Foreign investments in Australia are regulated by the Foreign Acquisitions and Takeovers Act 1975 (FATA) and associated acts and regulations, and administered by the Foreign Investment Review Board (FIRB).
Australian law on foreign investment has been constantly updated and refined in recent years. Some amendments in 2019 include:
- FIRB Guidance Note 23, updated on 15 January 2019, in relation to the notification requirements applicable to entities in which a foreign government or separate government entity holds a substantial interest; and
- FIRB Guidance Note 14, released on 1 January 2019, in relation to the acquisition of commercial land in Australia.
Foreign investment regime
Under the Australian investment regime, acquisitions by a "foreign person" are subject to governmental control for reasons of national interest if they fall in one of two categories: "significant actions" and "notifiable actions".
Investments by foreign persons which qualify as notifiable actions always have to obtain FIRB approval prior to completing the transaction. In contrast, investments by foreign persons which are significant actions don't necessarily have to obtain FIRB approval. However, in practice, many such transactions will still be notified to FIRB at an early stage to ensure that any potential concerns are addressed at an early stage
The term "foreign person" is defined broadly in the FATA. A foreign person is:
- any individual who does not ordinarily reside in Australia; or
- a corporation or trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds a substantial interest (at least 20%); or two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate interest of at least 40%; or
- a foreign government.
Different, more stringent rules apply to investments by "foreign government investors" compared to private foreign investors. For example, a foreign government investor needs FIRB approval simply to commence business in Australia. Any entity is a foreign government investor if 20% or more is owned directly or indirectly by a foreign government (which can include for example sovereign wealth funds).
A significant action is an acquisition of interests in securities, assets or Australian land, or otherwise an action in relation to entities and business (e.g. entering into agreements) that:
- meets the relevant monetary thresholds (adjusted yearly and published on the FIRB website);
- has a connection to Australia; and
- other than in relation to the acquisition of interest in Australian land, results in a change of control involving a foreign person.
The following acquisitions that meet the monetary thresholds (adjusted yearly and published on the FIRB website) are notifiable actions:
- acquisition of a direct interest in an Australian entity or business that is an agribusiness;
- acquisition of a substantial interest (at least 20%) in an Australian entity; or
- acquisition of an interest in Australian land. There does not need to be a change of control.
Foreign investment notifications are filed with the treasurer through the online FIRB applications portal. The role of FIRB is to review and advise the treasurer as to the national interest implications of the notified proposed foreign investment.
Once an application has been made, FIRB generally reviews the application and provides the applicant with requests for further information where required, however the final decision to grant or refuse FIRB approval for reasons of national interest rests with the treasurer.
Where the applicant has complied with the provisions of FATA, the treasurer has 30 days, from the date that the application fee is paid, to review and make a decision on whether to grant FIRB approval. This period may be extended by up to 90 days, in the event that an interim order is made. FIRB approval will generally be granted unless the foreign investment is considered a threat to Australia's national interests.
The term 'national interest' is not defined in the FATA. However, Australia’s Foreign Investment Policy (December 2015) provides a non-exhaustive list of factors that are typically considered:
- type of investment – whether or not the investment is in a sensitive business and its effects;
- national security – the extent to which the investment will affect Australia’s ability to protect its strategic and security interests;
- competition – whether it would promote healthy competition;
- impact on the economy and community – the extent to which the investment will develop and provide fair return for the Australian people (e.g. creation of jobs).
- character of the investor – corporate governance practice of the investor and the basis of operations and regulations.
Upon review, it is within the treasurer's power in relation to significant and notifiable actions to permit a foreign investment with or without additional conditions, prohibit the foreign investment and, as the case may be, have the investment unwound; and impose even civil or criminal charges.
In the past, most foreign investment proposals have been approved. In 2017-18, only two foreign investment proposals, involving residential real estate and the proposed purchase of agricultural land for residential development purposes, were rejected and three applications for exemption certificates were declined by the treasurer. In relation to the declined exemption certificate applications, the treasurer's decision to decline the applications was without prejudice to any separate application from the foreign person for any other acquisition which would have been covered by the exemption certificate if it had been granted.
In the event that an application raises national interest concerns, the treasurer will impose conditions on the FIRB approval in order to mitigate those risks and concerns. Generally, we are seeing more conditions being imposed on FIRB approvals, with around 43% of the approvals provided by the treasurer subject to conditions in 2017-18, this is a 3% increase in the conditions imposed in 2016-17.
The majority of the conditions imposed on non-residential applications relate to potential tax risks. However, we have recently seen bespoke conditions drafted and imposed on FIRB approvals which are considered to be sensitive to national interest, such as applications in relation to Australian energy assets.
The increased imposition of conditions together with the recent decision by the Treasurer to reject a AU$13 billion proposed takeover bid for Australian gas pipeline company, APA, by Hong Kong's CKI, indicates an increase in the scrutiny of FIRB applications made by foreign investors in relation to Australian infrastructure and energy assets.
Criminal and civil penalties may apply if a foreign person:
- fails to give a notice before taking a notifiable action;
- takes a significant action before the end of the determination period;
- contravenes a condition imposed on the FIRB approval; or
- contravenes an order made by the Treasurer in relation to the significant action, which includes imposing conditions, prohibiting the action or requiring the action to be undone.
We note that an officer of a corporation who authorises or permits the corporation to commit an offence or contravene a civil penalty, or fails to prevent a contravention of a civil penalty provision, may also be found to commit an offence or contravene a civil penalty provision. This means that the directors and officers of a corporation may be personally liable if the corporation is found to have breached the provisions of FATA.