Buying Australian? Please form an orderly queue
The Australian Government has recently announced temporary changes to foreign investment review processes during the COVID-19 pandemic, under which all foreign acquisitions and significant investments in Australian businesses will require government approval. Nicholas Blackmore, Special Counsel discusses the new rules and their impact.
Like many countries, Australia has laws which subject foreign investment to Government review. The Foreign Acquisitions and Takeovers Act 1975 (the “Act”) allows the Australian Government to review foreign investment proposals to ensure they are not contrary to Australia's national interests. Usually, this review process only applies to investments in large businesses or businesses in industries that are considered sensitive to foreign influence.
However, in the wake of the COVID-19 pandemic, the Australian Government has extended these rules to apply to all Australian businesses, regardless of size. The move was triggered by concern that, during the economic downturn which is expected to follow the pandemic, distressed Australian businesses and their assets could be bought cheaply by foreign investors, against Australia’s national interests.
How have the rules changed?
Ordinarily, foreign investments are only subject to Government review if the value of the business is A$275 million or higher, with lower thresholds for businesses in particularly sensitive industries like broadcast media. Effective from 29 March 2020, the Australian Government has reduced this threshold to zero. This means that any proposal by a foreign investor to acquire or make a significant investment in an Australian business will now have to be approved by the Government.
How long will the Government’s review process take?
The timeframe for the Government to grant approval to foreign investments has been significantly extended. Ordinarily, under the Act, the Government has a maximum of 30 days to approve or object to a proposed foreign investment. To allow for the large volume of reviews which will need to be conducted under the changed rules, the Government has increased this review period to six months.
Six months is obviously a substantial period to wait for approval for an acquisition, particularly in the current fast-changing social and economic landscape. The Government has emphasised that six months is merely the maximum time for review, and that not all reviews will take that long.
The Government has indicated that it will give priority to reviewing investments which are time-critical – for example, because they will prevent imminent insolvency or layoffs. They are also recommending that foreign investors file their applications as early as possible, before the queue becomes any longer.
To what investments do the rules apply?
The rules apply to any action which results in a foreign person taking control of an Australian business. This includes a very wide range of actions - acquiring shares in an entity, acquiring the assets of a business, or entering into an arrangement with an entity or the directors of an entity as to how the entity will operate. The rules contain “anti-avoidance” provisions to capture any scheme which has the purpose of avoiding the application of the rules.
The rules also apply to any acquisition by a foreign person of 20% or more of an Australian entity’s shares, even if that does not result in control of the entity.
When will an investment be blocked?
The Treasurer may prohibit an acquisition or investment if he is satisfied that it would be contrary to the national interest. This decision will take into account a range of factors, including the identity of the foreign person(s), the business being acquired and its importance to the national interest, protecting jobs, encouraging innovation, etc. The Foreign Investment Policy sets out these factors.
What are the penalties for making an investment without approval?
The penalties for a foreign person who fails to notify a foreign investment, or proceeds with an investment before the end of the six month review period, are imprisonment of up to three years or a fine of up to $157,500 for an individual or $787,500 for a corporation. Penalties can be imposed on the corporation and its officers. The Treasurer also has the power to order an action taken in breach of the Act to be undone (e.g. by ordering divestment of the relevant shares or assets).
These penalties may not be enforceable overseas, so foreign investors who have no presence or assets in Australia may decide they can disregard them.
What if my acquisition was agreed before 29 March 2020?
The new rules do not apply to any action taken under an agreement entered into prior to 10:30pm AEDT 29 March 2020. This exception applies even if the acquisition under the agreement has not yet completed, and regardless of whether there are still conditions precedent to be met before completion will occur.
For how long will these new rules apply?
The Foreign Investment Review Board ("FIRB") states that the changes "are temporary measures that will remain in place for the duration of the coronavirus crisis". However, there has been no guidance on how it will work when the threshold is returned to its usual value; presumably, the FIRB will allow applications that are no longer necessary to be withdrawn at that point.
Where can I get more information?
The FIRB has published a series of Q&As on its website to explain how the changes work in practice.
What do the new rules mean for me?
If you are a foreign investor looking to acquire or make a significant investment in an Australian company, you should seek advice about whether you need to apply for approval of your proposed investment. You should also consider the impact a potential six month wait for approval would have on your investment.
Australian businesses courting foreign investment should also be aware of the new rules, and the effect it may have on investors.