Australia has a foreign investment approval regime that regulates certain types of acquisitions by ‘foreign persons’ of equity interests in Australian companies and unit trusts, and of interests in Australian businesses and interests in Australian real property assets.
The principal regime (commonly known as the FIRB regime)1 is set out in the following legislation:
- Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA);
- Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (the FATR); and
- Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth) and the accompanying Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020 (Cth).
The legislation is supported by Australia’s Foreign Investment Policy (the Policy) and Guidance Notes on the specific application of the law, each issued by Treasury. Neither the Policy nor Guidance Notes have the force of law.
The FATA provides that certain foreign investment proposals can fall within either:
- a compulsory notification and FIRB approval regime – which applies where the proposal constitutes: both a notifiable action and significant action, or a notifiable national security action; or
- a voluntary notification and FIRB approval regime – which applies where the proposal constitutes a significant action or a reviewable national security action.
Responsibility for making decisions on whether or not to approve foreign investment proposals rests with the Australian Treasurer. When making these decisions, the Treasurer is advised by the Foreign Investment Review Board (FIRB), which examines foreign investment proposals and advises on the national interest implications. FIRB is a non‑statutory advisory body. The FATA refers to the issuance of ‘no objection notifications’ rather than ‘approvals’, but such notifications are commonly known as ‘FIRB approvals’.
1.1 Foreign persons
A foreign person is generally:
- an individual that is not ordinarily resident in Australia;
- a foreign government or foreign government investor;
- a corporation, trustee of a trust or general partner of a limited partnership in which an individual not ordinarily resident in Australia, foreign corporation or foreign government holds a substantial interest of at least 20%; or
- a corporation, trustee of a trust or general partner of a limited partnership in which two or more foreign persons hold an aggregate substantial interest of at least 40%.
Entities are designated as foreign persons if a foreign holder holds a ‘substantial interest’ in the entity, ie, 20% or more. Trusts and limited partnerships are similarly designated, through their trustee or general partner, based on foreign holders’ interests in the trust or limited partnership.
Entities are also treated as foreign persons if two or more unrelated foreign holders hold an aggregate substantial interest of at least 40%. However, entities having their primary listing on an Australian stock exchange can disregard foreign holdings that are less than 5% (that is, it is not a substantial holding within the meaning of the Corporations Act 2001 (Cth) (the Corporations Act)) for the purpose of determining the aggregate substantial interest of 40%.
1.2 What foreign holdings count?
The interests that count towards the 20% substantial interest and 40% aggregate substantial interest threshold held by foreign holders are broadly defined. Holding securities is counted, but so is controlling voting power or potential voting power. ‘Potential voting power’ is a concept that assumes any right to acquire new votes has been exercised with the resulting percentage of votes calculated on a diluted basis. Any legal or equitable interest is counted, interests under options and conditional agreements are included, and any veto power over board decisions is deemed to be control of 20% of potential voting power.
For trusts, an interest includes any interest in units of a unit trust, and any beneficial interest in the income or property of a trust. If the trust is discretionary, then a beneficiary is deemed to have an interest in the maximum percentage of income or property that the trustee may distribute to that beneficiary – which means a single foreign beneficiary may render an entire discretionary trust foreign for approval purposes.
1.3 Tracing
To determine whether an entity is a foreign person, interests of 20% or more trace up through a chain of corporations, trusts and unincorporated limited partnerships, so that entities are characterised as foreign persons if there are sufficient upstream foreign holders.
An interest of just 20% is sufficient to trigger tracing – eg if ZambiaCo holds 21% of the shares in AusCo1, and AusCo1 holds 21% of AusCo2, AusCo2 is deemed to be a foreign person even if ZambiaCo does not control AusCo1 and AusCo1 does not control AusCo2.
This is broader than the equivalent tracing test (relevant interests) under the Corporations Act, where a 20% plus interest without control can only be traced once in a chain of entities.
1.4 Associates
When calculating whether a foreign holder holds a ‘substantial interest’, you add any interests held by an associate of a foreign holder. Associates include relatives, persons acting in concert, partners in a partnership, any entity of which the foreign holder is a senior officer and vice versa, any entity in which the foreigner holds a greater than 20% interest and vice versa, any trustee of a trust where the foreigner holds a greater than 20% interest and vice versa. Exemptions apply to carve out advisers, proxies, licensed trustees, general partners, consortium vehicles, and certain professional partnerships.
1.5 Foreign government investors
There are different rules in the legislation for investments by a foreign government investor compared with private investors. Foreign government investors are subject to more rigorous screening than other investors – generally there is no monetary threshold that applies before FIRB approval is required. Many commercial investors that operate independently are counted as foreign government investors – not only sovereign wealth funds and state-owned enterprises, but also many entities that have part-government ownership upstream.
Foreign government investors include foreign governments and their separate agencies and instrumentalities, and also corporates, trusts and limited partnerships (through their trustees, general partners and limited partners) in which any of them hold an interest of at least 20%, or more than one – even unrelated – hold an interest of at least 40%. The comments in paragraph 1.2 about the expansive meaning of interests apply here. The definition of foreign government investor contains its own tracing mechanism (so that corporations, trustees and general partners carry the designation as foreign government investor down the chain), plus the tracing provisions explained in paragraph 1.3 also apply.
