Australia is increasingly opening its doors to Chinese foreign investment and by following a few steps you can maximise the prospects of your investment application.
The rapid rise of Chinese investment in Australia has been a defining feature of recent times. Increasing from its previous ranking of sixth in 2007-2008 and eleventh in 2006-2007, China has become Australia’s second-largest investor with a total of $26.6 billion of approved investment in 2008-2009. In the past two years, there have been more applications by Chinese companies seeking to invest in Australia than throughout the previous decade. Many of these applications have been in the resources industry.
Although the Australian government welcomes and encourages this foreign investment from China, the procedures for obtaining investment approval can, at times, be complex and difficult. Becoming familiar with key aspects of the relevant legislation and the approval process will help to facilitate any investment application.
Foreign investment: the legal context
Foreign investment in Australia is regulated by the Foreign Acquisitions and Takeovers Act 1975 (FATA). The FATA, and the Australian government’s foreign investment policy, are administered by the Australian Treasurer, who is advised by the Foreign Investment Review Board (FIRB). While it is the Treasurer who is ultimately responsible for policy and decisions in relation to foreign investment, FIRB is an important element of Australia’s foreign investment approval regime.
It is compulsory for foreign persons to notify FIRB of certain types of investment proposals and substantial penalties apply for non-compliance. Investment proposals requiring notification include, for example:
- acquisitions by a foreign person or persons of a controlling interest in an Australian corporation that has gross assets exceeding $231m or where the proposal values the corporation at over $231m;
- acquisitions by a foreign person or persons if they wish to acquire an interest in an offshore company with Australian subsidiaries or gross assets are valued above $231million;
- direct investment by foreign governments and their agencies irrespective of the size of the proposal; and
- acquisitions of interests in Australian urban land.
Notification of a foreign investment proposal under FATA must be made in accordance with the forms prescribed in the Foreign Acquisitions and Takeovers (Notices) Regulations 1975. Upon receipt of a valid notice by the Treasurer, a 30-day statutory examination period commences. If the Treasurer does not take action within this period, the power to prohibit the proposal or to impose conditions expires. A further period of 10 days is available to publish any order in the Commonwealth of Australia Gazette and to notify the parties.
The 30-day examination period may be extended by up to a further 90 days by the issue of an interim order. Some parties elect to withdraw their application prior to the issue of an interim order and resubmit to preserve the confidentiality of their proposal.
"Building a relationship with FIRB based on respect and open communication will pay dividends when negotiating a mutually acceptable position"
Maximising your chances of an investment application approval
Australia’s legislation provides for government scrutiny of proposed foreign purchases of businesses and property. Foreign investment proposals are examined on a case-by-case basis with all information that may bear upon the national interest being taken into account. If upon examination the Treasurer determines that a foreign investment proposal is contrary to the national interest, the Treasurer has wide powers to prohibit the proposal and may order the divestiture of an Australian company or the unwinding of foreign investment arrangements.
It is recommended that Chinese investors take the below into account when putting together their foreign investment application:
- an acquisition of an asset in a sensitive area used by Australia’s defence forces is not likely to be allowed;
- an acquisition of the whole of a new mining province is not likely to be allowed;
- an acquisition that is likely to result in lower than market prices for Australian commodities may not be allowed;
- an acquisition of a non-controlling shareholding is less sensitive than a controlling shareholding;
- small acquisitions are less sensitive than large acquisitions;
- although some Chinese employees may be able to work on the Australian project in accordance with Australia’s immigration laws, retaining the Australian workforce will be a positive factor;
- providing new capital to an Australian company that is having difficulty in obtaining capital from other sources will be regarded favourably;
- when acquiring an interest in a listed company, it is better to acquire less than 100 per cent of the company; and
- keep the company listed on the Australian Securities Exchange rather than acquire 100 per cent and delist the company.
The other main criteria assessed by FIRB relates to capping investment in Australian companies. FIRB has a position that an acquisition of a substantial greenfields project should not be more than 50 per cent of the project or the company that owns the project. In addition, an acquisition in a major producer should also not be more than 15 per cent of the producer. However, how big a producer needs to be before it is ‘major’ is not clear and is decided on a case-by-case basis.
Consultation is the key to success
The FIRB and the Treasurer have broad discretion when assessing applications from Chinese investors, so it is worth considering how to present an application in a manner which will maximise the prospects of the discretion being exercised favourably. In most cases, the recommended approach includes careful preparation of a draft application and reasons why FIRB should approve the application.
It is important that foreign investors also work closely with FIRB before lodging any application. Experience suggests that FIRB prefers investors to directly and confidentially engage with them early in the process before any deal is signed. Building a relationship with FIRB based on respect and open communication will pay dividends when negotiating a mutually acceptable position.
The annual report from FIRB in 2008/09 shows that it considered a total of 5821 applications, with 5352 approved, three rejected, 341 withdrawn and 125 exempt. This is a high application success rate, and new investors can similarly maximise the prospects for their proposal by seeking early advice, preparing a comprehensive application, and consulting with FIRB at the beginning of the process. Minter Ellison has extensive experience in liaising with the Australian government, and can ensure that the application process proceeds with the best opportunity of being approved.
For further advice, please contact:
James Phillips, Partner – Minter Ellison
+61 2 9921 4945