As mergers and acquisitions (M&A) advisors, a common condition precedent seen to the completion of a deal is Foreign Investment Review Board (FIRB) approval.
What is FIRB?
- FIRB is a non–statutory body established in 1976 to advise the Treasurer and the federal Government on foreign investment matters. FIRB’s functions are advisory only and it does not make decisions on foreign investment proposals. Responsibility for making decisions on foreign investment policy and investment proposals rests with the Treasurer. However, the Treasurer has provided delegations to senior officers in the Treasury and ATO to make decisions on applications that are consistent with the foreign investment framework. Certain applications are decided by other Treasury portfolio ministers.
- Foreign investment proposals in Australia are subject to review by FIRB if they exceed certain monetary thresholds or involve sensitive sectors such as national security, media, or telecommunications. FIRB’s review process is designed to promote transparency and accountability, and to provide a level playing field for foreign and domestic investors.
- FIRB’s role is to advise the federal Government on the national interest implications of foreign investment proposals and to provide recommendations on whether a proposal should be approved, approved with conditions, or rejected. The national interest test applied by FIRB is guided by criteria such as the impact of the proposal on competition, the Australian economy, and national security.
Why does Australia want foreign investment?
- Foreign investment contributes to the prosperity of businesses, communities and the overall economy. Australia is an attractive destination for foreign investment due to its open economy and stable policy settings. Australia welcomes foreign investment for several reasons:
- Job Creation: Foreign investment can bring new jobs and employment opportunities to the local economy. This can have a positive impact on the community and help to boost economic growth.
- Capital Infusion: Foreign investment provides much-needed capital to support Australian businesses and finance infrastructure projects. This can help to spur economic growth and improve the standard of living for all Australians.
- Technology Transfer: Foreign investment can bring new technologies and ideas to Australia, which can help to modernize local businesses and improve their competitiveness.
- Increased Competition: Foreign investment can increase competition in the local market, which can lead to better quality products, lower prices, and more innovation.
- Diversification: Foreign investment can help to diversify the Australian economy and reduce its dependence on a single sector or industry. This can help to insulate the economy from downturns in individual sectors.
- Improved Balance of Payments: Foreign investment can help to improve Australia’s balance of payments, which is the difference between the country’s exports and imports. A positive balance of payments can help to strengthen the local currency and reduce inflation.
- In summary, foreign investment is important to Australia because it can help to create jobs, provide capital, improve competitiveness, and boost economic growth. FIRB’s role is to ensure that foreign investment is consistent with the national interest and does not have negative impacts on the Australian economy or national security.
When is FIRB Approval required?
- Amongst other things, the role of FIRB is to examine proposed investments that are subject to the foreign investment framework (Framework), which encompasses the Foreign Acquisitions and Takeovers Act 1975 (Act) and supporting legislation and regulations, and to make recommendations to the Treasurer and other Treasury portfolio ministers on the national interest implications of these proposals.
- Foreign investment proposals in Australia may require FIRB approval if they exceed certain monetary thresholds, involve a change in control, or involve sensitive sectors. The thresholds and sectors are determined by the Act and regulations made under it.
- Generally, FIRB approval is required for foreign investment proposals if:
- Monetary Thresholds: The investment exceeds the monetary thresholds set by the Australian Government.
- Change in Control: Where, for example, the Treasurer is satisfied that one or more foreign persons begin to control the entity or business being acquired.
- Sensitive Sectors: The investment is in a sensitive sector, such as national security, media, or telecommunications.
- Ineligibility: The foreign investor is considered ineligible, such as an individual or entity from a country subject to sanctions by the Australian Government.
- It is important to note that these requirements can change periodically as the government reviews and updates its foreign investment policies. Additionally, specific conditions and exemptions may apply in some cases. Therefore, it is advisable to consult with a professional or directly with the FIRB for a comprehensive understanding of the requirements for a specific investment proposal.
