New Australian Foreign Investment Policy

The new Australian Foreign Investment Policy (New Policy) was published by the Foreign Investment Review Board (FIRB) on 30 June 2010.  There are certain noteworthy differences between the New Policy and the previous foreign investment policy which was published in April 2007 (Previous Policy).  These changes relate to investments by foreign governments, foreign investments in the media sector and the factors that play a part in whether a proposal is deemed to be contrary to Australia’s national interest.

Background

In 2009, FIRB considered a large number of proposals by Chinese state-owned enterprises to invest in the Australian resources sector, in which there was a high level of public interest.  Following this, the Senate Economics Reference Committee published a report in September 2009 pursuant to its enquiry Foreign investment by state-owned entities, which included a recommendation that FIRB develop a more effective communication strategy which, amongst other things, provides additional information about how foreign investment decisions are made.  The New Policy has been published by FIRB in response to this recommendation and to address heightened public scrutiny of foreign investment.

National Interest Test

The Previous Policy did not address the national interest test in detail, however, in February 2008, FIRB published Guidelines for Foreign Government Investment Proposals (Foreign Government Guidelines).  The New Policy contains a more detailed description of factors which are considered when the Government assesses the national interest. The factors set out in the New Policy are essentially the same as those set out in the Foreign Government Guidelines, but apply to all investment proposals. In addition, the New Policy does not refer to consideration of the independence of the investor’s operations from the relevant foreign government, which is an issue set out in the Foreign Government Guidelines.

The New Policy provides that FIRB will consider national security, competition, tax revenues and other Australian Government policies, the impact of the proposed investment on the general economy and the community, and the character of the investor. In particular, FIRB will consider the transparency and commerciality of the investor’s operations and the investor’s corporate governance practices.

Direct Investment by Foreign Governments

Under the Previous Policy, all direct investments by foreign governments and their agencies had to be notified to FIRB for approval, “irrespective of size”.  The New Policy also provides that direct investments by foreign governments must be notified to FIRB, however, the New Policy sets out a definition of the term “direct investment” which states that generally, a direct investment is an investment of 10 percent or more.  An exception to this is an interest below 10 percent which can be used by the acquiring foreign government or related entity to influence or control the enterprise, which must also be notified to FIRB.

The New Policy states that such investments include:

• preferential, special or veto voting rights;
• the ability to appoint directors;
• contractual agreements including with respect to loans and the provision of services;
• investments in preparation for a takeover bid; and
• enforcement of a security interest over a business’ assets or shares.

The New Policy provides that FIRB’s general approach to investment proposals by a foreign government or a related entity is to consider whether the investment is of a commercial nature, or if the investment may be undertaken for broader political or strategic reasons which are contrary to Australia’s national interest. In considering this, FIRB will assess whether the proposed investor’s governance arrangements could enable actual or potential control by a foreign government, including through funding arrangements.

There are various mitigating factors set out in the New Policy which will assist FIRB in determining that investment proposals are not contrary to the national interest. The factors include the following:

• the existence of external partners or shareholders in the investment;
• non-associated ownership interests;
• governance arrangements;
• ongoing arrangements to protect Australian interests from non-commercial dealings; and
• whether the target will be, or will remain, listed.

The policy states that the size, importance and potential impact of any proposed investments will also be considered, and that investments in enterprises that are large employers or have significant market share may raise more sensitivities than investments in smaller enterprises.

Investments in the Media Sector

The New Policy refers to the previous requirement for notification of portfolio investments of five percent or more in the media sector.  However, the New Policy contains a definition of “media sector” which refers only to daily newspapers, television and radio, and internet sites that broadcast or represent any of these forms of media. In addition, the New Policy no longer requires notification of direct (i.e. non-portfolio) investments in the media sector irrespective of size.

Conclusion