As reported in New Authors on Foreign Investment our Foreign Investment in Australia service is undergoing a progressive review. These revisions are underway but their final form will be subject to any changes that may be made by the commencement of the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (FATA Amendment Bill) and the Register of Foreign Ownership of Agricultural Land Bill 2015 (Foreign Register Bill).
In the meantime, Marcus’ article below provides a helpful and comprehensive insight into the main features of the proposed amendments. More detailed commentary of the current state of Australia’s foreign investment framework can be found in the New Developments chapter of the service.
New Foreign Investment Regime: significant actions and notifiable actions
The exposure draft of the FATA Amendment Bill proposes a new FATA that provides for a new foreign investment regime based on two categories of actions:
- “significant actions”, in respect of which a voluntary notification regime will operate; and
- “notifiable actions”, in respect of which a compulsory notification regime will operate.
Significant actions and notifiable actions are defined by reference to various transactions involving three distinct investment targets: entities (corporations or unit trusts), Australian businesses and interests in Australian land. There are substantial overlaps in the transactions that are significant actions and/or notifiable actions under the new FATA and the transactions that attract voluntary notification and compulsory notification under the existing FATA. However, there are a number of important differences, including the following.
- The size of an interest in an entity or trust required to constitute a “substantial interest” has been raised from 15% to 20%: s 3. However, a person will be deemed to control 20% of the potential voting power in an entity (and, thereby, to have a substantial interest) if it is in a position to veto any resolution of the board, central management or general meeting of the entity: s 22(4).
- A new concept of acquiring a “direct interest” is introduced. It is defined by reg 11 of the Foreign Acquisitions and Takeovers Regulation 2015 (FATR 2015) to include an interest of at least 10% in an entity or business but will catch an interest of at least 5% if a “legal arrangement” is put in place, an interest of at least 1% if acquired within 12 months of acquiring any other interest and an aggregate interest of at least 5% is held, or an interest of any percentage if the foreign investor is in a position to influence or participate in the central management and control or influence, participate in or determine policy.
Direct interests regulate two distinct investment categories of significant/notifiable actions;
- Investments by foreign government investors in an Australian entity or Australian business: new FATA ss 49 and 53 and FATR 2015 reg 39(3)(a). The change will give legislative backing to the current regulation of direct investments by foreign government investors under the Policy.
- Investments by any foreign investors in an Australian entity or Australian business that is an agribusiness. This will implement the Government’s proposal for a new A$55 million threshold for foreign acquisitions of agribusiness. Refer to [0.22] of Foreign Investment in Australia for further discussion.
- Generally, the indirect acquisition of Australian corporations via offshore transactions, while being a significant action, will not be a notifiable action and, therefore, not subject to compulsory notification. This is achieved by suspending the operation of the substantial interest tracing rules in determining whether a direct interest or a substantial interest is acquired: ss 19(3) and 52(2). However, reg 33 of the FATR 2015 excludes the suspension in the case of a foreign government investor with the result that indirect acquisitions of Australian corporations by them via offshore transactions will still be subject to compulsory notification.
This takes Australia’s foreign investment regime back to its pre-2010 position, before the changes made by the Foreign Acquisitions and Takeovers Amendment Act 2010 (Cth) resulted in many offshore transactions being subject to compulsory notification.
- The acquisition of an interest in any Australian land is potentially subject to compulsory notification. Under the current FATA, the acquisition of an interest in Australian rural land is not subject to compulsory notification. The change will give legislative backing to the current regulation (since March 2015) of acquisitions of Australian rural land under the Policy but based on a broader concept of “agricultural land”. Refer to [0.21] of Foreign Investment in Australia for further discussion.
- Dividing Australian land into a number of new categories for various purposes including applying different monetary thresholds, application fee rates and penalties: “agricultural land”, “commercial land”, “residential land”, and “a mining or production tenement”. Land is also categorised by reference to whether it is “vacant”: FATR 2015 reg 5. Currently, land is divided into two categories – Australian urban land and Australian rural land – although specific categories of Australian urban land are created in the FATR for the purpose of applying monetary thresholds and other exemptions.
- The introduction of deeming provisions in relation to acquisitions of entities whose securities are stapled with another entity or which operates on a unified basis with other entities. Among other things, this will address a potential loophole for dual-listed entities such as BHP Billiton and Rio Tinto where the acquisition of shares in the foreign entity (BHP Billiton plc or Rio Tinto plc) may not be caught by the current FATA.
The scheme of the FATA Amendment Bill appears to contemplate that notifiable actions are a subset of significant actions. However, there are a number of inconsistencies as follows.
- Section 3 explains that “[s]ome significant actions (called notifiable actions) must also be notified to the Treasurer before the actions can be taken” suggesting that all notifiable actions will be significant actions. Yet the same commentary goes on to refer to “significant actions and notifiable actions” in relation to record keeping – if all notifiable actions were significant actions, this reference to notifiable actions would be redundant.
- Section 51 explains that “[U]nlike for a significant action, there does not need to be a change in control for actions relating to entities and businesses to be notifiable actions”. This and a comparison between the meanings of significant actions in ss 46, 47 and 48 and notifiable actions in s 52 suggests that there will be at least some notifiable actions that are not significant actions; namely, the acquisition of a substantial interest in an Australian entity which does not result in a change of control under s 59.
- Sections 82(1) and (6) stipulate that a notifiable action may be a significant action. Again, the need for such a stipulation appears to support the possibility that not all notifiable actions will be significant actions.
