisition of an interest in a greenfields development, such that the 50 per cent limit referred to by Mr Colmer should apply. An alternative explanation is that FIRB saw the acquisition as significant not because of its size, but because approval of the acquisition would increase China’s already dominant market position as a producer of rare earths.

Western Plains decision

Also in September, the Australian Defence Department stated that it would not support the proposed joint venture between Wugang Australian Resources Investment Pty Ltd, a subsidiary of China’s Wuhan Iron and Steel (Group) Co and Western Plains Resources Ltd. The Department’s reasoning was that the Hawks Nest magnetite project, in which Wugang was to take a 50 per cent stake, was within the Woomera Prohibited Area.

The Western Plains decision has obvious parallels with the Treasurer’s rejection in March 2009 of China’s Minmetals’ proposed acquisition of OZ Minerals. The Western Plains decision reinforces that state-owned entities are unlikely to be permitted to acquire assets that are located in an area which is significant to Australia’s national security.

It also provides an illustration of FIRB’s decision making process in action. The Department of Defence’s rejection came prior to a FIRB application being submitted by Wugang, following FIRB’s suggestions that Wugang would need to secure Department of Defence approval. FIRB consults with a number of government agencies, including the Department of Defence and the Australian Competition and Consumer Commission, prior to granting its approval.

Felix Resources decision

On 23 October 2009, Assistant Treasurer Nick Sherry approved Yanzhou Coal Mining Company Limited’s $3.5 billion takeover bid for Felix Resources Limited.

The acquisition is subject to a number of undertakings including Yanzhou:

• operating its Australian mines through an Australian incorporated and headquartered company (Yancoal Australia) which has a predominantly Australian management and sales team, and
• listing Yancoal Australia on the ASX and reducing Yanzhou’s holding to less than 70 per cent by the end of 2012.

Additionally, the approval requires that Yanzhou’s economic ownership of the existing underlying assets must be at or below 50 per cent following the listing of Yancoal Australia (taking into account that many of the mines operated by Felix are owned through joint ventures).

The Felix Resources decision could be viewed as demonstrating FIRB’s preference, as stated by Mr Colmer, for Australian companies that are acquired by state-owned foreign entities to remain listed. This allows the ongoing participation of the Australian investing public in Australian resources and ensures that the state-owned entities are subject to the corporate governance standards required of listed entities.

Senator Sherry’s office has since rejected comments that the Yanzhou decision could serve as a precedent for future state-owned foreign investment, stating that it ‘should only be read as a decision on the case at hand’. It has been reported in the press that the government’s approval of the acquisition was on the basis that Felix’s major product, thermal coal, is not considered to be as strategically important as iron ore.

Conclusion

The government’s approach to these recent investment proposals by state-owned entities suggests that although there is a developing body of decisions in this area, those decisions do not amount to precedent or to a clear-stated policy. The government will consider
acquisitions by state-owned entities on a case-by-case basis.

FIRB provides only brief commentary on investment proposals by state-owned entities in its policy documents and that commentary is primarily directed at the additional disclosures that must be made in that case.

FIRB’s handling of proposals by state-owned entities is evolving and its current approach leaves room for FIRB to provide additional formal policy guidance at some point in the future.

This article was written by Andrew Pike, Partner, Sydney and Paul Branston, Senior Associate, Melbourne.

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