• Judging from recent developments, 2014 looks to be a significant year for legislative and/or policy change in relation to foreign investment regulation in Australia
• We expect there will be growing pressure for the new Coalition government to undertake a review of Australia’s foreign investment laws
• This process may lead to changes in the monetary and investment thresholds for foreign investments in the agricultural sector. Further amendments may also be made to clarify the government’s policy regarding the national interest test

Setting The Scene

2013 saw a number of key developments which are likely to have a significant impact on foreign investment regulation in Australia, notably the Coalition’s election to federal government, the publication by the Rural and Regional Affairs and Transport References Committee (Senate Committee) of its final report on foreign investment and the national interest (Final Report) and the conclusion of negotiations on the Australia-Korea Free Trade Agreement.

These developments have set the scene for what looks to be a significant year for legislative and/or policy change in relation to foreign investment regulation in Australia. There are signals that the government will:

• Agriculture: maintain its focus on agriculture, potentially change the monetary and investment thresholds for foreign investments in the agricultural sector and take further steps to resolve the issues around establishing a register of foreign ownership; and
• National Interest Test: potentially clarify the considerations relevant to the national interest test and maintain its focus on tax and revenue leakage issues when considering whether a proposal is contrary to the national interest.

Foreign Investment In Australian Agriculture

There is a significant amount of political and media focus on foreign investment in the agricultural sector, and we anticipate that this will continue in 2014. 

It is difficult to predict what impact (if any) the Treasurer’s decision to block Archer Daniels Midland’s proposed acquisition of GrainCorp will have on Australia’s foreign investment policy. It could be viewed as lending support to the proposition that the government is moving towards tighter scrutiny of foreign investments in agriculture. Consistent with this, the Treasurer has recently appointed former South Australian Liberal Federal MP Patrick Secker to the Foreign Investment Review Board (FIRB).¹ This appointment was described as an addition of agribusiness expertise to FIRB. The Treasurer noted that Mr Secker had accumulated extensive experience in agriculture and agribusiness as a primary producer, agricultural retailer and company director prior to entering into politics.²

However, the Treasurer’s earlier decision to approve Saputo’s takeover of Warrnambool Cheese and Butter suggests that foreign investment proposals (including those in the agricultural sector) will continue to be assessed on a case-by-case basis.

In 2014, the government is likely to be under continuing pressure to apply stricter oversight to proposed foreign investments in Australia’s agriculture industry. In particular, we expect to see a move to implement some or all of the following changes which have been discussed in the Senate Committee’s Final Report:

• Agricultural Land – Individual Investment Threshold: a reduction in the monetary threshold for private foreign investment in agricultural land from AUD 248m³ to a lower level. AUD 15m was the threshold recommended by the Senate Committee;
• Agricultural Land – Cumulative Investment Threshold: a requirement for FIRB approval to be obtained once a foreign investor’s cumulative purchases of agricultural land have reached a certain threshold. Again, AUD 15m was the threshold recommended by the Senate Committee; and 
• Agribusiness: currently, FIRB approval is required for a foreign investment of 15% or more in an agribusiness valued at more than AUD 248m. The Senate Committee has suggested that, in addition, any foreign investment which exceeds AUD 54m should also be subject to FIRB approval, even if the 15% / AUD 248m threshold is not reached.

We also expect further developments to be made in relation to the establishment of the register of foreign ownership of agricultural land (Register). The government is committed to establishing the Register, but there are a number of issues relating mainly to form and content which need to be resolved. We expect the government to take further steps to resolvethese issues (which are broadly summarised below) in the coming year.

• Scope Of The Register: Legal and equitable interests in land and water rights are likely to be included. It remains to be seen whether the Register will also record interests under leases, licences and profit-sharing arrangements. The Senate Committee recommended that the Register take into account (amongst other things) ‘debt structuring and ultimate liability’. It will be interesting to see whether this brings within the scope of the Register security interests acquired by foreign banks.
• Monetary And Investment Thresholds: The Senate Committee recommended that the Register sets no minimum thresholds and captures ‘all foreign investment’. This is consistent with the approach which is taken in Queensland under the Foreign Ownership of Land Register Act 1988 (Qld) (although the Queensland register records foreign ownership of all land, not just agricultural land). If Queensland is considered to provide a useful precedent, the government may be under pressure to adopt a similar recording system which is separate from, and additional to, the FIRB approval process.
• Public Access To The Register: Although the Senate Committee is mindful of issues of commercial confidentiality, it expresses in its Final Report that the information on the Register should be ‘as accessible to public and parliamentary scrutiny as possible’. According to the government, the purpose of the Register is to ‘inform public debate or policy’.⁴ The question for the government will be to what extent disaggregated and potentially commercially sensitive information needs to be disclosed to achieve that purpose.

