Foreign Investment Review Board (FIRB) – COVID-19 changes and impact on capital raising and M&A
On 29 March 2020, The Hon Josh Frydenberg MP, Treasurer of Australia, announced temporary changes to the foreign investment review framework, designed to protect Australia’s national interest during the COVID-19 crisis. Whilst these temporary measures are in place, Australian companies (particularly small cap companies) looking to firm up additional funding from foreign investors or vendors seeking to sell Australian businesses or companies to foreign investors, are now more likely to require FIRB approval before these investments or acquisitions can take place.
Effective from 10.30pm AEDT on Sunday, 29 March 2020, the threshold amounts which determine whether Foreign Investment Review Board (FIRB) approval is required for particular investments by foreign persons have all been reduced to $0.
This means that where there were previously investment thresholds below which FIRB approval was not required (for example, investments into developed commercial property or business acquisitions below $275 million generally did not require FIRB approval), those thresholds are now $0 and the investments will require FIRB approval.
FIRB has confirmed that these changes do not apply to agreements entered into prior to 10:30pm AEDT 29 March 2020, including in relation to acquisitions that have not yet completed, regardless of whether there are outstanding conditions.
FIRB has noted on its website that the Guidance Notes will be updated to reflect the temporary threshold reduction to $0 but the details are not known yet.
The Treasurer stated in his announcement that this is not an investment freeze. He pointed out that Australia is still open for business. By temporarily reducing the foreign investment thresholds, the Australian Government will have oversight over all proposed foreign investments during this time.
Percentage ownership threshold
FIRB has separately confirmed that these changes to the monetary thresholds do not change the percentage ownership thresholds that are used to determine whether or not an interest results in a notifiable or significant transaction.
The key ownership thresholds for FIRB approval to keep in mind are:
- an acquisition by a foreign person of 20% or more of an interest in an Australian entity, valued above the monetary threshold (previously A$275m and now A$0)
- an acquisition by a foreign person of an interest of 5% or more in a company, unit trust or business that wholly or partly carries on an Australian media business, regardless of value
- the acquisition by a foreign government investor of 10% or more of an interest in an Australian entity or business, regardless of value, or the start of a new business in Australia by a foreign government investor.
Extending timeframe for review
The volume for FIRB applications will increase significantly as a result of this announcement.
Accordingly, FIRB has announced that the timeframe to review applications may now be up to 6 months, which is a significant increase from the existing 30 days. FIRB is also advertising for additional case officers in order to deal with the anticipated increase in workload.
It should be noted that applications which support Australian businesses and Australian jobs will be prioritised.
For applicants concerned about the extended timing for processing their application and to assist FIRB in the prioritisation of applications, FIRB has requested applicants to advise it if their application has commercial imperatives or broader economic impacts by submitting additional supporting information with their application.
The exact impacts of these changes will need to be considered once FIRB releases its updated Guidance Note and regulations. For example, there are a number of exemptions in the Foreign Acquisitions and Takeovers Regulations 2015 (Cth), under which FIRB approval is not required for specific acquisitions by foreign investors. At this stage, it is not known whether all of those exemptions will continue to apply.
The announcement does not deal with the fees that will be charged for FIRB applications. Prior to the announcement, FIRB fees were primarily charged based on what is proposed to be acquired and the value of the acquisition. As FIRB applications will now need to be made even where the value is below the previous threshold, it is unclear what fees FIRB will charge for such applications.
What does this mean for foreign investors seeking to participate in capital raisings by Australian companies?
Foreign investors will need to consider whether they need to seek FIRB approval to participate in capital raisings by Australian companies, where this would result in their shareholding in the company exceeding 20%.
This is particularly relevant in the context of small cap companies which previously fell below the monetary threshold (generally A$275 million) but are now captured due to the A$0 threshold. The new changes may make it more difficult for such companies to raise capital in this market or companies may need to look to an alternative structure for the capital raising. For example, existing foreign shareholders of Australian companies or new foreign investors may be practically unable to cornerstone a placement if they require FIRB approval (due to their holding exceeding the 20% threshold) because this may result in a significant delay to the availability of funding, which was previously a fast way for small cap companies to raise funds.
Exemptions are available for certain acquisitions including where existing foreign shareholders take up their pro rata entitlements under a pro rata rights issue, however this exemption does not extend to such foreign shareholders taking up additional shortfall shares or sub-underwriting rights issues (unless they have the benefit of an exemption certificate).
For foreign underwriters, business exemption certificates may be granted which allow for programs of acquisitions of interests in securities in an Australian entity, including interests acquired through the business of underwriting. The exemption certificate framework is intended to reduce regulatory burden for foreign underwriters by removing the need to make multiple notifications for a program of low risk investments. Any such business exemption certificates may be subject to conditions.
What does this mean for foreign investors seeking to make acquisitions in Australia?
The announcement effectively changes how we need to look at FIRB issues for foreign investors seeking to make acquisitions of Australian companies and businesses. Many more acquisitions by foreign investors will now require FIRB approval. Foreign investors should therefore assume that FIRB approval is required as a starting point.
With the significant increase in the timeframe for review, there is likely to be a major impact on new transactions. There may also be delays in dealing with existing FIRB applications, as there are already provisions in the Foreign Acquisitions and Takeovers Act 1975 (Cth) to extend the review period by agreement.
In these uncertain times, adding another hurdle may cause foreign investors to reconsider or delay their investments.
How long will the temporary measures last?
There is no end-date set for this temporary measure. The announcement states that the measures will remain in place for the duration of the current crisis.
Hopefully, this will only be a short-term measure and we will move out of these uncertain times soon.
Withdrawal of applications and refund of FIRB fees
In a possibly related development on 23 March 2020, FIRB announced that if applicants withdraw their applications because of delays to, or deferrals of, investment decisions arising from COVID-19 measures, then FIRB will consider refunding their FIRB fees.
Maddocks has produced guides to a range of legal issues raised by the coronavirus (COVID-19). You can access these guides here.
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