Australia still open for business, but greater certainty needed – FIRB and other issues
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On 16 October 2013, Treasurer Joe Hockey stated in a speech to the American Australian Association that “Australia is open for business, open for investment and is going for growth”1. Just over a month since making that bold statement, the Treasurer has created uncertainty over Australia’s foreign investment policy by blocking Archer Daniels Midland’s (ADM) proposed AUD$3.4 billion takeover of GrainCorp Limited (GrainCorp). This uncertainty is compounded by proposed changes to Australia’s foreign investment laws which have been announced and which have not yet been legislated.
Australia’s foreign investment regulations
Foreign investment in Australia is primarily regulated under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Foreign Investment Policy (Policy). FIRB is the arm of the Australian Treasury which is responsible for reviewing foreign investment notifications. Decisions on whether to oppose foreign investment proposals are made by the Treasurer on advice from FIRB. If a foreign investment proposal falls within the scope of the FATA, the Treasurer (through FIRB) must be notified of the investment proposal. The Treasurer has a fixed time (30 days for consideration plus 10 days for notification) in which to consider the investment proposal. Unless the Treasurer decides to reject the proposal or to impose conditions and notice is given to the foreign investor to this effect, the proposed acquisition may proceed without any further notification or approval from the Treasurer. If the Treasurer requires more time to consider an investment proposal, the Treasurer can issue an interim order which prohibits the investment for a period of up to 90 days. Foreign investors will usually seek to withdraw and resubmit their investment proposal rather than have the Treasurer issue an interim order. If a proposal does not fall within the scope of the FATA but is within the scope of the Policy (for example, where the investment is made by an entity in which a foreign government has a substantial interest), the proposal must be approved by the Treasurer and there are no formal time limits which apply to consideration of the transaction.
Broadly, acquisitions of assets must be notified to the Treasurer (through FIRB) if the value of the target is valued at or above a specified monetary threshold (currently AUD$1.078 billion for New Zealand investors and US investors (where the target is not in a sensitive sector) and AUD$248 million for other foreign investors (as well as New Zealand and US investors where the target is in a sensitive sector)). Separate value thresholds apply for investment in Australian urban land, and investments of 5 per cent or more in the media sector must be notified regardless of value.
The overarching theme of the foreign investment approval process is whether the proposed investment is contrary to the national interest. There is no definition of what constitutes the “national interest”, however the Policy sets out certain factors typically considered when assessing whether a proposal is contrary to national interest. These factors are:
- national security – the extent to which the investment will affect Australia’s ability to protect its strategic and security interests;
- other Government policies;
- the impact of the investment on the general economy and the community; and
- the investor. In particular, whether the investor “operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision”.
Given the political sensitivity of foreign investment into Australian agriculture, the Policy also sets out certain factors which will be considered when assessing whether a proposed investment in Australia’s agricultural sector will be contrary to the national interest. In assessing foreign investment proposals for an agricultural investment, the Treasurer will consider the effect of the proposal on:
- the quality and availability of Australia’s agricultural resources, including water;
- land access and use;
- agricultural production and productivity;
- Australia’s capacity to remain a reliable supplier of agricultural production, both to the Australian community and our trading partners;
- biodiversity; and
- employment and prosperity in Australia’s local and regional communities.
The current Australian Government was elected during September 2013. In the lead up to its election, it announced a number of changes to Australia’s foreign investment laws, including lowering the monetary thresholds from AUD$248 million to AUD$15 million for certain acquisitions in the agricultural sector. Further, there have been calls for the introduction for a spatial threshold for agricultural land, similar to the five hectare threshold that applies in New Zealand, as well as the development of a national foreign ownership register for agricultural land (similar to the system which currently applies in the United States).
The Treasurer cited various reasons for his decision to block ADM’s takeover bid, including that the Australian grain industry is still in a transition phase following deregulation and the move away from the single wheat exports desk (which was abolished in 2008). The Treasurer noted the concerns of industry participants that the acquisition by ADM could reduce competition and hinder growers’ access to GrainCorp’s grain storage, logistics and distribution network, which handles approximately 85 per cent of eastern Australia’s bulk grain exports.
The Treasurer referred to the criticism of ADM’s proposed takeover from stakeholders and the broader community, and his resultant decision that allowing the takeover to proceed “could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally”3. The Treasurer further stated that such an outcome would not be in the national interest.
Still open for business but greater certainty needed
The decision to block ADM’s takeover bid has led to some commentators stating that the decision sends a message to foreign investors that Australia is not open for business. Interestingly, the US State Department has expressed its disappointment with the Treasurer’s decision to reject ADM’s proposed acquisition of GrainCorp, noting that the United States “is the largest foreign direct investor in Australia”.
