Australia’s treasurer has removed the foreign investment conditions placed on Yanzhou Coal Mining Company, which required Yanzhou to reduce its ownership of Yancoal Australia. Foreign investment in industries that have declined may now be more palatable to the government.
Removal of conditions
In December 2013 the treasurer announced the removal of the foreign investment conditions placed in 2009 on Yanzhou Coal Mining, a Chinese state-owned enterprise (SOE), which restricted its ownership in Yancoal Australia.
The conditions placed on the 2009 acquisition of Felix Resources’ coal mining assets required Yanzhou to reduce its economzic interest in those assets to less than 50% and its ownership in Yancoal from 100% to less than 70% by the end of 2013. Yanzhou was also required to reduce its economic interest in the Syntech Resources and Premier Coal mines to less than 70% by 31 December 2014.
This is the second time these conditions have been amended. In March 2012, then treasurer Wayne Swan granted an extension to Yanzhou to reduce its ownership in Yancoal to less than 70% by the end of 2013. The original deadline was the end of 2012.
On the latest occasion the treasurer cited the current challenges in the Australian coal industry as the main reason for this decision. Importantly, he noted that Yanzhou has undertaken to:
- support Yancoal’s ongoing operations in Australia, maintaining its position as a major regional employer;
- while it continues to own at least 51% of the shares of Yancoal, ensure Yancoal continues to operate so that it remains solvent; and
- extend its existing loans to Yancoal if required, and support Yancoal’s plans to expand the Moolarben open-cut mine.
The invisible clause
While there had been speculation in the market that an extension to the 31 December 2013 deadline would be granted, it was not widely expected that the treasurer would waive the conditions all together. This decision appears to be an indication of the government’s foreign investment policy and a manifestation of its statement that “Australia is open for business”. In particular, it could indicate that the investment conditions placed on previous approvals may now be up for renegotiation, in the right circumstances.
The decision to allow Yanzhou to maintain its 78% interest in Yancoal rather than enforcing Yanzhou’s undertaking to divest its interest to a 70% holding by 31 December 2013 reflects the bargaining power held by Yanzhou in what is an important industry in Australia that is currently under pressure.
In this respect, the performance of the sector has made foreign investment more desirable, and almost necessary to prevent additional mine closures.
Investors should consider whether a similar “invisible clause” tied to pressures on the relevant industry and significance of the assets may be present in their current approvals, or could exist in future approvals.
As a general comment, we consider it unlikely that the government would seek to increase the burden of conditions placed on existing foreign investment approvals, but this is a clear indication that they may be eased somewhat if circumstances indicate a case for doing so.
Treatment of nations or industries?
The decision appears inconsistent with the treasurer’s decision in late November 2013 to reject the takeover bid for Graincorp by US conglomerate Archer Daniels Midland.
While the assets under consideration in both matters are in industries needing investment, the applications have found polar opposite outcomes. It has been theorised by a number of media sources that this may be in part the result of pressure on the treasurer from the Chinese government to approve a string of deals in Australia involving its state-owned enterprises.
Equally, it may partly reflect that initial concerns about Chinese investment have waned as the pace of investment has slowed.
This is a critical distinction between the Foreign Acquisitions and Takeovers Act 1975 and other statutory regimes that often touch on foreign investments.
The process is inherently political and does not provide much transparency for investors. The national interest test is naturally fluid and responsive to a changing political landscape, and changes in the Australian economy. This fluidity needs to be considered by investors. Past decisions are not necessarily a predictor for future transactions, even in the same industry.
Implications for foreign investors
Foreign investors should be aware of what may be a more open approach by the Australian government to foreign investments in ailing sectors, and respond accordingly.
The undertakings provided by Yanzhou are directed at maintaining the business in Australia and the employment opportunities in the region. Investors should consider this when discussing investment opportunities with key stakeholders and the Australian government.
What needs to be done?
Investors need to take a long-term view when negotiating conditions on investments in Australia. They should seek to include exceptions to conditions for changes in circumstances. It may also be possible to renegotiate an onerous condition.
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