Foreign investment

Acquiring a business in Australia

Most business or company acquisitions or investments in Australia are undertaken by private treaty. However, if the target is an Australian company or registered scheme that is listed on a stock exchange (such as the Australian Securities Exchange (ASX)) or an unlisted company with more than 50 members (Relevant Entity), then Chapter 6 of the Corporations Act 2001 (Cth) (Corporations Act) must be navigated as part of any acquisition or investment.

The general rule is that a person is prohibited from obtaining a “relevant interest” in voting securities in a Relevant Entity if that would result in the person’s voting power in the Relevant Entity:

• increasing from 20% or below to more than 20%; or
• increasing from a position above 20%.

A person’s voting power is the aggregate of the relevant interests in the voting securities of the entity of that person and its associates. There are exceptions to the general rule, including acquisitions:

• where prior shareholder approval is obtained;
• of no more than 3% in a six-month period;
• under rights issues;
• under dividend reinvestment plans; and
• under takeovers/scheme of arrangement.

Takeovers

Takeovers and schemes of arrangement are the primary methods by which an acquirer can seek to take control of a Relevant Entity in Australia.

A takeover can either be a market bid or an off-market bid. In a market bid, the acquirer purchases the target’s securities by bidding on the relevant stock exchange. The bid must be cash only and unconditional, so it is a less flexible and rarely used process.

An off-market bid is made directly to the target’s security holders, can be conditional and offer any form of consideration. An off-market bid can also be used to acquire the target’s unquoted securities such as options.

The process of a takeover bid and the timing of the steps in that process are prescribed by the Corporations Act, including the production and delivery of a bidder’s statement and a target’s statement.

Scheme of arrangement

A common alternative to a takeover bid is a scheme of arrangement effected under the Corporations Act. Schemes of arrangement are court regulated procedures between the target and its shareholders and, as a result, the process can only be used for a “friendly” acquisition.

After agreeing terms with the acquirer (which are usually contained in a scheme implementation deed), a scheme is proposed by the target and a scheme (explanatory) booklet prepared. The scheme booklet and scheme process are approved by the Australian Securities & Investments Commission (ASIC) and the court, before the target calls a meeting of its shareholders to approve the scheme.

A scheme must be approved by a majority of shareholders present and voting who between them hold at least 75% of the votes cast.

All takeovers are potentially subject to the jurisdiction of the Takeovers Panel, which is an expert panel designed to review and act quickly in relation to disputes regarding change of control transactions. Guidance published by the Takeovers Panel is relevant to the conduct of any takeover activity in Australia.

It should also be noted that there are public disclosure requirements once a person acquires a relevant interest in a listed entity of 5% or more. A disclosure must be made once a person’s relevant interest reaches 5% or more, and then again if there is a movement of 1% or more in their interest or if they cease to have an interest of 5% of more. The disclosure must be made within two business days of the person becoming aware of the change and must be on a prescribed form containing the information required by the Corporations Act.

Competition Law

The Competition and Consumer Act 2010 (Cth) (Competition and Consumer Act) prohibits mergers that are likely to substantially lessen competition in an Australian market. The provisions of the Competition and Consumer Act are enforced by the Australian Competition & Consumer Commission (ACCC). In determining whether a proposed merger would have the likely effect of substantially lessening competition, factors that are considered include:

• the actual and potential level of import competition in the market;
• the height of barriers to entry to the market;
• the barriers to entry to the market;
• the level of concentration in the market;
• the degree of countervailing power in the market;
• the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins;
• the extent to which substitutes are available or are likely to be available in the market;
• the dynamic characteristics of the market, including growth, innovation and product differentiation;
• the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and
• the nature and extent of vertical integration in the market.

Working with the ACCC

Parties to a merger are not required to notify the ACCC. However, the ACCC may intervene in a merger if it considers the merger may contravene the Competition and Consumer Act. This intervention may include an informal or mandatory request for information about the merger and approaching the Federal Court for an injunction to prevent the merger proceeding.

Under its merger guidelines, the ACCC recommends notification where the proposed merger will result in the merged firm having a post-merger market share of greater than 20%.

Parties have two avenues available to have a merger considered:

• informal merger review; and
• merger authorisation.

The informal merger review process provides the parties with the ACCC’s informal view on whether a merger proposal is likely to breach the Competition and Consumer Act and whether the ACCC intends to intervene.

A merger authorisation will be granted by the ACCC where the parties can demonstrate net public benefit from the proposed merger.

Foreign investment regulation

Foreign investment in Australia is regulated by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). Under the FATA before undertaking certain activities in Australia, a “foreign person” may be required to notify and seek a “no objection” approval from the Treasurer (Approval). The review function for an approval is delegated by the Treasurer to the Foreign Investment Review Board (FIRB).

