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In the first part of our series on transacting with the PRC, we talked about the capital controls and overseas direct investment restrictions imposed by the Chinese government on Chinese businesses looking to invest abroad and what Australian companies can do to mitigate risk associated with these approvals in a transaction.
In this article, we consider the foreign investment regime that governs certain investments in Australia by Chinese and other foreign investors.
Mapping the landscape – foreign investment in Australia
Foreign investment accounts for approximately 4% of Australia’s GDP. David Irvine AO, the Chairman of FIRB, notes that ‘without overseas investment, we would have fewer jobs, a lower rate of economic growth and an overall lower standard of living’. Foreign direct investment is positive for the Australian economy and foreign owned or invested businesses contribute to more than a quarter of our economy.
In 2017, the US and UK were the top two economies that invested into Australia as part of a $3.3 trillion foreign investment pie. Hong Kong (SAR of China) and mainland China were the fifth and ninth largest investors in Australia in that pie. However, in terms of Chinese investment, Australia is the second largest recipient of Chinese outbound investment after the US, with USD 99 billion invested here since 2008.
Australia, like most countries including China, has a regulatory framework in place to govern foreign investment into Australia. This framework seeks to ensure that foreign investments meets certain criteria such that they are not contrary to the national interest.
The Foreign Acquisitions and Takeovers Act 1975 (Cth) empowers the Treasurer to block an investment if the Treasurer is satisfied that the transaction would be contrary to the national interest or apply conditions on the way the investment is implemented to ensure it is not contrary to the national interest. The factors the Treasurer considers when assessing a foreign investment proposal includes the impact on the economy, community, national security and competition. The Foreign Investment Review Board (FIRB) was established to advise the Treasurer on these decisions.
It is very rare for FIRB to advise the Treasurer to block a transaction that requires foreign investment approval. Indeed, David Irvine AO notes that ‘the role of the FIRB is to facilitate rather than impede foreign investment’. For example, in 2016-17 more than 14,000 applications were approved (including 9,714 from Chinese investors) and only three applications were rejected (noting that FIRB seeks to work with applicants to address any national interest concerns before rejecting an application).
When is foreign investment approval required?
If a transaction involves a PRC or other foreign investor, it is important to consider whether the transaction triggers the foreign investment regime. If FIRB approval is required, there is a risk that the transaction could be blocked so this is something that should be identified early on by both parties.
If approval is required but not obtained, the consequences for breaching the rules can include criminal and/or civil penalties being imposed on the investor as well as the forced divestment of the asset / interest. These compliance risks sit with the investor, although a forced divestment will be problematic for other shareholders of an Australian entity.
The foreign investment regime kicks in if a transaction is a ‘notifiable action’ or a ‘significant action’. At a high level:
a notifiable action requires the foreign investor to notify FIRB and receive approval before undertaking the transaction; and
a significant action does not require mandatory notification before undertaking the transaction but is subject to potential review by FIRB during a certain period.
The tests for determining whether a transaction is a notifiable or significant action are relatively similar (noting that a significant action can also be a notifiable action). However, significant actions capture a broader set of transactions (including upstream transactions higher up the corporate chain through tracing rules) but must involve a change in control. These tests are technical and legal advice should be obtained.
As set out in the table below, there are three practical considerations to determine if FIRB approval is mandatory for a transaction: the identity of the foreign investor; the type of interest being acquired; and the size of the transaction.
What are practical takeaways for PRC transactions?
Based on our experience, below are some practical takeaways that can help ensure that a transaction involving a PRC entity that requires FIRB approval or notification proceeds as smoothly as possible:
State-owned enterprises – many PRC entities are state-owned enterprises for historical reasons which will instantly trigger the requirement for FIRB approval as a notifiable action. Even if the entity that is investing is not a state-owned enterprise, its ultimate ownership may be traced to the government which would then deem it to be a state-owned enterprise. It is important to note that if a state-owned enterprise acquires an interest in an Australian company that is more than 20%, all subsequent acquisitions by that Australian company will be notifiable transactions because the Australian company will be deemed to be a foreign government investor due to the tracing provisions.
Early engagement – under the legislation, FIRB has 30 days after receiving payment of the application fee for an application to make a decision. This can be extended by up to 90 days. FIRB often has a backlog, so it is important to engage early with FIRB to ensure that FIRB approval does not hold up a transaction if there are critical timeframes at play.
Condition precedent – it is common for a PRC investor to require a condition precedent to the transaction in its offer which requires FIRB approval to be granted if it is a notifiable action or, if the transaction is a significant action, to require a no objection notification from FIRB or the lapse of FIRB’s review period. Conditions precedent can hold up a transaction, so it is important from the Australian entity’s perspective to query early in the process whether FIRB approval is required and, if so, whether the investor is likely to receive that approval.
Imposition of tax conditions – if a transaction is a significant or notifiable action, FIRB can impose various conditions on its approval. The most common conditions relate to tax. For example, standard tax conditions may include a requirement that the applicant and/or entities within its control group comply with Australian tax law and provide documentation to the ATO to show compliance. More information about tax conditions can be found here. This is another reason why there should be early engagement with FIRB so that the PRC investor can ensure it can comply with any likely tax conditions.
Getting information from the investor – as part of the application process, FIRB may require detailed information about the shareholders and directors of the investor (including police clearances). If the investor is a PRC entity, this could potentially require certain individuals to return to their place of birth in the PRC to obtain police clearances which can create time delays. If the PRC entity is a large state-owned enterprise, then this could add even further delays depending on how many individuals need to provide information to FIRB.
Cost – the fees associated with a FIRB application must be paid before the application will be considered. The fees change based on the category and value of the transaction and range between $5,000 to over $100,000. Here is a link to a fee estimator. The PRC investor will need to factor this fee into their transaction costs and ensure that it is able to get the necessary funds out of the PRC. It is important to note that FIRB only commences its review of the FIRB application once the fee has been paid or waived.
From the perspective of Australian entities seeking investment and PRC investors looking to invest into Australia, it is important to consider whether foreign investment rules capture the proposed transaction. The key to avoiding last minute barriers to completion due to FIRB approval being required or, even worse, the stringent penalties that come with breaching the foreign investment rules, is to identify whether FIRB approval is required at the outset and then to stay in constant contact with FIRB to encourage a timely response to any application.
About the authors
Written by Brent Delaney (Partner at Hamilton Locke) and Joshua Bell (Senior Associate at Hamilton Locke).
Brent and Josh have extensive experience in advising on Sino-foreign transactions, including acting for both Australian companies and PRC investors.
 David Irvine, Address by David Irvine AO, Chair of the Foreign Investment Review Board to International CEO Forum, 16 May 2018, https://firb.gov.au/2018/05/international-ceo-forum/
 Austrade, ‘Investment – creating more opportunities for all Australians’, 10 January 2019, https://www.austrade.gov.au/International/Invest/benefits-of-foreign-direct-investment
 Department of Foreign Affairs and Trade, ‘Statistics on who invests in Australia’, June 2018, https://dfat.gov.au/trade/resources/investment-statistics/Pages/statistics-on-who-invests-in-australia.aspx
 KPMG, Demystifying Chinese Investment in Australia, June 2018
 The Treasury, Foreign Investment Review Board, Annual Report, 2016-17, p22.