FIRB updates its policy and enters caretaker mode

Foreign investment continues to be a hot topic in Australian mergers and acquisitions, with a number of foreign acquisitions keeping the Foreign Investment Review Board (FIRB) busy.

The Australian Government has sought to provide greater clarity in respect of certain issues relating to acquisitions by foreign entities and the application of the Foreign Acquisition and Takeovers Act 1975 (Cth) (FATA) in the recent release of FIRB’s updated Foreign Investment Policy.

Last updated in September 2009, the June 2010 incarnation of the policy is a substantial update.

The federal election has also created uncertainty, as FIRB has entered caretaker mode until the outcome of the election is known. FIRB is likely to reserve its decisions in respect of more significant applications until after a new government has been formed.

National Interest Considerations

The updated policy includes five ‘National Interest Considerations’ that FIRB will consider in assessing all foreign investment proposals:

• impact on national security
• impact on competition
• other Australian Government policies (including tax)
• impact on the economy and the community, and 
• character of the investor.

The National Interest Considerations should be addressed in all FIRB applications (whether by foreign investors associated with a foreign government or not).

There is substantial overlap between the National Interest Considerations and the six criteria in the old policy that FIRB said it would use in assessing whether applications by foreign government entities were in the national interest. It was previously common for applicants of all types to address the six criteria, so from a practical perspective the new policy should not significantly alter the approach to FIRB applications.

Clarifying the concept of ‘direct investment’

The position under the new policy remains that all foreign governments and their related entities should notify FIRB and obtain prior approval before making a ‘direct’ investment (as opposed to a ‘portfolio’ investment), regardless of value.

In broad terms, FIRB considers that a direct investment has the objective of establishing a lasting interest in, and a strategic long-term relationship with, the target enterprise.

As a rule of thumb, investments of less than 10% are not generally considered direct investments, unless the foreign government investor can use it to influence or control the enterprise. Preferential or veto rights, director appointment rights, or other contractual arrangements with the target would all be relevant in this analysis.

Additionally, FIRB has noted that a sub-10% stake which is ‘preparatory to a takeover bid’ will be considered to be a direct investment.

The policy also clarifies that foreign government investors require pre-approval for acquiring an interest in urban land, which is relevant where the target is an Australian urban land corporation.

Clarifying what is a foreign government investor

The policy now expressly identifies that ‘foreign governments and their related entities’ include:

• companies or other entities in which foreign governments, their agencies or related entities hold more than a 15% interest, or
• companies or entities that are otherwise controlled by foreign governments, their agencies or related entities.

The practical impact is that ASX-listed entities which have foreign government related entities as cornerstone investors, or in which sovereign wealth funds hold a significant stake, may be treated as foreign government related entities and therefore require FIRB approval for acquisitions in Australia, regardless of the value of the acquisition.

Generally, FIRB has specified that where a foreign government controlled entity operates on an arm’s length and commercial basis it is less likely to raise national interest concerns.

Caretaker mode

The developments surrounding the federal election have provided an interesting overlay in respect of FIRB’s decision-making process, with many government agencies (including FIRB) having entered into ‘caretaker’ mode prior to the federal election until the outcome of the election is known.

The caretaker conventions are designed to avoid major policy decisions that are likely to commit an incoming government during the period preceding an election.

The uncertainty of the final outcome of the election means that FIRB will remain in caretaker mode for a longer period than would have been the case if a definitive election outcome had been reached.

FIRB will continue to review applications during this caretaker period, but the Treasurer will refrain from making decisions that may be seen to be contentious until the outcome of the election has been determined.

Delays to decision making will continue for a period after the election result is known due to the resulting backlog of applications. Foreign investors will need to carefully consider the best strategic approach during this period.

FIRB’s common position in giving effect to this caretaker role is to invite applicants to withdraw applications (in order to avoid formal rejection) and reapply after the outcome of the federal election is determined.

The Thai-based Banpu Plc recently withdrew its application for FIRB approval in respect of the acquisition of Centennial Coal, expressly citing the impending federal election, and the need to extend the approval process, as the reason.

Conversely, Wilmar International did not withdraw its FIRB application regarding its proposed acquisition of CSR’s Sucrogen sugar business. Consequently, FIRB has issued an interim order that effectively extends the FIRB review period by up to 90 days.

In summary, during this caretaker period, foreign investors will need to consider whether they are better placed withdrawing and reapplying for FIRB approval, which, may result in an overall quicker FIRB decision, or alternatively allow FIRB to issue an interim order that keeps the clock ticking on the review period.

This article was written by Simon Haddy, Partner, Melbourne, Paul Branston, Senior Associate, Perth and Kam Jamshidi, Solicitor, Melbourne.

More information

For information regarding possible implications for your business, contact a member of the Mergers & Acquisitions team.