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27 Aug 2009

More foreign investments require vetting

A wider range of transactions involving foreign investors will require notification (or earlier notification) to the Foreign Investment Review Board, under a Bill now before Parliament.

Importantly, the Bill is retrospective to 12 February 2009, the date on which the Government announced its intention to change the law. This means that transactions since that date may now need to be notified to FIRB.

Background

Since 1975, acquisitions of shares in Australian companies by foreign investors have been subject to the Foreign Acquisitions And Takeovers Act. Where the value of the company exceeds a prescribed monetary threshold, acquisitions resulting in the holding of "substantial interests" by a foreign person of 15% or more (or by 2 or more foreign persons of 40% or more) must be notified to FIRB. FIRB then advises the Commonwealth Treasurer whether the acquisition should be prohibited on the grounds that it would be contrary to the national interest.

A "substantial interest" is currently defined as the holding of 15% or more of the voting power, or 15% or more of interests in the issued shares in the company. An "aggregate substantial interest" is currently defined using a 40% or more threshold. On 12 February 2009, the Government announced that the Act would be amended to ensure that it applies equally to all foreign investments irrespective of the way they are structured. This was because current market practice can deliver control of a company without the need to acquire shares or formal voting control. The Government pointed to convertible notes as a major example of such practices, but indicated that its intention was to capture all non-equity arrangements.

On 20 August 2009, the Government introduced the amendments into Parliament. As noted above, they will, when passed, be retrospective to 12 February 2009.

Potential voting power and future shares

The major change made by the Bill is to the definition of "substantial interest". As well as 15% or more of the voting power or 15% or more of interests in the issued shares in the company, there will now be a substantial interest where:

  • a foreign investor currently has 15% or more of the "potential voting power" in the company, being voting power 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.

Corresponding changes have been made to the definition of "aggregate substantial interest".

Both new definitions effectively accelerate the future potential effect of conditional arrangements, so that a person is deemed to presently have the votes or shares that he might acquire in the future. All that is necessary is that the person has a current right to require the shares or votes, "whether the right is exercisable on the fulfilment of a condition or not".

The most obvious target of the new definitions is convertible notes and options, but it is clearly not limited to debt instruments or even to instruments. The "potential voting power" definition catches contractual arrangements to confer voting rights without any issue or transfer of securities.

The existing money-lender exception for acquiring "interests in shares" by way of security will not extend to money-lending agreements with quasi-equity characteristics and therefore such security may require notification to FIRB in the future.

Other potential effects

Although the main target of the Bill is quasi-equity and voting arrangements, it has a number of other potential effects.

For example, the Treasurer can currently prohibit, on national interest grounds, a shareholders' agreement or a profit participation / management agreement which results in a change of control of a company or Australian business. A change of control occurs where a foreigner acquires the ability to determine "the policy" of the company or business. Under the Bill, that will be extended to situations in which a foreigner acquires the ability to determine the policy of the company or business "in relation to any matter". On its face, this would appear to cover any part or aspect of the company's business, rather than the whole or a substantial part of a company's business.

Another side-effect of the changes is the expanded scope of the associate provisions. At present, the Act aggregates the substantial interests of a foreigner with those of its associates. An "associate" includes any corporation in which the foreigner holds a substantial interest. As noted above, the Bill expands the definition of "substantial interest", for the stated purpose of covering the acquisition of potential voting power and rights to unissued shares in Australian companies. However, because the definition of associate also refers to "substantial interest", the Bill may create associations - and thereby notifiable transactions - where none previously existed. The tracing of downstream interests in foreign investors may be similarly affected.

Retrospective effect

The Bill will require some re-examination of transactions which took place on or after 12 February 2009. That's because, once passed, it will apply retrospectively from that date.

This means that any deals involving "potential voting power" or rights over unissued shares will, if they crossed the prescribed percentage and monetary thresholds, have to be notified to FIRB (unless they were already notified). The Explanatory Memorandum to the Bill says that the Treasurer will have the power to impose conditions upon such deals, but it is unclear whether there would also be power to order the unwinding of a completed deal.

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.