There are important features of the new FATA that do not contemplate the possibility that some notifiable actions will not be significant actions. For example, Div 4 of Pt 2 sets out a threshold test that is supposed to apply to notifiable actions (as contemplated by s 52(3)) but only references significant actions. Similarly, s 72 only gives the Treasurer the power to prohibit significant actions and s 74 only gives the Treasurer the power to require disposal of interests in relation to significant actions – it does not appear that the Treasurer will have any power under the new FATA to prohibit, or require disposal of interests in relation to, notifiable actions that are not significant actions.
Another apparent anomaly is that, while s 80 will permit the Treasurer to make what is referred to as a “no objection notification” in respect of a notifiable action that is not a significant action (achieved in a round-about way by omitting references to s 46(5) from s 80(1)(b)(i) and s 47(4) from s 80(1)(b)(ii)), the Treasurer will only have the power to impose conditions in respect of a no objection notification if it relates to a significant action: s 79(1).
Further, the prohibition in s 86 on a foreign person entering into an agreement to take a notifiable action imposes this prohibition by reference to decision periods in s 82, but s 82(6) defines “decision period” by reference only to significant actions.
Therefore, while it is clear that a notifiable action must be notified to the Treasurer (s 85), if the notifiable action is not a significant action, a foreign person may be able to proceed with the action in the knowledge that the Treasurer will have no power to require disposal.
Legislative backing for Policy notification requirements
The FATA Amendment Bill addresses criticism that the Policy imposes notification requirements that are not supported by legislation (see discussion at [2.60] of Foreign Investment in Australia), by including the following additional notification requirements in the new FATA.
- Classifying the acquisition of an interest in any Australian land as potentially a notifiable action: s 52(2)(c). This will include agricultural land thus giving legislative backing (but also expanding) the current regulation of foreign investment in Australian rural land under the Policy, which has applied since 1 March 2015.
- Classifying the acquisition of at least 5% in an entity or business that wholly or partly carries on an Australian media business as a significant action and a notifiable action: new FATA ss 49 and 53 and FATR 2015 reg 39(2). The change will give legislative backing to the current regulation of foreign investment in the Australian media sector under the Policy.
- Classifying the acquisition by a foreign government investor of a direct interest in an Australian entity or business as a significant action and a notifiable action. The change will give legislative backing to the current regulation of “direct investment” by foreign government investors under the Policy.
- Classifying the starting of an Australian business by a foreign government investor as a significant action and a notifiable action: new FATA ss 49 and 53 and FATR 2015 reg 39(3)(b). The change will give legislative backing to this current and longstanding requirement under the Policy.
Other proposed changes
In addition to the changes discussed above, the following changes have been proposed.
- Revising the definition of “associate”: s 6. The definition is still very broad, it no longer provides for a person’s associates to include the associates of its own associates. However, the definition is still very broad in its reach and has been expanded in some aspects.
- Persons with whom a foreign person are acting in concert are now considered to be associates: s 6(1)(b). This is not expressly limited to the affairs of a particular investment target. Therefore, a literal reading of s 6 would suggest that two parties, who are acting in concert in respect of a particular investment target, will be associates for other targets in respect of which they are not acting in concert.
- It is sufficient that a foreign person proposes to become associated with a person for that person to be an associate: s 6(1)(c). It is unclear whether a unilateral proposal is sufficient to create an association.
- Of concern for foreign government investors is that all foreign government investors from the same country will be associates: s 6(1)(n).
- Expanding the current exemption for Australian citizens who are foreign persons (by virtue of them not being ordinarily resident in Australia) to acquire interests in Australian urban land to become an exemption to acquire interests in all Australian land: FATR 2015 reg 25. Currently, the Policy does not exempt such Australian citizens from compulsory notification of their acquisition of interests in Australian rural land. Australian citizens who are foreign persons will remain subject to the FATA in relation to their investments in entities and assets of Australian businesses.
- Revising the definition of “moneylending agreement” to provide for other forms of financial accommodation (not just the lending of money) and accommodate secondary debt trading between moneylending businesses: FATR 2015 reg 5. However, there are limits to the exemption for moneylending agreements, including that:
- the exemption does not extend to investors in the secondary debt market who do not themselves provide financial accommodation; and
- in the case of interests in residential land, the moneylender’s holding entity must be a licensed financial institution that is listed (but not necessarily in Australia) and has at least 100 shareholders.
- In determining whether Australian entities with a principal listing in Australia are “foreign persons” by virtue of aggregate substantial interests (40% or more) by foreign persons, excluding interests of less than 5% held by individual foreign investors and their associates.
- A substantial overhaul of the powers available to the Treasurer in relation to significant actions: Pt 3. It includes some helpful clarifications including that no objection notifications may be made in respect of a foreign person that is not yet incorporated: s 81(2). The existing time limitations of 30 days for initial review of notifications and 10 days to notify a decision (with the ability to extend by interim order for an additional 90 days) have been retained. However, as a number of significant actions will be moved from the Policy to the Act, the time limits will now apply to these whereas the Policy does not impose time limits on Government decision making.
- Expanding the range of criminal offences and increasing penalties, introducing civil penalties and (in the case of residential land) basing the maximum penalty on any capital gain generated or a fixed percentage of consideration paid or market value, introducing infringement notices for residential land, liability for officers of corporations who knowingly, recklessly or negligently fail to prevent contraventions: Pt 5.
- Introducing substantial application fees (up to A$100,000): Pt 6.
- Introducing comprehensive record-keeping requirements for various actions, including significant actions and notifiable actions: Div 2 of Pt 7.
- Codifying confidentiality arrangements for information provided in connection with notifications including the circumstances in which disclosure of that information is permitted: Div 3 of Pt 7.