Broadly, the FATA outlines two primary categories of investments by foreign persons which may require FIRB approval – those requiring mandatory notification (Notifiable Actions) and those for which voluntary notification can be made (Significant Actions). On 1 January 2021, the FATA was substantially amended, introducing new approval categories with a focus on actions that may pose a risk to Australia’s national security. The two new categories are “notifiable national security actions” (Notifiable NSA) requiring mandatory notification and “reviewable national security actions” (Reviewable NSA) for which voluntary notification may be made.

FIRB routinely seeks input from the ACCC (and other government agencies) on mergers that come before it. This will impact the parties’ decision whether to voluntarily notify the ACCC of the merger beforehand.

Failure to notify of a Notifiable Action or Notifiable NSA carries penalties (both criminal and civil) and may also result in the investment being unwound. Similar penalties can apply to transactions the Treasurer considers to be Significant Actions or Reviewable NSAs for which no voluntary notification was made but where the transaction is subsequently considered contrary to the national interest or raises a national security risk, highlighting the importance of seeking advice on whether to obtain approval or not.

Foreign person

The definition of “foreign person” is broad, and generally covers overseas residents, foreign corporations or foreign governments and entities in which such people hold an equity interest of at least 20% (or if two or more, an aggregate equity interest of at least 40%).

Tracing

In considering whether a person is a "foreign person", the FATA requires interests in securities or control over voting power of 20% or more to be traced through a corporate group. The result is that the ultimate foreign shareholders of an entity may be deemed to be acquiring the same interests as that of its subsidiaries - meaning those ultimate foreign shareholders will require FIRB approval in addition to the subsidiaries. It is important to seek advice early in order to ascertain the full shareholding structure and relevant information to ensure all impacted parties are adequately captured in the one approval. Adding new applicants after an application has been lodged can cause delays in obtaining approval (even if those applicants are related or part of the same corporate group).

For example, an acquisition by an Australian group of companies which are ultimately foreign owned may still trigger a notifiable action, irrespective of the fact that it is an Australian entity actually making the acquisition.

Types of investment requiring FIRB approval

Certain investments in entities, businesses, or Australian land which are undertaken by foreign persons are typically Notifiable Actions under the FATA.

Notifiable Actions

Notifiable actions for investments in entities or businesses include:

• investments of 20% or more in:
  • an Australian business or entity; and
  • “sensitive businesses” such as telecommunications, media, transport, human resources, military and defence and nuclear mines or facilities; and
• acquisitions of a direct interest in an Australian entity or Australian business,

in each case which exceed in value the relevant monetary threshold, which varies depending on the location of the investor and type of action.

Notifiable actions for investments in Australian land include:

• acquiring an interest in developed commercial land (including interests in an Australian land corporation or land trust, being an entity where interests in Australian land account for more than 50% of the entity’s total assets, or leases with a right to occupy which exceeds five years);
• acquiring an interest in developed commercial land which is considered sensitive (for example, where the land has public infrastructure on it);
• acquiring an interest in agricultural land;

again in each case which exceed in value the relevant monetary threshold, which varies depending on the location of the investor and the type of land involved.

In addition, acquiring an interest (of any value) in:

• residential land or vacant commercial land;
• a mining, production or exploration tenement; and
• an Australian land corporation or land trust (if more than 10% of the assets held by that entity are the above types of land, will be a notifiable action.

Notifiable actions for investments by foreign government investors may include (but are not limited to):

• acquisitions of an interest of 10% or more in an Australian business or entity (of any value);
• acquisitions (of any percentage) where that interest allows the investor to participate in the management and control of the business;
• starting an Australian business; or
• acquiring an interest (of any value) in Australian land.

Notifiable National Security Actions (NSAs)

Notifiable NSAs include:

• starting or acquiring a direct interest in a “national security business”, which generally includes businesses involving:
  • critical infrastructure assets (such as ports, airports, telecommunication assets or carriers, utility assets);
  • storage or access to security classified information;
  • supplying goods, technology or critical services to defence or intelligence communities; and
  • storage or maintenance of personal information of the defence or intelligence community which, if accessed could compromise Australia’s national security; or
• acquiring an interest in “national security land”, being Australian land which includes:
  • land owned or occupied by the Australian Defence Force (ADF) and “defence prohibited areas” (as those terms are defined under the Defence Act 1903 (Cth)); and
  • land in which an agency in the intelligence community has an interest, if the interest is publicly known or could be known upon making reasonable enquiries.

National Interest Test

When reviewing an application involving a Notifiable or Significant Action, the Treasurer’s (with assistance from FIRB) key consideration is whether the proposed transaction will be “contrary to national interests” of Australia.

