Updated as at Tuesday 28 April 2020
On 29 March 2020, in response to the extraordinary economic implications of the COVID-19 pandemic, the Australian Government announced important temporary changes to Australia’s foreign investment review framework. These changes will have the effect of lowering the monetary screening threshold for all foreign investments in Australia to $0 and significantly extending the timeframe for processing foreign investment approval applications.
Increased oversight of foreign investment
In response to the pressure placed on Australian businesses as a result of the COVID-19 pandemic, the Australian government has announced that, with effect from 10:30pm (AEDT) on 29 March 2020:
- all proposed investments into Australia which are subject to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA) will require approval, regardless of value or the nature of the foreign investor; and
- FIRB will be working with existing and new applicants to extend timeframes for reviewing applications from 30 days to up to 6 months.
The Government has noted its concern that without these changes, it is possible many normally viable Australian businesses will be sold to foreign interests without any government oversight, presenting risks to Australia’s national interest.
While the changes are temporary, they will remain in place for the duration of the current COVID-19 crisis.
Monetary screening thresholds reduced to $0
Prior to 10:30pm (AEDT) on 29 March 2020, the various types of foreign investment proposals that were subject to the FATA and associated regulations had different monetary screening thresholds, ranging from $0 to $1,192 million. Those thresholds have now all been reduced to $0.
Some of the early media commentary in relation to these changes has suggested that “all foreign investment” into Australia will now require approval, due to the fact that the monetary screening threshold has been reduced to $0. However, this is not the case. This is because the monetary screening threshold is but one of a number of conditions that must be satisfied in order for a proposed investment to engage the provisions of the FATA and associated regulations. FIRB has confirmed that the reduced monetary screening threshold changes will not alter the meaning of a ‘significant action’ or ‘notifiable action’ under the FATA and associated regulations (i.e. the types of foreign investment that may be voluntarily notified to FIRB for approval (significant actions) or which are legally required to be notified to FIRB for approval (notifiable actions)).
For example, although there are special rules for investments in Australian agribusinesses, media businesses, and land entities (as well as all investments by foreign government investors (FGIs)), acquisitions of securities in Australian entities will generally only require FIRB approval if, in addition to meeting the relevant monetary screening threshold (now $0) they involve a foreign person acquiring an interest of ≥20% in that entity.
Expanding on this example, one effect of the new across-the-board $0 monetary screening threshold is that, unless a foreign investor can rely on an exemption under the relevant legislation, the acquisition of an interest of ≥20% in any Australian entity (regardless of its value) will need to be notified to FIRB for approval. Prior to the announced changes, a significant number of acquisitions in this category were not required to be notified to FIRB for approval in light of the general $275m monetary threshold which previously applied (together with higher thresholds for investors in certain countries with which Australia has a free trade agreement).
FGIs will remain subject to the stricter rules governing their proposed investments into Australia (which were already subject to a $0 monetary screening threshold in any event).
Percentage thresholds and availability of exemptions
Importantly, FIRB has confirmed that the changes will not affect the various percentage thresholds that apply in determining whether FIRB approval is required for a proposed acquisition of securities in an Australian entity by a foreign investor (e.g. the ≥20% threshold above – lower thresholds apply under the special rules for acquisitions of interests in Australian media businesses (≥5%), acquisitions by foreign government investors (generally ≥10%) and acquisitions of securities in Australian land entities).
The Government has not yet indicated any intention to suspend the availability of the various exemptions available under the legislation for actions that might otherwise require approval (for example, participating in rights issues or acquiring a <10% interest in a listed Australian land entity).
Does the $0 threshold apply to agreements entered into before the changes were announced?
Importantly, FIRB has clarified in the regulations giving effect to the announced changes (being the Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020 (Cth)) that they do not apply to agreements entered into prior to 10:30pm (AEDT) on 29 March 2020, including in relation to acquisitions that have not yet occurred, regardless of whether there are unmet conditions in those agreements or not.
Extended timeframes for reviewing applications
As noted above, the timeframes for reviewing applications for foreign investment approval are likely to be extended from 30 days to up to 6 months. FIRB is already processing a high volume of applications, and we expect its workload over the coming months will continue to increase in light of the announced changes.
Certain applications will be prioritised
Unsurprisingly, the Government has indicated that it will prioritise urgent applications for investments that protect and support Australian businesses and Australian jobs. We expect this will result in applications for approval of proposed investments into distressed Australian targets being fast tracked.
FIRB has separately indicated that it will seek to accommodate commercial deadlines wherever possible, although it will require supporting information to be provided outlining the relevant commercial imperatives and the impact if a decision is not able to be made on the approval application by a certain date.
Possible refunds of fees
FIRB has also announced that it will consider refunding filing fees paid to it by foreign investors who withdraw their applications due to processing delays or in response to the economic conditions associated with the COVID-19 pandemic. However, FIRB still retains the discretion not to refund these fees where an investor’s decision to withdraw their application is unrelated to those processing delays or economic conditions.
Consequences of the changes
We expect that these changes will have a number of important consequences in the coming weeks and months:
- a significant number of potential acquisitions which may not have previously required FIRB approval, particularly private treaty acquisitions of SMEs, will now require approval before they can be completed;
- in light of the extended processing times for applications which FIRB does not consider to be ‘urgent’, targets undertaking sales processes that include foreign bidders may seek to postpone those processes, or favour Australian bidders who will be able to complete a transaction more expeditiously;
- the anticipated completion dates for deals that were signed before the changes were announced, but which are conditional on FIRB approval, may be significantly delayed due to the extended application processing times; and
- foreign investment applications may be approved subject to new kinds of conditions that have not been regularly encountered in previous years.
Additional commentary and guidance from FIRB on these changes was released on 24 April 2020 in a new guidance note titled ‘Temporary measures in response to the coronavirus [GN53]’, which is available on the FIRB website.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020