Foreign investment in Australian businesses is regulated by the
Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). This is administered by the Federal Treasurer acting through the Foreign Investment Review Board (FIRB), an arm of the Australian Federal Government Treasury.
FIRB decisions have indicated that the Treasurer has adopted a narrow policy towards the applicability of higher exemption thresholds available to United States investors before FIRB approval is required for investment in Australian businesses.
When does the Treasurer have the right to prohibit a proposed investment or takeover?
The FATA specifies transactions where a ‘foreign person’ may be prohibited from undertaking an investment or takeover in relation to an Australian business without having first obtained FIRB approval.
The transactions encompass acquisitions and arrangements in respect of shares, assets, control of companies and businesses in Australia.
The Treasurer may prohibit a proposed investment or takeover by the ‘foreign person’ where the Treasurer believes the investment will be contrary to Australia’s ‘national interest’ and certain exemption thresholds are exceeded with respect to the target Australian business.
‘Foreign persons’ include non-Australian resident controlled or deemed controlled corporations.
Generally a target Australian corporation for an investment or takeover proposal by a ‘foreign person’ will be deemed an ‘exempt corporation’ or ‘exempt business’ (FIRB notification and approval not required) where the value of its total assets does not exceed $100 million.
United States ‘prescribed foreign investors’ and higher exemption thresholds
Under the FATA, a ‘prescribed foreign investor’ is an entity that is a ‘United States national’ or ‘United States enterprise’ prescriptively defined.
United States ‘prescribed foreign investors’ are generally afforded higher exemption thresholds in respect to investment or takeover proposals regarding Australian businesses than other ‘foreign persons’. These higher exemption thresholds are indexed annually and the current 2008 exemption thresholds in relation to the target Australian business are $105 million for investment in ‘sensitive sectors’ including media, telecommunications and transport, and $913 million for any other investment or takeover proposals.
Additionally, FIRB notification relief is available for investments by United States ‘prescribed foreign investors’ in certain financial sector entities which are subject to the operation of the Financial Sector (Shareholdings) Act 1998 (Cth) (such entities being banks and insurance companies and their holding entities).
Investment through an Australian entity
FIRB however adopts a narrow interpretation of the FATA provisions such that the higher exemption thresholds for United States investors have been seen to only apply in respect of direct investments in Australian businesses by United States investors. We are aware of instances where FIRB has not accepted the higher exemption thresholds applying in respect of a United States investor (in circumstances where we would otherwise have expected the higher exemptions to apply) where the investor has proposed to invest in an Australian business through an Australian entity owned by the United States investor.
While this may seem an anomalous outcome, it is based on clear wording of the relevant provisions of the FATA and is, according to policy officers of FIRB, the intended effect of those provisions.
Preserving the benefit
We have considered a number of scenarios and structures in light of the prescriptive nature of the clear wording of the FATA. If, for example, an Australian-controlled holding company accepts a limited recourse United States lender investor, this of itself may not necessarily invoke the FIRB requirements. If there is no actual or deemed control present as part of that transaction there is no foreign acquisition. If the debt later converts to equity then that acquisition of equity upon conversion may attract the benefit of the higher thresholds as a direct United States prescribed foreign person investment in an Australian asset. Before implementing any transaction of this nature the ‘anti avoidance’ and ‘associate’ provisions of the FATA must be carefully considered. Each transaction will require review on its facts.
We have extensive experience in respect of the FIRB application process and procedures generally and would be happy to assist you in respect of FIRB matters.
More information
For information regarding possible implications for your business, contact