- FIRB assesses foreign investment proposals in Australia and categorises investments into three categories:
- Notifiable: This category refers to foreign investment proposals that do not require prior approval from FIRB but must be notified to the agency. This type of investment is typically subject to lower monetary thresholds and may not involve sensitive sectors.
- Conditional: This category refers to foreign investment proposals that require prior approval from FIRB and are subject to conditions. This type of investment typically involves sensitive sectors and may exceed the monetary thresholds for notifiable investments.
- Prohibited: This category refers to foreign investment proposals that are prohibited under the Act and regulations made under it. Prohibited investments may pose a risk to national security or competition and are not allowed under any circumstances.
- Whether a proposed M&A is an exempt, approved or prohibited acquisition depends on the type of asset being acquired (e.g. manufacturing companies, agricultural land and water assets are more likely to be deemed in the national interest), its value, the proportion being acquired (lower value or proportion often means more likely to be exempt or approved), the country of origin of the investor (some countries have free trade agreements with Australia and therefore higher thresholds) and the type of investor (private or government).
Who is a Foreign Person under the Framework?
- A foreign person is defined in section 4 of the Act to mean the following:
- an individual not ordinarily resident in Australia; or
- a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest (at least 20%); or
- a corporation in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest (at least 20%); or
- the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest (at least 20%); or
- the trustee of a trust in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest (at least 20%); or
- a foreign government; or
- any other person, or any other person that meets the conditions, prescribed by the regulations.
What is being proposed to be acquired?
- FIRB approval will be likely needed if a foreign person is proposing to acquire:
- an interest in Australian land or an Australia land entity;
- at least 10% of a mining, production or exploration entity;
- a direct interest (usually 10% or more) in an Australian entity or Australian business that is an agribusiness;
- a substantial interest (usually 20% or more) in an Australian entity;
- at least 5% in an Australian media business;
- a direct interest (usually 10% or more) in a national security business or an entity that carries on a national security business; and an interest in national security land.
Has the relevant monetary threshold been met?
- Monetary thresholds are indexed annually on 1 January save for the cumulative threshold for agricultural land ($15m) and the threshold for agricultural land for Thailand investors ($50m) which are not indexed.
- If the relevant monetary threshold test is met, it is likely that FIRB approval will be needed. The following are some example monetary thresholds:
- Acquisitions in non-sensitive businesses by private investors from certain Free Trade Agreement partners (FTA partners), $1,339m
- Acquisitions in sensitive businesses by FTA partners’ private investors, $310m
- Acquisitions in sensitive and non-sensitive businesses by non-FTA partners’ private investors, $310m
- National security business, $0
- Media sector, $0
- Agribusiness, generally $67m (cumulative)
- Residential land, $0
- Vacant commercial land, $0
- Developed commercial land, $310m or $1,339m for FTA partner’s private investors
- Agricultural land, generally $15m (cumulative) or $1,339m for Chile, NZ and US private investors
- Mining and production tenements, $0 or $1,339m for Chile, NZ and US private investors
- Any interest by foreign government investors, $0
Do any exemptions apply?
- If an exemption applies, FIRB approval is not required. The following are some example exemptions included in the Act:
- Individuals purchasing land as joint tenants with their Australian citizen spouse (this exemption does not include purchasing property as tenants in common).
- Acquisitions by persons with a close connection to Australia.
What is the Tracing Rule?
- Under the Act, substantial interests (at least 20%) can be traced through corporations and trusts to determine the true value and proportion that a foreign person is seeking to acquire in a given asset.
What is the Associate Rule?
- The Act sets out people who are associates of a person (e.g. any relative of the person). When multiple entities are held to be associates, they will be treated as a single entity when determining whether they hold a substantial interest (at least 20%) in a given asset.
What advice should be sought?
- Before making an investment decision, foreign investors should obtain professional advice on the following questions:
- Is FIRB approval required and is the proposed M&A permitted?
- If FIRB approval is required, what application should be made?
- If FIRB approval is required, how do you structure the proposed transaction and communicate the merits of the proposal to gain approval?
