Foreign Investment Review Board – recent developments

By Michael Wadley and PC Feng, Blake Dawson
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For Chinese companies interested in investing in Australian industry, it is important to have an appreciation of the Australian foreign investment regime.

Michael Wadley, International partner; head of China practice, Blake Dawson
Michael Wadley
International partner;
Head of China practice
Blake Dawson

The operations of the Foreign Investment Review Board (FIRB) and Australian policy towards Chinese investment in the resources sector in particular, have gained prominence in recent times given the outcome of high-profile deals such as Sinos- teel’s potential investment in Murchison Metals (which was capped by the FIRB at 49.9%); Wuhan Iron and Steels’ bid to take a 50% stake in Western Plains Resources’ magnetite project in South Australia (which wasblockedbytheDefenceDepartmenton “safety, operational and national security grounds”); and Chinalco’s failed A$28 billion (US$25.6 billion) proposed alliance with Rio Tinto.

A significant recent development is the amendment of the foreign investment framework which increases notification thresholds for private investment. Investments below these thresholds can proceed without notifying the FIRB.

The Australian foreign investment regime is mainly regulated by:

(a) the Foreign Acquisitions and Takeovers Act 1975 (FATA).

(b) the Foreign Acquisitions and Takeover Act (Notices) Regulations 1975;

(c) the Foreign Acquisitions and Takeover Act Regulations 1989; and

(d) the Foreign Investment Policy.

The government regularly updates the Foreign Investment Policy, which is publicly available and aims to enable foreign investors to gain an understanding of whether their investment proposals would gain approval. Although the Foreign Investment Policy has no force of law, in practice, if the proposed investment does not comply with its requirements, it is likely that the government will refuse to approve the proposal.

PC Feng, Legal consultant, Blake Dawson
PC Feng
Legal consultant
Blake Dawson

Responsibility for approval

The FIRB is primarily responsible for examining proposals by foreign interests for investment in Australia and making recommendations to the Treasurer on those proposals. Final responsibility for foreign investment policy and for making decisions on proposals rests with the Treasurer, currently Wayne Swan.

In general, a private foreign investor will only need to notify the FIRB if it acquires a voting power of 15% or more (or the aggregate voting power of foreign investors exceeds 40%) in an Australian company and the value of the target company is above the minimum threshold. If the proposed investment is by a foreign government or its agencies, then regardless of the size, it must be approved by the FIRB. There is currently no threshold for an acquisition of an interest in Australian urban land, being any land not used exclusively for primary production. This includes vacant land that is used for mining or petroleum production.

On 22 September 2009 amendments to the Foreign Acquisitions and Takeover Regulations 1989 came into effect which changed the assets thresholds for which notification to FIRB is required. A notable effect of the amendment was to harmonize the thresholds for acquisitions in a number of business categories at A$219 million. This figure is to be indexed annually as at 1 January. In addition, the requirement for non-US investors to notify when establishing a new business valued at or above A$10 million has been repealed. In assessing proposals in the resources sector, the FIRB director stated at a recent China-Australia Investment Forum in Sydney on 24 September 2009, that FIRB will be “much more comfortable when we see investments which are below 50% for greenfields and around 15% for major producers. However … we do look at all investment proposals on a case by case basis”.

State-owned enterprises

Not with standing the recent amendments described above, there have been no changes to the current screening arrangements for investments by foreign governments and their agencies, which includes State-owned enterprises and sovereign wealth funds. The Treasurer can prohibit foreign investments which he believes to be contrary to the national interest. But this is not defined in the FATA. The Treasurer has published six principles to which the government will typically have regard when deciding whether or not an investment proposal is consistent with Australia’s national interest:

(a) whether an investor’s operations are independent from the relevant foreign government;

(b) whether an investor adheres to the law and observes common standards of business behaviour;

(c) whether an investment may hinder competition or lead to undue concentration or control in the industry or sectors concerned;

(d) whether an investment may impact on government revenue or other policies;

(e) whether an investment may impact on national security; and

(f) whether an investment may impact on the operations and directions of an Australian business as well as its contribution to the Australian economy and broader community.

On receipt of notification, the Treasurer has 30 days to make a decision and 10 days to inform the investor of that decision (unless an interim order is made to extend the time for a decision by 90 days). In practice, the Treasurer will either give written approval of the transaction or will discuss it with the foreign investor if he does not want it to proceed. It has also become common for the Treasurer to request the withdrawal and resubmission of proposals (whether or not amended) and to extend the timeframe. When deciding that the investment proposal is consistent with “national interest” the Treasurer may impose certain conditions on the approval.

Comment

For foreign investors navigating the FIRB process, it is always important to:

    • understand the policy background that may be relevant to the application;
    • consult early with the FIRB, in order to minimize surprises; and
    • be proactive in anticipating concerns that may arise and provide appropriate reassurance. An investor may be able to obtain a strategic advantage by structuring its investment to be consistent with the policy objectives of the Australian government. These include:

(1) supporting regional employment opportunities, particularly among traditionally disadvantaged groups;

(2) high standards of corporate governance, occupational health, safety and environmental management;

(3) developing infrastructure to service the mineral export industry; and

(4) increased tax revenue (such as from mineral royalties).

Michael Wadley heads Blake Dawson’s China practice. PC Feng is a legal consultant in Blake Dawson’s Shanghai office.

Blake Dawson

Blake Dawson Shanghai office
Suites 3408-10, CITIC Square,
1168 Nanjing Road West, Shanghai
Postal code: 200041
Tel: 86 21 5100 1796
Fax: 86 21 5292 5161
Email: michael.wadley@blakedawson.com

www.blakedawson.com

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