The COVID-19 pandemic has prompted stronger screening of foreign investment across the globe. So in this episode we have on board Jo Wright from our very own Aspect Legal, to discuss the important changes impacting foreign investor activity and the FIRB approval process, as well as common mistakes and best practice tips. This is an important update if you are (or are dealing with) foreign investors as buyers.
- Foreign investments and the FIRB approval process
- The temporary changes to FIRB approval for acquisitions in Australian business by foreign investors
- Overview of what the position was prior to these changes
- Drilling deep into these changes
- The mistakes that can be made during the application process
- How to avoid these commonly made mistakes
- Final takeaways
COVID-19 continues to disrupt the global economy, demolishing all manner of business throughout the world. Due to this coronavirus pandemic, the Australian Government has made temporary changes to the monetary thresholds and application processing times under the regime governed by the Foreign Investments and Takeovers Act 1975 (Cth). What are these changes? And how do these changes affect your acquisitions or divestments?
In this episode, we have onboard Jo Wright from our very own Aspect Legal, to discuss the important changes impacting foreign investor activity and the FIRB approval process. We discuss the temporary changes in the FIRB approval process due to COVID. We also drill into the mistakes that are commonly made during the FIRB approval process and provide the best tips on how to avoid these commonly made mistakes. This is an important update if you are dealing with foreign investors as buyers.
Note: This has been automatically transcribed so will be full of errors! We are not providing it to you as a word-perfect version of the podcast but just as an easy way to provide you with a different way to be able to see or scan what kind of information that might be relevant to you if you are the kind of person that likes a transcript.
Joanna: Hi, it’s Joanna Oakey here. And welcome back to The Deal Room Podcast, a podcast proudly brought to you by a commercial legal practice Aspect Legal. Now today we have a very topical podcast for you all about transactions involving foreign investors and in particular, the FIRB approval process that has changed or indeed, in particular, the threshold that has changed in relation to the Ferb approval process in the recent COVID epidemic. So today, we’re talking about the changes that have come into play in relation to the FIRB approval process and the FIRB approval thresholds. And we are also just looking at foreign investment and the processes and thresholds as a whole. So to talk about this topic we have onboard Jo Wright from our very own Aspect Legal. So let’s launch straight into it with Jo.
Hi, Jo. Welcome on to The Deal Room podcast.
Jo Wright: Hi, Joanna, how are you?
Joanna: I am fabulous. Thank you so much for joining us today. Now, Jo, how about you kick it off by Why don’t you give us a quick background of your experience in the FIRB space?
Jo Wright: Okay, sure. I started my legal career at Mallesons, King & Wood Mallesons and was predominantly in mergers and acquisitions. But a large part of that work was with their foreign investment team. And we worked for probably four to five years doing foreign investment applications to Treasury I’m working on a range of matters from acquisitions, business acquisitions to land acquisitions, unit trusts, Australian land holdings, various range of acquisitions and dealing with clients from both foreign investors as well as foreign government investors. So dealt with probably in my time, I think roughly 150 applications while I was at Mallesons, ranging from all sorts of different transactions from property to corporate, to land acquisitions, so quite a diverse range.
Foreign investments and the FIRB approval process
Joanna: Right. Okay, wonderful. And look, the reason why we’re talking about things obviously today is that the big news of the moment is the new provisions that in the temporary provisions that have come through changing the thresholds that applied to the requirement for getting FIRB approval for acquisitions in Australian businesses, by foreign investors. So maybe, can you give us a little bit of an overview of what the position was prior to these changes and then also will then start to delve into what the changes are. So prior to now, what was the date? It was the end of March. I think that these changes came into place.
