Government announces options paper to modernise the foreign investment framework

WHAT YOU NEED TO KNOW

In line with its commitment to reduce red tape and put in place a more focused foreign investment framework, the Government has decided to seek further views on proposals to simplify and modernise the legislative framework for foreign investment. Proposals include:

• incorporating policy only notification and prior approval requirements into the legislative framework;
• updating the legislation to reflect current administrative practices and regulatory concepts;
• introducing measures of relaxation where certain proposals are not likely to impact the national interest; and
• amending the legislation so that it applies irrespective of transaction structuring.

Background

On 2 May 2015, in a joint media release, the Prime Minister, Tony Abbott, and the Treasurer, Joe Hockey, announced measures to strengthen the integrity of the foreign investment framework and that the Australian government (Government) wished to undertake further consultation on options to simplify and modernise the legislative framework. Further consultation ensued following submissions received by the Government in response to the options paper it released in February 2015 Strengthening Australia's Foreign Investment Framework (February Consultation Paper).

On 18 May 2015, the Government released the options paper Australia's Foreign Investment Framework: Modernising Options (Options Paper). This announcement and Options Paper continue to reflect the Government's recognition that the Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act) and Foreign Acquisitions and Takeovers Regulations 1989 (Cth) (Regulations) have remained largely unchanged since they came into effect and need to be amended to promote investor certainty and consistency in the application of the foreign investment framework and, more generally, to be more workable for modern day businesses.

Putting policy into the Act

Under the current foreign investment screening framework, proposals may require notification and prior approval under Australia's Foreign Investment Policy 2015 (Policy) as well as under the Act. This has historically caused investors a great deal of uncertainty in deciding whether or not they are required to notify FIRB or seek approval for proposed acquisitions, as policy-based requirements do not have the force of legislation.

The Government is proposing to include the Policy-only requirements in relation to foreign government investors and the media sector (including proposed changes to the 5% threshold to align with direct investment (10%) or the substantial interest threshold (15%) into the legislative framework and possibly abolishing the requirements altogether for heritage-listed developed commercial property.

Update Act to reflect core administrative practices and modern business and corporate finance concepts

The Government is also proposing that core administrative practices be included in the legislative framework to increase legal certainty and that the legislative framework be harmonised with similar regulatory regimes such as the takeover rules to reduce regulatory cost, promote compliance and leverage off an existing body of law that is better understood.

Some of the current administrative workarounds in the Act relate to information collection, use and sharing, allowing the withdrawal and resubmission of applications to facilitate the extension of the review period without the application becoming public, the default 12 month period for approvals and not proceeding with compliance action so long as the foreign person complies with certain requirements. If such practices are included in the Act, it would better support appropriate information sharing amongst relevant government departments, allow for applicants to voluntarily agree to extend the screening period on a confidential basis and give the Treasurer the statutory power to issue exemption certificates under a common framework, as well as impose or vary conditions in certain circumstances.

To harmonise with other legislation, the Government is considering changes to:

• increase the substantial interest (control) threshold for a single foreign person from 15% to 20%, aligning with the takeovers rules 20% threshold under the Corporations Act 2001 (Cth) (Corporations Act) and make similar adjustments to the threshold for the definition of "foreign government investor";
• reduce the regulatory burden for substantially Australian entities such as ASX-listed entities which at different times have foreign ownership levels exceeding 40%;
• simplify the definitions of "foreign person" and "associates" to better align with other Commonwealth legislation (for example, the Options Paper canvasses using the "associates" definition in the Broadcasting Services Act 1992 (Cth) or in the takeover rules in the Corporations Act);
• update the moneylending exemption to reflect current lending approaches;
• exempt compulsory acquisitions and buyouts following takeover bids from the requirement for prior notification and approval by FIRB;
• remove investments in financial sector companies from the foreign investment framework for all investors (so that current non-trade agreement investors are not disadvantaged by the double-up requirement for the same investment to seek the Treasurer's approval under the Act as well as the Financial Sector (Shareholdings) Act 1998 (Cth));
• exempt from compulsory notification acquisitions where a majority owner who already has "control" over an Australian company increases its direct interest; and
• import selected exceptions from Australia's takeover rules (such as those for pro-rata rights issues and dividend reinvestment plans where investors have no intention to seek control in their own right and for underwriters in the ordinary course of underwriting).

Measures of relaxation where proposals not likely to impact national interest

An important aspect of delivering a more focused foreign investment framework is to remove red tape where it is unnecessary, especially in light of the application fees which will take effect from 1 December 2015.

The majority of proposals submitted for review are approved, which suggests that most of the transactions approved may be low risk. As such, the Government is considering the following proposals where it considers there is unlikely to be an impact on the national interest:

• broadening the scope of annual programs, designed to minimise compliance costs for frequent foreign investors, to include indirect as well as direct investments in urban land (including extending its application, in certain circumstances, to foreign government investors);
• legislating interim solutions to deal with obsolete references in the Regulations in relation to the exemption for passive investments in urban land trusts;
• broadening the exemptions for dealings with urban land trusts and corporations to include indirect as well as direct dealings; and
• raising the threshold for proposals to acquire non-sensitive developed commercial real estate from $55 to $252 million.

Consistency and equal application of the Act

Lastly, the Government intends that the foreign investment framework apply equally irrespective of transaction structuring. Under the current rules, emphasis is placed on the acquisition of shares, with no discernible policy rationale for not dealing equally with other securities such as units. Regardless of transaction or whether the acquisition is direct or indirect, the Options Paper is clear that equal application is important to increasing consistency and ultimately simplifying the Act.

Submissions

Ashurst is currently preparing submissions in response to the to the Options Paper. Any Ashurst client that wishes to comment on the issues set out in the Options Paper can provide comments directly to Ashurst for inclusion in the Ashurst submission. Any such comments received will only be attributed to "industry participants" and specific organisations will not be named.

Submissions under the Options Paper close on Friday, 29 May 2015.