New financial year brings new FIRB policy

Introduction

At the end of June 2010, the Foreign Investment Review Board (FIRB) released its updated foreign investment policy. This is the main policy which explains how the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), a complex piece of legislation, is applied in practice.

The new policy is a substantial rewrite of the September 2009 version of the policy, but the effect of the changes is incremental only. The new policy introduces a set of ‘National Interest Considerations’, clarifies certain aspects of the policy as it relates to foreign government investors and clarifies the treatment of certain mining tenements.

The focus of the changes appears to reflect the fact that since the policy was last updated in September 2009, FIRB has considered a significant number of resources proposals and investments involving foreign governments.

New detailed ‘National Interest Considerations’

The policy now includes five ‘National Interest Considerations’ that FIRB will consider in assessing foreign investment proposals—national security, competition, other Australian Government policies (including tax), impact on the economy and the community, and character of the investor.

The express reference to, and discussion of, the National Interest Considerations is helpful as it gives some definition to the ‘national interest’, a broad and flexible concept. The practical effect of the express inclusion of the National Interest Considerations in the policy is that all foreign persons should now address them in their FIRB applications.

This is a change from the position under the old policy. Previously, the substance of the National Interest Considerations featured in the policy as the six factors in Attachment A. Those factors applied specifically to the consideration of proposals from foreign government investors, and such investors were required to address the factors in their applications. The recasting of these factors as National Interest Considerations broadens their range of application to proposals by all foreign investors, not just those associated with a foreign government.

The new policy also expressly states that FIRB will consider competition issues as part of its examination of investment proposals. This is an interesting development given the Australian Competition and Consumer Commission’s central role in regulating acquisitions based on their competitive effects in Australian markets. We suspect, however, that this consideration is primarily aimed at investments in the mining and resources sector and concerns regarding the effect that these investments might have on global competition for commodities and the pricing of products and materials derived from them.

Clarification of what is a foreign government investor and what is a ‘direct’ investment

The general position applying to investments by foreign governments and their related entities remains the same under the updated policy. That is, all foreign governments and their related entities should notify FIRB and obtain prior approval before making a ‘direct’ investment, ‘regardless of value’.

However, the policy now expressly identifies that ‘foreign governments and their related entities’ include companies or other entities in which foreign governments, their agencies or related entities hold a more than 15% interest or companies or entities that are otherwise controlled by foreign governments, their agencies or related entities. This addition to the policy corresponds with the definition of foreign government investor used in FATA and makes it clear that entities in which a foreign government directly holds 15% or more will be treated as foreign government investors. It also potentially implies that entities in which a foreign government indirectly holds 15% (say, through an interposed entity which holds more than 15% in the acquiring entity) may be considered foreign government investors.

The practical impact of this is that ASX listed entities which have foreign government related investors with strategic or cornerstone investments, or in which sovereign wealth funds hold a significant stake, may be treated as foreign government related entities and therefore require FIRB approval for acquisitions in Australia, regardless of the value of the acquisition. This is particularly relevant for Australian mining companies, which often attract cornerstone investments by state-owned entities and sovereign wealth funds in conjunction with offtake arrangements.

The new policy goes on to clarify what FIRB considers to be a direct investment as opposed to, say, a portfolio investment. In broad terms, FIRB considers that a direct investment has the objective of establishing a lasting interest in, and a strategic long-term relationship with, the target enterprise.

The policy provides a rule of thumb that investments of less than 10% are not generally considered direct investment. However, it goes on to say an investment of less than 10% may be considered a direct investment where the foreign government investor can use it to influence or control the enterprise. For example, investments of less than 10% which include contractual arrangements such as offtake agreements, preferential, special or veto voting rights or the ability to appoint directors must be notified to FIRB for approval.

In addition, investments preparatory to a takeover bid (such as acquiring a pre-bid stake) will be considered a direct investment.

The policy also specifies that ‘enforcing’ a security interest over a business’ assets or shares is also classified as a direct investment. This means that the moneylending agreement exemption does not apply to banks with foreign government ownership (such as certain European banks that became government owned in the wake of the global financial crisis and also certain Chinese banks) which will need to gain FIRB approval in order to enforce their security.

Further guidance on specific factors relevant to investments by foreign governments

The new policy also identifies specific mitigating factors that assist in determining that proposals by foreign governments and their related entities are not contrary to the national interest.

These include the level of non-associated ownership interests, ongoing arrangements to protect Australian interests from non-commercial dealings and whether the target will be, or remain, listed on ASX.

While these factors were previously alluded to in public comments by FIRB officials and were evidenced in particular FIRB decisions, their inclusion in FIRB policy provides them with official backing and is useful guidance for applicants.

Form of FIRB application and time limits applying to applications by foreign government investors

The new policy also clarifies that there is no statutory form for applications made under the policy only (ie applications by foreign governments and their related entities). The application should therefore be set out in a letter to FIRB containing all relevant information.

There is also no time limit for the Treasurer to consider an application that is made under the policy only. FIRB has indicated that, where possible, it will endeavour to consider such applications within the usual 30-day period. This may give rise to a number of concerns (particularly for public M&A transactions) given that there is no statutory deadline and, therefore, no timing certainty.

Clarification relating to mining and petroleum tenements

FIRB approval is typically sought for the acquisition of mining tenements on the basis that mining tenements are captured by the provisions of FATA dealing with the acquisition of an interest in ‘urban land’ (which basically includes all land that is not rural ie. farming land).

The updated policy clarifies that ‘urban land’ includes all seabed within Australia’s Exclusive Economic Zone, which is the area extending up to 200 nautical miles from the territorial sea baseline. It is therefore now clear that offshore petroleum production licences and other offshore petroleum tenements that meet certain requirements (provide a ‘right to occupy’ and have a term exceeding five years) are interests in urban land, and their acquisition will require FIRB approval.

The updated policy also states that where a mining tenement is developed to an operational mine, it will then be considered developed commercial property. The intention behind the policy here is not entirely clear, but it suggests that, in contrast to the usual position that acquisitions of urban land require notification to FIRB regardless of value, a $50 million threshold applies to acquisitions of mining tenements that include an operational mine (and $1,004 million for US investors).

This aspect of the new policy is yet to be tested in practice, but it suggests FIRB may be intending to apply a de minimis rule to the acquisition of operational mines. This is perhaps on the basis that an operational mine valued at less than $50 million is unlikely to be significant to Australia’s national interest, whereas it is necessary for FIRB to examine all proposals to acquire undeveloped mining tenements because it is more difficult for FIRB to understand their resource potential and therefore their significance to the national interest.

This article was written by Justin Little, Partner, Perth, Mark Crean, Partner, Sydney, Paul Branston, Senior Associate and James Sippe, Solicitor, Perth.

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