Temporary FIRB changes significantly lengthen application review periods

Summary of the key changes that have come into effect

On 29 March 2020, the Federal Treasurer announced major changes to Australia's foreign investment approval (FIRB) regime to address risks arising from the COVID-19 pandemic. These major changes are supplemented by 'Guidance Note 53 – Temporary Measures in Response to the Coronavirus' which addresses the effects of the temporary changes to the FIRB regime that have been announced.

The temporary changes substantially expand the scope of oil and gas transactions requiring FIRB approval and are likely to significantly lengthen FIRB review periods for applications. For all foreign investors and Australian companies looking to sell assets or shares to foreign investors, understanding their impact will be critical, especially during the six months from March to September.

What are the changes?

Effective from 10.30pm AEDT on 29 March 2020:

• all monetary screening thresholds under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act) will be reduced to $0. This applies to all foreign persons subject to the Act irrespective of the investor’s country of origin, and irrespective of whether they are a private foreign investor or a foreign government investor; and
• FIRB review periods for new and existing applications under the Act will be extended by up to six months, with priority to be given to processing applications for investments that protect and support Australian businesses and jobs.

The reduced $0 threshold was implemented via the Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020 (Cth) (the Amending Regulations) which amends the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (the Regulations). The Amending Regulations were released on 17 April 2020 but take effect from 10.30pm AEDT on 29 March 2020. The Amending Regulations do not contain a sunset date, meaning the $0 threshold will remain in place unless and until repealed by further legislation. However, the Federal Government has indicated that the $0 threshold is a temporary measure and will remain in place for the duration of the COVID-19 crisis. This is expected to be a period of at least six months from 29 March 2020 until at least the end of September 2020.

The new $0 monetary screening threshold is intended to address concerns that the negative impact of COVID-19 on Australian businesses will likely result in an increase in distressed sales to foreign purchasers at prices that are below the usual FIRB monetary screening thresholds.

The extensions to the FIRB review periods on applications are intended to give FIRB and the Treasurer sufficient time to screen applications. This is an administrative change and has not involved any changes to the Act or Regulations. Further, the Act does not empower the Treasurer to unilaterally extend FIRB review periods for applications – apart from issuing interim orders to extend the period by up to 90 days. The Act effectively provides that extensions need to be agreed by applicants. It is expected that FIRB will revert to its usual processing time frames at the same time the $0 threshold is repealed.

With growing concerns regarding the new timeframes, on 22 April 2020, the Chair of FIRB, David Irvine, indicated that while timeframes have been extended, FIRB is working to introduce measures to ensure the majority of applications are processed much faster to meet commercial deadlines.

What is the impact of these changes?

The new $0 monetary screening threshold will have a significant impact on oil and gas transactions where the acquirer is a foreign person and will also have broader implications for the oil and gas sector as the number of transactions requiring FIRB notification will expand. For instance:

• (Australian oil and gas companies) Every acquisition by a foreign investor of a 20% or greater equity interest in an Australian oil and gas company will now require FIRB approval irrespective of value, compared with the previous monetary threshold of $275 million (and $1.192 billion for certain free trade agreement investors).
• (Australian oil and gas land corporations) All share acquisitions of an oil and gas company that qualify as an Australian land corporation by a foreign investor will now require FIRB approval irrespective of value, unless it is a passive interest of less than 10% in a listed company or a passive interest of less than 5% of an unlisted non-residential company. Previously there were monetary thresholds that varied depending on the type of land held by the Australian land corporation. An Australian oil and gas company will qualify as an Australian land corporation if it holds interests in Australian land that account for more than 50% of the value of the entity.
• (Australian land) Every acquisition by a foreign person of an interest in Australian land will now require FIRB approval irrespective of value. This affects the acquisition of petroleum production licences, retention leases and certain other forms of petroleum tenure that constitute Australian land for the purposes of the Act. Previously, there were monetary thresholds that varied depending on the type of Australian land held by the Australian land corporation. As clarified in the Guidance Note, these distinctions between land remain relevant when considering the types of conditions that may be imposed to protect the national interest.
• (Offshore acquisitions) Where a private foreign investor indirectly acquires 20% or greater interest in an Australian oil and gas company via an offshore acquisition, the mandatory FIRB approval requirements will be triggered if the company is an Australian land corporation and the applicable monetary threshold has been exceeded. As the applicable monetary threshold is now $0, all offshore acquisitions of a 20% or greater interest in a foreign company that holds an Australian land corporation requires FIRB approval (regardless of the value of the Australian land corporation). As clarified by the Guidance Note, where parties notify such actions and if they require urgent handling to facilitate a broader offshore transaction, the parties should advise FIRB accordingly.
• (Capital raisings) While the pro rata rights issue exception will remain, a foreign investor seeking to underwrite a capital raising by any Australian oil and gas company (regardless of the company’s value) needs FIRB approval unless they enter into arrangements to cap their potential interest in the company to less than 20%, or the underwriter has an exemption certificate.
• (Internal restructures) More internal restructures of oil and gas companies will now require FIRB approval and be subject to oversight by government agencies, particularly the Australian Taxation Office.
• (Delayed completion of acquisitions) As a result of FIRB's extension of the nominal statutory review period from 30 days to up to six months, it is likely that current and future oil and gas transactions will be subject to delays, with the exception being for investments that FIRB considers will protect and support Australian businesses and jobs.
• (Continuation of exemptions) The various exemptions under the Act (including the rights issue exemption and moneylending exemption) will remain in place. However, there are no new exemptions including no ordinary course or business as usual exemptions. Importantly, grants of petroleum tenure captured by the definition of Australian land by Commonwealth and State Governments will continue to be exempt, other than for grants to foreign government investors.
• (Exemption certificates issued before 29 March 2020) The Guidance Note clarifies that existing exemption certifications granted prior to 10:30pm AEDT 29 March 2020 are still valid provided the conditions (if any) specified in the certificate continue to be met. Certain exemption certificates granted prior to 10:30pm AEDT 29 March 2020 contain conditions that exclude the acquisition of particular interests which were specified in subsection 52(6) of the Regulations – this subsection has now been repealed.
  
