A snapshot of the Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020
Several weeks ago, the Treasurer announced important changes to Australia’s foreign investment framework which stated that the monetary screening thresholds would be reduced to zero for all actions. We discussed those changes and their implications here, while we waited for the detail of the changes to be revealed in the updated regulations.
Those updated regulations are out now. The Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020 are short, sharp and do not add much detail beyond what the Treasurer announced and FIRB indicated on their FAQ page.
The key headlines to note are:
Thresholds are zero
All monetary thresholds are now zero for all actions. This means that many transactions which previously would not have required foreign investment notification will now either require approval before the transaction can proceed (if it is a notifiable action) or be subject to later review by FIRB if it is a significant action).
However, this change does not impact on the tests that need to be applied to determine if an action is a notifiable or significant action – the only difference is that the monetary screening thresholds for all actions is now $0 (instead of changing based on the nature of the investor, the type of transaction or whether the transaction is in a prescribed sector).
This change means that it is now best practice to assume that any foreign investment in Australia is a notifiable or significant action and then to apply the analysis and determine if any exemptions apply.
There is no impact to any exemptions that are currently available in the legislation or regulations, which include the exemption around money lending agreements for taking security and foreign shareholders taking up pro rata entitlements in a rights issue.
Announcement time exemption
These changes commence from the announcement time, being 10.30pm (AEST) on 29 March 2020. The updated regulations state that any agreements entered into before the announcement time, whether conditional or not, are exempt from the changes. This is an important exemption which was flagged by FIRB and discussed in our previous article.
Since the regulations do not offer detail around what constitutes an ‘agreement entered into’ before the announcement, we expect that a key question will be whether email agreements or heads of agreement will qualify for the exemption. Currently, the legislation casts a broad net over what can constitute an ‘agreement to acquire an interest’, so it will be interesting to see if FIRB clarifies this point in their Guidance Note. Certainly, the fact that FIRB have not taken this opportunity to address various seemingly unintended consequences from the changes suggests that their view is that an application should be made if there is any doubt.
The Treasurer warned that applications could now take up to six months to be assessed and priority will be given to applications which protect Australian jobs and businesses.
These updated regulations do not address the extended application process because the statutory deadline is set out in the legislation rather than the regulations (which means it would require Parliament to amend the legislation). However, FIRB already has levers at its disposal to extend timetables, both at a statutory and practical level.
The key takeaway is that parties entering into transactions or arrangements should:
prepare for a six month delay to the transaction timetable because applications will not be assessed on a “first in first served” basis, but rather applications which persuasively show how they secure Australian jobs will jump to the front of the queue; and
be mindful of the extended timeframe when considering timing implications to your deal (such as sunset dates, working capital targets and earn out metrics, protections to deal with the extended time between signing and completion).
A practical point to keep in mind is that FIRB have hired (and are hiring) new staff to deal with the expected wave of new applications. As in any industry, inexperienced case managers are likely to rigorously follow checklists when assessing applications. For applicants, it will now be more important than ever to take the time to put together a thorough and detailed application which addresses all relevant factors to avoid even further delays.
Transactions that are captured by these changes will need to make an application to FIRB. This can have a significant impact on the deal economics because application fees can range from $2,000 to $100,000+. Here is a fee estimator.
Note that FIRB have indicated that they may consider refunding application fees for applications made before the announcement date where parties decide not to proceed due to the extended timetable.
It is expected that FIRB will release a Guidance Note on these changes soon, so keep an eye out for that on their website.
Hamilton Locke is a corporate law firm specialising in complex corporate finance transactions, including mergers and acquisitions, private equity, finance and restructuring, litigation, property and fund establishment.
If you would like any guidance on these changes and how they affect your transaction, please contact Brent Delaney, Partner (firstname.lastname@example.org), or Joshua Bell, Senior Associate (email@example.com).