The proposed amendments are largely in accord with the Treasurer’s announcement made on 12 February 2009 (see our earlier alert). The changes will operate retrospectively from that date (but there are transitional provisions which remove the offence of failing to comply with FATA in the transition period for proposals that are now caught by the amended FATA).
The proposed amendments continue the difficulty for foreign investors of determining whether notification is compulsory or where the Treasurer’s powers are active, and notice is not required, but prudent to give. Notification is now compulsory where “potential voting power” or a “right to issued shares” amounting to a substantial interest (15% or more) is acquired, say through a convertible note. The Treasurer’s powers may be active where control is acquired through other means, such as an economic interest, but notice not compulsory.
Australia’s Foreign Investment Policy is not changed by these amendments. Policy continues to require that direct investments by foreign governments or their agencies, irrespective of size, are to be notified for prior approval.
Currently under the FATA, the Treasurer's powers are active and prior approval is required where a foreign person proposes to acquire or add to a substantial interest (15% or more) of either the:
voting power, or
of a an Australian corporation, where the value of the total assets of that corporation is A$100 million or more.
The Bill extends the notion of “substantial interest” and “aggregate substantial interest” to expressly capture:
potential voting power, and
rights to issued shares.
The notion of an “interest in a share” will also be clarified to expressly include a right to acquire a share or have a share transferred under an instrument, agreement or arrangement, whether the right is exercisable presently or in the future, and whether on the fulfillment of a condition or not. These amendments specifically capture all financing arrangements that involve a component of control or influence or future element of control or influence, regardless of the way they are structured, including debt instruments having quasi-equity characteristics, and expressly includes convertible notes, which previously did not attract the operation of the FATA until conversion.
Structures which do not give rise to potential voting power or rights to issued shares do not appear to fall within the compulsory notification regime but they may nevertheless activate the Treasurer’s powers if such an acquisition gives the person the ability to determine the policy of a corporation in relation to any matter.
There are certain proposals which are not compulsorily notifiable under FATA, but for which the Treasurer’s powers may nonetheless be activated. If the Treasurer considered the proposal to be contrary to Australia’s national interest, he could exercise his powers to make adverse orders with respect to the proposal. This is regardless of the giving of notice.
Such circumstances also include an acquisition by a foreign person of an interest in an Australian business with assets valued at A$100 million or more where that acquisition involves a foreign person obtaining control of the company or a change in control of the company. This includes offshore acquisitions by a foreign person of the assets of a foreign target which include Australian assets or downstream Australian subsidiaries.
Currently, the notion of “control” relates to a foreign person or persons being “in a position to determine the policy of the corporation”. The Bill expands this notion to clarify that this involves the ability to determine the policy of the corporation in relation to any matter.
This is potentially broad enough to capture interests including structures using converting instruments, economic only interests, derivative or even swap positions in Australian entities or offshore entities with Australian assets if that interest leads to a foreign person or persons having the ability to determine the policy of a corporation in relation to any matter. Where such interests are being acquired by a foreign person, consideration should be given to providing the Treasurer with a voluntary notice and receipt of a statement of no objection to deactivate the Treasurer’s powers with respect to the proposed transaction.
If the Bill is passed by Parliament, foreign investors will need to carefully assess the nature of proposed investments in Australia and consider whether those interests give rise to future rights in shares or voting power in Australian corporations, or whether the investment could put them in the position to determine the policy of the corporation in relation to any matter.
Where such interests are being acquired by a foreign person and amount to 15% or more, consideration will need to be given to whether the Treasurer’s powers are active to make adverse orders and whether notification will be either compulsorily required or prudent to give.
AuthorSophie Rihani, Solicitor
Who does this affect? All foreign persons or entities with foreign ownership proposing to invest in Australia. This includes all entities who deal with foreign investors.
What do you need to do? Consider whether any proposed investment in Australia will fall within the scope of the Foreign Acquisitions and Takeovers Act 1975, which will now include most forms of investment, irrespective of the way they are structured.