In our view, foreign investors should not be concerned that Australia is closed for business. The decision needs to be interpreted in the context of its unique facts, in particular, the significant role played by GrainCorp in eastern Australia’s bulk grain exports. It also needs to be remembered that the Australian Treasurer only recently waved through the bid by Saputo, a Canadian dairy processor, to acquire a local dairy processor. This decision was made in the face of significant pressure from local counter bidders and within the initial 40 day review window. Accordingly, while there is greater sensitivity around agribusiness assets, foreign investors are not blocked from acquiring them.
The decision does however highlight the need for greater certainty in Australia’s foreign investment approval process, in particular, the matters that are likely to lead to the Treasurer forming the view that a proposed acquisition will not be in Australia’s national interest. The Government should also move quickly to legislate the changes to the foreign investment approval process relating to acquisitions in the agricultural sector which were announced prior to its election in September 2013.
Minimising deal risk – FIRB approval no longer an afterthought
The decision also highlights how important it is for foreign investors to manage the foreign investment approval process to minimise deal risk. Foreign investment approval should not be considered to be a “rubber stamp” approval.
Norton Rose Fulbright has extensive experience in navigating the foreign investment regulatory landscape and in formulating and implementing strategic processes to obtain foreign investment approval.
Our approach to the foreign investment approval process recognises the need for:
- Early engagement: Engaging with FIRB as early as possible in the acquisition process. Foreign investors should not wait until due diligence and acquisition terms are well advanced before turning their attention to foreign investment approvals.
- Engagement with non-government stakeholders: Engaging with industry stakeholders as soon as possible so that industry and community concerns can be addressed earlier in the process. We are able to assist with this process given our networks and industry knowledge in the key sectors in which foreign investors are active.
- Fallback options: Formulating multiple fallback options at an early stage in the acquisition process in the event foreign investment approvals are unlikely to be forthcoming. This could include offering to spin-off those parts of the target’s Australian business that may result in the approvals being denied or teaming up with an Australian partner to acquire the target or parts of the target’s business.
- Collaborative approach: Ensuring that financial and legal advisers work closely with media and other consultants to address industry and community concerns. This includes formulating and offering undertakings to mitigate industry and community concerns, even if they are not legally required.
Norton Rose Fulbright has successfully adopted this approach to obtain foreign investment approvals for a number of foreign investors, including in relation to the high-profile acquisition of Cubbie Station by Shandong RuYi Scientific & Technology Group Co. Ltd and Lempriere Pty Ltd.
BoxRED Corporate are a specialist Australian and New Zealand Agribusiness private equity manager and boutique corporate services and advisory firm with a proven track record in successful Australian and New Zealand Agribusiness project development, operation, and investments and deep linkages to Asian and Pacific markets
We are a specialist Australian and New Zealand Agribusiness private equity manager whose team has a proven track record in the three dimensions critical to achieving superior returns:
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We are majority owned by The Merkin Group (The Rothsey Family Office) in Australia with shareholdings expected to be held by Business Succession Partners Hong Kong , other stakeholders, and we are in discussions with potential joint venture partners which provides to opportunity to accumulate in specie assets, structures and additional core competencies.
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AUSTRALIAN CHAMBER OF COMMERCE HONG KONG & MACAU
The Merkin Group (BoxRED Corporate’s parent) is a corporate member of the Australian Chamber of Commerce Hong Kong and Macau since 2011.
BoxRED is a reciprocal member of all Australian Chambers throughout Asia, including mainland China.
Since 2012 Sean Rothsey has been a Committee Member of the Australian Chamber of Commerce Hong Kong and Macau ’s Finance , Legal and Taxation Committee whose missions include
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Current projects of the Committee include lobbying and awareness for a Double Taxation Treaty between Hong Kong and Australia and mutual funds management recognition.
BoxRED can facilitate introductions to the Chamber , Government , business or professionals in Hong Kong and as a consultant can assist you in an unregulated and unlicensed capacity in a buy sell or other transaction and makes no legal warranties or representations of any kind as to the Buyer, Seller or Transaction. We can also facilitate introductions to licensed entities in a regulated regime where required and can both represent and assist any party in those regimes. Additionally the Finance, Legal and Taxation Committee organizes an annual senior Australians in Finance cocktail party in Hong Kong which ensures excellent networking and market awareness capabilities year round.
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Norton Rose Fulbright is a leading global legal practice offering a full business law service to many of the world’s pre-eminent corporations and financialinstitutions. They have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.They are the authors of the above piece.
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1“Australia: Open for Business”. Speech by Treasurer Joe Hockey to the American Australian Association on 16 October 2013. Available at: Australia: Open for Business
3Foreign Investment Application: Archer Daniels Midland Company’s proposed acquisition of GrainCorp Limited. Media Release by Treasurer Joe Hockey on 29 November 2013. Available at: Treasury media release