In undertaking this review, the Treasurer considers a range of factors, including:

• national security;
• competition;
• Australian government policies including taxation;
• impact on the community and economy; and
• the character of the investor.

If an application is made for a Reviewable NSA or Notifiable NSA only (and does not involve a Notifiable or Significant Action), the application will be reviewed against the national security limb only.

In either case, when making its assessment, the Treasurer will consult with other government departments and agencies, notably the Australian Taxation Office and the ACCC. This process can result in various requisitions flowing from these consultation partners through FIRB to the relevant applicant for their response. To avoid delays, applicants should seek to address key tax, competition or other relevant national interest considerations in their initial application as far as possible. In addition, changes to transaction structures necessitate amendments to the relevant application and may also contribute to delays.

Despite this consultation process, the government respects any “commercial-in-confidence” information it receives and ensures that it is kept secure within each department it consults. It will not share applications with other third parties unless it has the applicant’s permission or is ordered to do so by a court.

Powers of the Treasurer

The Treasurer can “call in” for review actions which do not have approval or were not otherwise notified, if the Treasurer considers that the action may pose a national security risk. The power can be used while an action is still “proposed” and up to 10 years after the action completes. For investments “called in”, the Treasurer may give approval, prohibit the action, or require divestment. A foreign person can extinguish the Treasurer’s ability to use the “call-in” power by voluntarily notifying.

The Treasurer also has a “last resort” power which allows the review of actions after 1 January 2021 (even if approval has been issued) where exceptional circumstances arise. Such circumstances include:

• where the business structure of the foreign person has materially changed since the original notification;
• if the Treasurer becomes aware of a materially false or misleading statement or omission in the original notification process; and

as a result of the above:

• the Treasurer is reasonably satisfied the circumstance raises or relates to a national security risk; and
• exercising its last resort powers is reasonably necessary to eliminate or reduce the national security; and
• the use of other options under the government’s existing regulatory systems would not adequately reduce the national security risk.

As part of the review of an action under the last resort power, the Treasurer is obliged to negotiate in good faith with the applicant and consult with, and obtain advice from, the national intelligence community. Following conclusion of the review, the Treasurer may give approval (conditional or unconditional), vary or revoke pre-existing conditions on an approval, prohibit the action, undo a part or the whole of the action or require divestment.

Free Trade Agreement countries

Australia is currently party to 10 free trade agreements (FTAs) under which it has made various commitments relating to foreign investment screening. A key commitment is a variation to the monetary screening thresholds which may apply to investors from the relevant country or region. Depending on the specific country of origin, investors generally benefit from a higher threshold. The applicable countries include USA, New Zealand, Japan, Singapore, China (amongst others) together with countries that are signatories to the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership (CPTPP).

If interests in entities are traced through multiple jurisdictions, the fact that the ultimate parent is located in an FTA country will not guarantee that the higher monetary threshold would be available. FIRB will only apply the higher threshold if the entity taking the action is located in the FTA country.

Making an application to the FIRB

If approval is required, the relevant “acquirer” should apply for (and secure) approval from FIRB in advance of signing the relevant transaction documents. If this is not practicable, the parties may proceed with signing transaction documents provided they specify that approval is a condition precedent to the parts of the agreement which relate to the acquisition of the relevant interest.

Determining whether approval is necessary is critical as applications attract fees ranging from A$4,000 up to A$1,045,000 per Notifiable Action, depending on the value and classification of the proposed investment. These fees are in addition to the costs of obtaining advice and preparing the necessary applications. Application fees are usually not refundable. Once an application is filed (and the relevant fee paid) FIRB will examine the proposed acquisition and make a recommendation to the Treasurer on whether the proposal is suitable. As part of that process, FIRB may seek additional information. This may delay the consideration by FIRB so it is important to provide as much information as possible in the application.

FIRB has 30 days to consider the application with a further right to extend that period by up to 90 days via an interim order. Following the Treasurer’s determination, FIRB has 10 days to notify an applicant of the outcome of the application.

Practically, if FIRB’s review is still incomplete and the 30-day period is nearing expiry, it will likely approach the applicant to agree a voluntary extension of time.

The voluntary extension is far more flexible than an interim order as it can be agreed at any time, for any period, although usually it is a week or two weeks at a time, and multiple voluntary extensions may be sought.

Likelihood of application approval

The Treasurer has the power to prohibit or impose conditions on proposed transactions which the Treasurer determines are not in line with Australia’s national interests. Conditions may also apply as a matter of course for certain transactions (e.g. development conditions for vacant commercial land acquisitions).

Transactions in relation to sensitive businesses may be subjected to greater scrutiny. Similarly, Australia’s political relationship and the global economic climate may impact the level of scrutiny applied to investors from certain countries or investments made into certain industries.