However, a corporation, trustee of a unit trust or general partner of an unincorporated limited partnership will not be considered a foreign government investor under the above ‘40% test’ if they operate a passive investment fund or scheme where (in broad terms) individual investors in the fund are not able to influence any individual investment decisions, or the management of any individual investments, of the corporation, trustee or general partner under the investment fund or scheme. The intention behind the reference to ‘individual’ investment decisions and investments is so that the streamlined foreign government investor definition may still be available where investors have representatives on advisory committees and/or where investors can influence broad investment strategy.
Holdings of associates are required to be taken into account when determining whether a FIRB filing is required. Importantly, if a person is a foreign government investor, they are deemed to be an associate of all other foreign government investors originating from the same country, even if they are unrelated. This information is often not public, so investors deemed to be foreign government investors will face a difficult compliance challenge if they do not know whether any other foreign government investors of the same country hold a stake in the target the subject of their transaction.
Stricter rules apply to foreign government investors. Generally, a foreign government investor requires approval in order to acquire a 'direct interest' (normally a 10% or greater interest – see paragraph 1.6) in an Australian company, Australian unit trust or Australian business irrespective of value. A de minimis exception applies where a 'direct interest' is to be acquired via an offshore transaction (ie where the target is not an Australian entity but has one or more downstream Australian entities). For the exception to apply, the total value of the target’s Australian assets must be less than $71 million and represent less than 5% of the value of the target’s total assets, and none of the target’s Australian assets are assets of a national security business (see paragraph 3.3) or sensitive business (see paragraph 3.4).
In addition to the lower ‘direct interest’ trigger for notifying a transaction to FIRB, the following additional transactions by a foreign government investor require approval:
- starting an Australian business;
- acquiring a legal or equitable interest in a mining, production or exploration tenement; and
- acquiring an interest of at least 10% in securities in a mining, production or exploration entity.
1.6 ‘Direct interest’ trigger for foreign government investors, national security businesses and agribusinesses
Generally, a minimum 20% interest in a target is needed before FIRB approval is mandatory. Not so if the acquirer is a foreign government investor or associate (see paragraph 1.4), or if the target of the acquisition operates a national security business (see paragraph 3.3) or is an agribusiness (see paragraph 5.1). In those cases any direct interest in a target that meets the monetary threshold (which is nil in the case of a foreign government investor or where the target operates a national security business) will require FIRB approval.
In respect of the ‘direct interest’ concept the points to understand are:
- Any stake of 10% or more will be a direct interest.
- An interest of 5% or more will qualify as a direct interest if the acquirer taking a 5% stake has entered into a ‘legal arrangement’ relating to the acquirer’s business and the target’s business. The explanatory statement accompanying the FATR refers to a strategic alliance as an arrangement that would be caught by this provision, and states that the provision is not intended to capture ordinary arm’s length agreements for goods or services (eg an offtake agreement) that is made on ordinary commercial terms – but the FATR itself contains no such exception.
- There is no minimum percentage (so that approval would be needed for any interest above zero) if the person who acquired the interest is in a position to influence central management or the policy of the target.
1.7 What does it all mean?
The tests governing whether a person is foreign or a foreign government investor are complex and layered, and will require
careful analysis on a case‑by‑case basis.
To give a sense of the variation among different types of investors and targets, consider a foreign investor looking to acquire a stake in an Australian entity. Some investors can acquire up to 20% without the need for approval, but not so for foreign government investors, or where targets operate a national security business or are in the agricultural sector or are land rich.
In terms of a dollar threshold, there is no minimum for foreign government investors or where the target operates a national security business. For agribusiness, however, it is $71 million; and it is $330 million for entities not subject to special rules (calculated differently than for agriculture) or $1,427 million if the transaction is not subject to special rules and the acquirer is from one of the free trade agreement counties or regions, namely Canada, Chile, China, Hong Kong, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, South Korea, United Kingdom, the United States of America and Vietnam (each an FTA Country) – but not if the target is in a sensitive sector or operates a national security business, and not if the acquirer is a subsidiary of an FTA Country investor incorporated elsewhere, including Australia. Brunei Darussalam will also be an FTA Country when the TPP-11 comes into force for that particular country. In addition, non-foreign government investors from India have the benefit of a $533 million threshold when seeking to acquire an interest in an Australian entity or business that carries on, or is, a business supplying a service through a commercial presence in Australia (provided the Australian entity or business does not carry on a business in a sensitive sector).
Footnotes
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FIRB stands for Foreign Investment Review Board, a non-statutory advisory body which examines foreign investment proposals and advises the Australian Treasurer on the national interest implications. This paper covers only the FIRB regime and not the various sector and company-specific laws that also impose limits on foreign ownership, eg Financial Sector (Shareholdings) Act 1998 (Cth), Air Navigation Act 1920 (Cth), Qantas Sale Act 1992 (Cth), Airports Act 1996 (Cth), Shipping Registration Act 1981 (Cth) and Telstra Corporation Act 1991 (Cth).