The temporary changes to FIRB approval for acquisitions in Australian business by foreign investors
Jo Wright: Yeah. So on the 29th of March, the Australian Government announced two significant changes to their foreign investment regime. So prior to that, they if a foreign investor wants to acquire a business or an interest, whether it’s land or business property in Australia, then they need to go through and see whether the transaction is a notifiable transaction under the relevant legislation, which is the Foreign Acquisitions and Takeovers Act, or everyone calls it the FATA. And so if the acquisition is either voluntarily notifiable or notifiable under compulsorily notifiable under the data, then it’s usually a transaction that goes for FIRB approval. And basically the way that those acquisitions work is that there’s usually a monetary threshold. So if an acquisition hits that monetary threshold, then it will be notifiable. And then the second criteria is whether the person is acquiring enough of a percentage interest in whatever they’re acquiring. So whether they’re acquiring, say 25% interest in a business, and that would trigger the notification whether, as opposed to a 10% interest, which is lower than the threshold. So what the government did on the 29th of November was basically remove the monetary threshold for all investors and remove it down to zero threshold. So if there’s a foreign investor, that whether it’s foreign governments or an individual or corporation, they’re acquiring and interested in Australia, then there is no monetary threshold that applies at the moment for the next six months.
Joanna: But we still have the proportionate ownership threshold?
Jo Wright: Correct. So there’s still the proportionate ownership threshold so they need to be acquiring depends on who the mystery so if it’s a corporation or a foreign person, Then they need to be acquiring in terms of a business acquisition more than 20% of that business. If they’re from a government investor, then they will be, then their direct investment criteria still apply, which is 10% of a company, there are different thresholds for land. So any interest, any acquisition in lands, there’s no percentage interest there. So that still applies. So it really comes down to businesses. The second criteria that the second big change they made was the notification or the processing time that they will take to process an application. So usually the turnaround time preferred is 30 days that they will get back to you and approve an application, whereas now they’ve extended that out to up to six months. But having said that, even though they’ve made that change in terms of the timeframe of up to six months, it’s unlikely that it depends on what the transaction is, but it’s unlikely that some transactions will take that full six months period to get approved, but it does Come down to what the nature of that transaction is.
Overview of what the position was prior to these changes
Joanna: Sure. I mean, you know, that’s a long period of time, though that it could take, isn’t it? So I guess that’s why it’s really important that professionals are engaged in dealing with businesses that might be selling to a foreign investor, or you know, acting for the foreign investor on the buy-side have to be aware that there might be significant delays in the timing of completion, whilst the FIRB approval is dealt with.
Jo Wright: Yeah, that’s correct. But it depends on the transaction. And if the transaction is designed to stimulate an Australian business or to stimulate jobs or retain jobs in Australian business, and there’s an urgency to that transaction going ahead, then there’s a chance that it will be processed within the 30 days and in fact, I’ve seen some transaction that has been turned around within a matter of days over the last few weeks since those changes have come in, and those transactions have been deemed urgent because they are designed to fit into the government’s criteria in terms of stimulating Australian businesses and retaining jobs. So if there is a priority in that area, then they will process them quickly. But so if there’s a transaction that will protect and support Australian businesses and jobs, and that you will get a high perch in the processing if there’s a transaction that says it’s an internal reorganization, or it’s an internal reorganization that will trigger the notification, or it’s for, say, tax purposes, then that’s unlikely to be processed anytime soon. And that will be placed a sort of to the bottom of the priority list. And in fact, I’ve seen some commentary where, for internal reorganization’s there’s some commentary saying, Just wait until the six months is over because Treasury is not going to be interested in processing those applications. That might be a bit of a harsh response, they probably will assess them, but they won’t be a high priority.
Joanna: Hmm, I guess that brings back into for the point that we should be making here, which we did mention the beginning. But let’s mention again, that these are only temporary measures. They’re only in place for six months. And then at the end of that six month period, we’re back to the previous regime that had a much higher monetary threshold. Well, we’re talking about a zero threshold right now. The threshold in the past was 254 million or something like that right?
Drilling deep into these changes
Jo Wright: Yeah, it’s currently 275 million. And you’re right like the thresholds are incredibly high for an impact they’re high for so free trade agreement partners, they have a threshold of a billion and 109 thousand and a hundred 19 million copies, I heard. So a very high threshold for free trade countries and then for everyone else the thresholds usually 275 million. But the other thing to note is that these changes are not to dampen foreign investments. They’re not. It’s a lot of the publicity has been saying, Well, every transaction is going to be notifiable now and every transaction is going to be scrutinized. That’s not necessarily true. It is, as you’ve mentioned before the percentage threshold still comes into play. And it’s also the ability to scrutinize these measures have been put in place for two reasons. One is to protect the strain jobs and to support the strained businesses. And so if a foreign investor can show that their acquisitions doing that, then there’s going to be no issue. It’s the scrutiny will come where a foreign investor is trying to I guess snap up something that’s been incredibly devalued over during the COVID period or to take advantage of this unusual economic time. So it’s really designed to protect those businesses as opposed to stop for an investment.
