Foreign investment rules eased

By David Landy.

Key Points:
Rules for foreign investment in Australian companies have been eased. The result will be less paperwork for trustee corporations and for corporate acquisitions valued at less than $100 million.

The past month has seen some important changes to Australia's foreign investment rules.

The major effect of the changes is to reduce the number of foreign investment proposals which have to be notified to the Foreign Investment Review Board ("FIRB"). This will be achieved by a doubling of the general notification threshold: from now on, acquisitions of substantial interests in Australian companies will only have to be notified if the company has assets of more than $100 million (previously $50 million).

The changes also provide relief for foreign custodians who acquire interests in Australian businesses on behalf of clients.

Background

In general terms, the Foreign Acquisitions and Takeovers Act governs the foreign acquisition of more than 15 percent of an Australian company. Where the company's assets are above a certain threshold, the Act requires the acquisition to be notified to FIRB. FIRB then examines the proposal and reports to the Federal Treasurer on whether the acquisition should be prohibited on the grounds that it is contrary to the national interest.

In 1999, the notification threshold was set at $50 million. However, for some time, acquisitions in companies with assets worth between $50 million and $100 million have usually been waved through. (Indeed, the overwhelming majority of all proposed acquisitions - regardless of size - are approved.)

The picture is complicated by a couple of special rules:

• as a result of the Australia-US free trade agreement, the notification threshold for acquisitions by US investors in 2006 is $831 million (indexed annually - see below), except for investments in a number of "sensitive sectors" (where the 2006 threshold is set at $52 million);
• foreign-to-foreign takeovers which result in a change of ownership of a downstream Australian company also have different notification threshold requirements;
• a special exemption regime applies to custodians (ie trustees who acquire shares for a third party).

Change 1: custodians

For some time, the Act has provided a limited exemption for foreign custodians who were making acquisitions on behalf of Australian investors, but no exemption for foreign custodians who were acting for foreign investors.

The Government has decided that there is little point in imposing notification requirements on foreign custodians, since their clients are independently subject to the requirements.

Accordingly, the Government has exempted foreign custodians, except in relation to acquisitions that they make on their own behalf (rather than as mere trustees).

Change 2: standard notification thresholds

As noted above, there has been a longstanding requirement to notify acquisitions of companies worth over $50 million - even though acquisitions up to $100 million are not examined in any detail by FIRB. 

Given that acquisitions between $50 million and $100 million generally don't raise any significant concerns about the national interest, there appears to be little justification for imposing the cost of notification on business. Accordingly, the $50 million threshold has now been raised to $100 million.

Change 3: downstream notification threshold

Where one overseas corporation takes over another overseas corporation, there can be a downstream effect in Australia if the overseas target corporation controls an Australian company. Where the Australian company is worth over $50 million or accounts for half or more of the upstream target's group assets, the downstream change in control must be notified to FIRB.

Because of the compliance cost and the potentially adverse effect on upstream acquisitions, the Government has bumped up the monetary value threshold to $200 million. This new threshold also applies to foreign-to-foreign takeovers by US investors with a downstream effect in a "sensitive" Australian sector (see below).

Change 4: US investment in sensitive sectors

US investors generally enjoy a $831 million investment notification threshold (to be indexed up to $871 million in 2007). However, as noted above, there is a $52 million threshold for "sensitive sectors":

• media;
• telecommunications;
• transport (including airports, port facilities, rail infrastructure, international and domestic aviation and shipping services provided within, or to or from, Australia);
• the supply of training or human resources, or the manufacture or supply of military goods or equipment or technology, to the Australian Defence Force or other defence forces;
• the manufacture or supply of goods, equipment or technology able to be used for a military purpose;
• the development, manufacture or supply of, or the provision of services relating to, encryption and security technologies and communications systems;
• the extraction of (or the holding of rights to extract) uranium or plutonium or the operation of nuclear facilities.

From 1 January 2007, that sensitive sector threshold will be raised to $100 million, in line with the general threshold increase. For foreign-to-foreign acquisitions with a downstream effect, the threshold will be $200 million.

For further information, please contact David Landy.