The Treasury recently announced that the Commonwealth Government will amend the Foreign Acquisitions and Takeovers Act 1975 (FATA) to clarify the operation of the foreign investment screening regime effective 12 February 2009.
Overview
The FATA provides the Treasurer with the power to examine proposed foreign investment into Australia to determine if such investment is ‘contrary to the national interest’. The Government determines what is ‘contrary to the national interest’ by having regard to widely held community concerns of Australians. The FATA and the Foreign Acquisitions and Takeovers Regulations 1989 provide criteria and monetary thresholds which, if satisfied or exceeded, trigger the relevant FATA provisions.
Some examples of foreign investments subject to Foreign Investment Review Board (FIRB) notification are:
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acquisitions of substantial interests by a foreigner in an Australian business where the value of business gross assets exceed $100 million or the proposal values assets above $100 million, except for US investors;
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direct investments by foreign governments and their agencies irrespective of size; and
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proposals where any doubt exists as to whether the proposal is notifiable.
For purposes of the first example, a substantial interest occurs when a single foreigner (and any associates) has 15% or more of the ownership or several foreigners (and any associates) have a 40% or more in aggregate of the ownership of a corporation, business or trust - see section 9 of the FATA.
Pre-amendment classification of equity interests
The FATA provides the Treasurer with the power to make an order prohibiting a proposed acquisition by a foreign person in shares (including an interest in shares) and assets (including an interest in assets) where the investment is contrary to the national interest. However, the prevailing view was that the issue of convertible notes did not trigger FIRB notification until the actual conversion of the notes into equity.
The amendments
Essentially the amendments will:
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ensure that the FATA applies equally to all foreign investments irrespective of investment structuring; and
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mean that any investment including through instruments such as convertible notes will be treated as equity under the FATA.
These amendments will act to clarify the operation of the foreign investment screening regime at a time where there is increasing foreign investor interest in Australian assets, especially from state controlled enterprises and government backed investment funds seeking to invest in the Australian resource sector.
What now?
Foreign investors will need to recognise that their investments will be scrutinised by FIRB regardless of how they are structured. For example, the issue of convertible notes to investors as part of an acquisition will require upfront FIRB approval (if relevant conditions and thresholds are reached). Investors in convertible notes may need to factor in FIRB approval as a condition precedent to completion.
We will keep you updated on these legislative amendments and any other developments. If you have any questions, please feel free to contact the DibbsBarker M&A team.