The mistakes that can be made during the application process
Joanna: And this brings me to another point that I wanted to delve into, which is the mistakes that can be made during the application process. And, you know, I think one of the things that you’re pointing out here, which I think is important to make clear, is that there is a path to a right strategy and perhaps a wrong strategy or mistakes that can be made along the way. So let’s just touch very briefly on any issues that you have seen in the past with, you know, applications that have been made, perhaps poorly by others that have created issues where they didn’t need to be created.
How to avoid these commonly made mistakes
Jo Wright: I think the bottom line is communication is key. So FIRB is a very misunderstood area of the law and one of the myths dispel is that it’s actually everyone refers to it being FIRB approval, and the approval actually comes from Treasury. So the treasurer has the ultimate decision making responsibility in respect to all applications that come through and the Foreign Investment Review Board FIRB is an advisory board to Treasury. So the application actually is made to the Department of Treasury. And the Department of Treasury or the ATO depending on the nature of the application will then assess that application and then make the decision or the recommendation to the treasurer. And the decision is made by the treasurer as opposed to the Foreign Investment Review Board, but they do play an advisory role. So referring to it as a privilege, not necessarily correct, but it is kind of a colloquial way everyone refers to it. So the foreign investment is it is a very misunderstood area of the law. And that’s because there’s the legislation that’s a play, but in the past has also been the policy that’s been a play as well. So it comes down to a lot of in an application, you need to address the national interest criteria. And the national interest criteria basically underlies every application. So to get approval for foreign acquisition, you need to pass the national interest test. And that is not a defined term. And the government is very reluctant to give clear guidance on what that term means because they want the flexibility in how they apply it for different circumstances. And actually, COVID provides a perfect example that they’ve now what’s in the national interest is businesses and jobs. But that’s not necessarily the case on every acquisition. So when people make an application to FIRB because people don’t understand necessarily the steps involved or what the criteria is. Often they don’t fully provide enough information to Treasury for them to assess the application or to understand the application and that can be..that’s one of the big hurdles in the application processes is there is a lot of areas that have misunderstood and misunderstood in terms of how to provide the application, what information you do provide, and then how its assessed, and what criteria Treasury’s looking at in that assessment of the application. And it all comes down to the fact that the national interest is another defines term. It’s not a defined test, it’s very open. It’s very opaque. It’s very flexible in the way that the government applies that and they’ll apply differently based on the different transaction.
Joanna: And so I guess, you know, the point is, this is one of those instances where, you know, perhaps it can seem like you’re going through a tick box exercise in terms of information that you’re providing answers that you’re providing. But the reality is, there’s a lot of commercial nous and legal nous that really needs to happen behind the scenes to make sure you’re providing the right information in the right way to maximize your chances of a positive outcome rather than something that drags on forever or down. get you the approval that you’re after?
Jo Wright: Absolutely. That’s absolutely right. you’ve explained that perfectly. And it’s when you said about the approval that you’re after conditions can be made on FIRB approval. So often FIRB approvals it the rejection rates very low. So usually an acquisition has a high approval rate, but they can be conditions placed on it. And those conditions can be placed on it if there is misunderstanding that application process.
Joanna: And I guess we get to see how the landscape will fully play out in the next six months as well. So whilst that application, the approval rate may have been high in the past, you know, maybe it’ll take a beating right now. I guess it will be interesting to see what goes on in this next six month period.
Jo Wright: I guess we’re in unprecedented time. We’ll wait and see what happens because never before I don’t think in the history of from my experience, the thresholds never been zero. So it’s going to capture a lot of transactions.
