New foreign investment laws passed by House of Representatives

Proposed amendments to extend the reach of the Foreign Acquisitions and Takeovers Act have themselves been amended.

Before passing the Foreign Acquisitions and Takeovers Amendment Bill on Monday 23 November, the House of Representatives agreed to a set of additional amendments intended to improve the operation of the Bill. However, as noted below, the additional amendments themselves raise some practical concerns.

The story so far

As noted in our Alert of 27 August 2009, the Amendment Bill extends the range of transactions requiring notification to the Foreign Investment Review Board.

Specifically, where the monetary notification thresholds are satisfied:

• notifiable "substantial interests" in Australian corporations and foreign corporations with downstream Australian assets may arise where a foreign investor has 15% or more of the voting power in a company which might be cast if they exercised all their rights or a foreign investor would have 15% or more of interests in the issued shares in the company, if they exercised all their rights to have shares issued to them;
• notifiable "aggregate substantial interests" in Australian corporations and foreign corporations with downstream Australian assets may arise where two or more foreign investors have 40% or more of the voting power in a company which might be cast if they exercised all their rights or two or more foreign investors would have 40% or more of interests in the issued shares in the company, if they exercised all their rights to have shares issued to them;
• there will be an extension of the interests which will attributed to a foreign person, as a result of the application of these new concepts to the test for foreign investment associate relationships and foreign investment tracing through interposed entities; and
• shareholders' agreements or profit participation / management agreements will be notifiable if they result in a foreigner acquiring the ability to determine "the policy" of the Australian company or Australian business "in relation to any matter".

The first three of these changes are retrospective to 12 February 2009 (the date the Government first announced them).

New interpretation rules

Yesterday, the House of Representatives agreed to Government amendments to the Bill.

New interpretation rules will apply when determining the percentage of the interests in the issued shares in a corporation that a person holds at a particular time under rights. If it cannot be determined at a particular time (whether from the right itself or from the circumstances existing at that time) whether the exercise of the right might result in the person holding an interest in an issued share in the corporation, it is to be assumed that the right was exercised at that time.

For example, where the number of shares to be issued under a convertible note is determined by reference to the price or value of shares at the time of conversion, the interpretation rule would require the percentage interest to be determined at the time the convertible note agreement is notified to FIRB.

The rule that provides that a notification of an option to acquire shares is deemed to include the exercise of those options (ensuring that a second notice is not required upon the exercise of those options) was also extended to rights to acquire shares.

New issues

The new interpretation rule will be easy to apply in some circumstances but not in others.

It will be easy to apply when the number of shares to be issued under a convertible note is determined by dividing the note debt by the market share price at the time of conversion and the shares are traded on a market at that time. In that case, the new interpretation provision would deem the noteholder's interest at the time of FIRB notification of the convertible note agreement to be the note debt divided by the share price at the time of notification.

However, if the conversion mechanism for the convertible note contains a more complicated pricing mechanism (such as note debt divided by a share price determined from an external valuation), it would appear that mechanism would need to be followed to determine the percentage interest.

It is also unclear what would happen if the share price under the conversion mechanism decreased between the time of FIRB notification of the convertible note and the time of conversion of the convertible note. In that situation, the foreign investment approval of the right at the time of FIRB notification would be for a lower number of assumed shares than the actual number of shares issued on conversion under the right. It may be necessary to seek further approval for the conversion of the convertible note if the conversion mechanism results in a higher actual number of issued shares compared with the assumed number of issued shares at the time of FIRB notification under the interpretation rules.

Where to now?