  However, transition measures have been implemented so that subsection 52(6) (and associated provisions) continue to apply in relation to an exemption certificated (granted prior to 10:30pm AEDT 29 March 2020) as if the repeal had not occurred. As a result of the temporary changes, certain acquisitions may now potentially give rise to significant and/or notifiable actions where this would not have previously been the case.

• (Exemption certificates issued after 29 March 2020) The Guidance Note indicates that new exemption certificates issued after 29 March 2020 are likely to include conditions that prevent the certificate holder from being able to acquire interests in sensitive developed commercial land under the certificate. Therefore, acquisitions of those relevant interests may require separate notification to FIRB (similar to the position with respect to exemption certificates granted before 29 March 2020).

It is important to be aware of the following key points for oil and gas companies that have not yet been impacted by the changes:

• (Pre-existing agreements not affected) The new $0 threshold will not apply to agreements entered into prior to 10.30pm AEDT on 29 March 2020, irrespective of any acquisition that has not yet completed and whether the agreement remains conditional. As clarified by the Guidance Note, in determining whether an agreement has been reached before the announcement, negotiations will need to have been completed and the parties have arrived at a mutual understanding of all essential elements of their bargain. Therefore, the concept of an agreement will not apply to preliminary stages in negotiations or other circumstances that fall short of a mutual understanding of all the essential elements of a bargain.
• (No changes to non-monetary thresholds) The non-monetary thresholds under the Act will not change, nor will the definitions of notifiable action and significant action.
• (No changes to acquisitions of exploration permits) As there are no changes to the definition of Australian land, acquisitions of interests in exploration permits by a foreign investor will not be impacted by these temporary changes.

FIRB's reporting expectations

Where FIRB conditions are imposed, clients should be aware of FIRB's recently revised (as of April 2020) reporting requirements and audit conditions:

• (Guidance Note 51 – Reporting Requirements for Compliance and Other Purposes) Provides FIRB's expectations on reporting, including information on circumstances where foreign investors need to report on their compliance with conditions and other matters, the different types of reports that might be required, and guidance on how a compliance report should be prepared.
• (Guidance Note 52 – Independent Audit Conditions) Following the grant of a no objection letter from the Treasurer, subject to one or more conditions, this Guidance Note provides background information on compliance and reporting, with more specific information on independent audit conditions and compliance conditions when they are applied.

Major proposed changes to FIRB regime from January 2021

On 5 June 2020, the Federal Treasurer announced further major proposed changes to Australia's FIRB regime to address national security risks and ensure greater compliance with FIRB approval conditions.

The Government's proposed changes, if passed, will be the most comprehensive reforms to Australia’s foreign investment review framework in more than 20 years, and will come into effect on 1 January 2021.

Most significantly. the proposed changes include, amongst others:

• the imposition of a permanent $0 threshold for all foreign investments in sensitive national security businesses, whilst the current temporary $0 threshold for all other foreign investments will revert to the pre-29 March 2020 thresholds (subject to
  indexation);
• the ability of the Treasurer to impose new conditions and to unwind a transaction after FIRB approval has been granted, in cases where new national security
  concerns arise; and
• certain types of passive investments ceasing to require FIRB approval.

While the extent and impact of these changes will vary depending on the actual legislation (and corresponding regulations) that is passed, they do not immediately affect the 29 March 2020 temporary changes set out above. The Government has indicated that it will release exposure draft legislation in July 2020 ahead of a six week consultation period. Following the consultation, the legislation will be introduced to Parliament with a scheduled commencement on 1 January 2021. So we can expect the current regime to continue until 1 January 2021.

For further details on the proposed changes, please refer to our full article here.