Joanna: Yeah. And so this is a point, I think it’s really important for our listeners just to understand just for us to really ram on some of these important points, the monetary threshold is zero now for foreign investors. So if you’re acting for a foreign investor, or you’re acting on the sell-side for an Australian entity that selling to a foreign investor, and then foreign investors looking at acquiring more than 20% of the entity, if it doesn’t have land, or more than 10%, if it does have land or the land rich entity, they now no matter what they’re paying, they now need to potentially get FIRB approval before that transaction can complete.
Jo Wright: Yeah, that’s correct. But also they need to be mindful that if they do if the entity does hold land, then it’s worthwhile getting legal advice on whether it will trigger FIRB now because of the definition of an Australian land cooperation in it. So there’s a percentage holding that the corporation. If they hold a certain percentage holding upland, then that will trigger FIRB and there’ll be classism straight land corporation.
Joanna: Hmm. So many complexities, Jo, so many complexities.
Jo Wright: Definitely.
Joanna: That’s why we have FIRB experts like you on the case.
Jo Wright: Exactly. Yeah, it’s a very complex area. There’s a lot of different nuances and different definitions and different percentages. You think that you’re all clear in one area, and then all of a sudden you realize, oh, that business is an Australian mining Corporation because it holds these interests inland, and then you’re back at being notifiable. So it’s a very tricky area of the law.
Joanna: Brilliant. Okay. All right. Well, look, I guess, do we have any parting words, it’s a tricky area of the law. Obviously, be aware that there’s now these absolute change in thresholds that will make a big impact if you’re dealing with foreign investors who are looking at Australian assets for purchase Anything else that you want to throw out there, Jo? In terms of takeaways for our audiences?
Jo Wright: Final remarks would be that if there are transactions not to get scared off by the six-month delay or the zero threshold, it’s not about limiting or stopping for an investment. It’s still, you know, the treasurer and the Prime Minister still say this country’s open for business and is inviting foreign investment. So it’s not about being scared off by those criteria. It’s just about getting the right advice as to how you can work your transaction into the current climate.
Joanna: Brilliant. Okay, absolutely love it, well Jo, thank you so much for joining us on The Deal Room today.
Jo Wright: My pleasure. Thanks so much.
Joanna: Well, that’s it for this episode of The Deal Room podcast. And of course, in this episode, we were talking with the fabulous Jo Wright, who’s one of our senior lawyers here at Aspect Legal and who is a specialist in dealing with the FIRB approval process. Now if you’d like more information about these topics, then head over to our website at thedealroompodcast.com, where you’ll be able to download a transcript of this podcast episode. If you’d like to read it in more detail there, you’ll also be able to find out how you can contact Jo Wright or any of our other legal eagles at Aspect Legal If you or your clients would like to discuss any legal aspects of foreign investment, or the FIRB approval process, as Jo spoke about today, there are a lot of mistakes that can be made in this area. And certainly one of those areas where it’s absolutely imperative that you have a specialist expert advice guiding you through the process. And of course, there are many, many, many businesses and many transactions that will be captured now that had not been captured in the past in terms of foreign investment into Australian businesses because they simply hadn’t met the thresholds that were in place in the past and of course, as we said that threshold right now the period of time that these new temporary provisions are in place is zero. So if you’re involved in a transaction, you’re concerned that the transaction might trigger the requirements for FIRB approval, then get in contact, we can help guide you through the many considerations and also help you put the application in place if indeed that is required in your situation. Now, of course, we can assist on a lot more than just advice on foreign investment and the approval process. We can, of course, assist through our great range of services to help guide businesses through sales, acquisitions, and mergers. So if you or any of your clients are looking at sale or acquisition then just get in touch. As I said, you can find us on the website thedealroompodcast.com where you can book in initial free discussion with any valid legal eagles at Aspect Legal or you can head over to our website at www.aspectlegal.com.au. We work with clients both big and small and have different types of services depending on size and complexity so don’t hesitate to book an appointment if you’d like to find out how we might be able to assist well that’s it for today. I hope you enjoyed the discussion today with me Joanna Oakey and of course a very special guest Jo Wright from Aspect Legal. You have been listening to the deal room podcast, which of course is brought to you by our commercial legal practice Aspect Legal, see you next time.
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