On 12 February 2010 the legislation governing foreign investment in Australia was reformed to account for the emergence of complex investment structures. Corporate Partner, Simon Champion and Corporate Lawyer, Vasyl Nair summarise the recent changes.
In Australia, the Foreign Investment Review Board (FIRB) is responsible for examining proposals by foreign interests to undertake direct investment in Australia and making recommendations to the Government, acting by the Treasurer. The Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act) provides the basis for the Treasurer to examine proposed foreign investments and to ensure they are not contrary to the national interest.
Pursuant to the Act, the Treasurer must be notified of circumstances in which: a foreign person (alone or together with any associate) proposes to acquire a substantial interest in an Australian corporation, and that acquisition exceeds the relevant monetary threshold (see previous article on changes to the thresholds).
As a consequence of the growing use of complex investment vehicles, in early 2009 the Treasurer sought to clarify the operation of FIRB’s foreign investment screening regime by making amendments to the Act. The Foreign Acquisitions and Takeovers Amendment Act 2010 (Cth) (Amendment Act) implemented those amendments.
Before the introduction of the Amendment Act, a foreign person was taken to have held a substantial interest in an Australian corporation under the Act if the person (alone or together with any associate):
- is in a position to control not less than 15% of the voting power, or
- holds interests in not less than 15% of the issued shares,
in the corporation.
In order to capture more complex investment structures, the Amendment Act operates to broaden the scope of persons holding a ‘substantial interest’ to include a person (alone or together with any associate) who:
- is in a position to control not less than 15% of the potential voting power in the corporation, or
- would hold interests in not less than 15% of the issued shares in the corporation, if shares in the corporation were issued as the result of the exercise of certain rights to issued shares (including rights under an instrument, agreement or arrangement, whether the right is exercisable presently or in the future and whether on the fulfilment of a condition or not (e.g. convertible notes)).
While the Amendment Act did not receive Royal Assent until 12 February 2010, the amendments contemplated by it apply retrospectively from 12 February 2009 (being the date the Treasurer announced the Government’s intention to amend the Act).
By widening the ambit of the term ‘substantial interest’ to capture complex investment structures, the Amendment Act broadens the circumstances in which FIRB must be notified of proposed foreign acquisitions in Australian corporations. Ultimately, this gives FIRB the opportunity to review more foreign investment proposals to ensure that those proposals are not contrary to Australia’s national interest.
Potential investors in Australia should be aware of the changes to the Act as well as the more general function and powers of FIRB. Piper Alderman is well qualified to assist with, and regularly advises potential investors on, questions in relation to this area of law.
Further update
On 24 April 2010, the Government announced a major tightening of foreign investment rules relating to residential real estate. Of particular note is the requirement for temporary residents to compulsorily sell established property they have bought when they depart Australia.
Further, a package of harsh new civil penalty, compliance, monitoring and enforcement measures will be introduced. At the time of writing, the amending legislation which will enact these changes has yet to be released.