Clarification Of The National Interest Test

When considering a foreign investment proposal, FIRB and the Treasurer will assess whether the proposal is ‘contrary to the national interest’. The ‘national interest’ is not defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). This is intentional, and allows foreign investment proposals to be assessed on a case-by-case basis. For example, this flexibility allowed the Treasurer to remove the foreign investment sell down conditions imposed on Yanzhou in connection with the merger of its subsidiary, Yancoal, with Gloucester in March 2012. As noted in our release in respect of this decision, it recognises the reality that national interests may change over time and flexibility is necessary to recognise changing economic and industry conditions (in Yancoal’s case, the emerging challenges in the Australian coal industry). 

Despite this, criticism has been levelled at the national interest test for being too broad. In its Final Report, the Senate Committee expressed concern about the lack of a systematic approach taken by FIRB to the national interest test and the lack of information made publicly available by FIRB in relation to foreign investment decisions. 

These developments may well be an impetus for the government to undertake a review of Australia’s foreign investment laws and policies in 2014, with the scope of the national interest test being the focus of such review. 

There is unlikely to be significant appetite to codify the national interest test in the FATA. To do so may remove the flexibility which allows FIRB and the government to respond timely to the changing investment conditions. However, there is growing pressure for the government to provide greater guidance on the factors which the government typically considers when assessing if a proposal is contrary to the national interest. The following factors are those which we think require greater clarification:

Tax / Revenue: Impact on Australian tax revenue is one of the factors which FIRB considers when assessing whether a proposed foreign acquisition or investment is ‘contrary to the national interest’. In 2013, we began to see a subtle shift in focus by FIRB on tax and revenue leakage issues in the context of the national interest assessment. Issues relating to tax were also considered by the Senate Committee, resulting in a recommendation that ‘the government further strengthen Australia’s tax regulations in order to protect against the erosion of Australia’s tax revenue’.⁵ Transfer pricing, capital gains, passive income and thin capitalisation were identified as being areas of particular concern.

The Treasurer has recently indicated that tax arrangements will continue to be scrutinised as part of the national interest assessment, particularly if a proposed transaction may result in the loss of a significant amount of revenue.⁶ These comments signal a continued focus by the government and FIRB on the tax and revenue implications of foreign investments.
In practice, foreign investors should be prepared to answer questions and address concerns regarding acquisition-related and post-acquisition arrangements which have implications on the tax revenue payable by the post-acquisition entity. These questions may cover the target company’s cross-border arrangements which have major revenue or expenditure implications (e.g. major cross-border supply contracts). 

However, it would be helpful for the foreign investment policy to clarify the specific aspects of the investor or the target which will be subject to greater scrutiny. 

Corporate Governance Arrangements: Corporate governance arrangements have been the subject of recent conditional approvals, mainly in the context of foreign investment proposals by State owned enterprises (SOEs). For example, we have seen requirements for there to be a minimum number of independent directors (Cubbie Station and Yancoal), for at least 50% of the SOE-appointed directors to be resident in Australia (State Grid), for the Chief Executive Officer and Chief Financial Officer to have their principal place of residence in Australia (Yancoal) and for a majority of board meetings in any calendar year to be held in Australia (Yancoal). 

Greater guidance and transparency around the types of corporate governance conditions and the reasons for their imposition would be welcomed. 

Agribusiness: Australia’s foreign investment policy states, in broad terms, some of the factors which the government will consider in assessing an investment in agriculture. These include, for example, ‘the quality and availability of Australia’s agricultural resources, including water’. Water rights were in turn a particular focus of the Treasurer’s conditional approval of the Cubbie Station acquisition in 2012. 

While individual investment proposals will likely continue to be considered on a case-by-case basis, it would be of assistance to further clarify the particular focus areas of FIRB in the context of foreign investments in this sector.

In rejecting Archer Daniels Midland’s proposed acquisition of GrainCorp, the Treasurer noted that the proposed acquisition had ‘attracted a high level of concern from stakeholders and the broader community’.⁷ The Treasurer reasoned that, in light of this concern, an approval would ‘risk undermining public support for the foreign investment regime and ongoing foreign investment more generally’,⁸ and that this was contrary to the national interest. 

It remains to be seen whether this link between public sentiments and national interest will become an independent criteria in Australia’s foreign investment policy. It does draw attention to the point that approval of foreign investment in a nationally significant business is a decision made by elected officials who are sensitive to public opinion. 

Management of public and stakeholder expectations should therefore be an important part of any foreign suitor’s investment planning, together with consideration of the other issues identified in this article which we predict will be the likely focus areas of the government and FIRB in 2014.

End Notes:

1. The Hon Joe Hockey MP, Media Release, Foreign Investment Review Board Appointment, 20 December 2013, available here.
2. As above.
3. Being the applicable 2013 indexed figure.
4. See the Coalition’s policy discussion paper on foreign investment in Australian agricultural land and agribusiness (August 2012), p.10.
5. See the Senate Committee’s Final Report, p. xi, available here.

6. David Crowe, David Uren, New tax test on foreign takeovers: Hockey targets profit-shifters, The Australian, 25 February 2014.
7. The Hon Joe Hockey MP, Media Release, Foreign investmentapplication: Archer Daniels Midland Company’s proposed acquisition of GrainCorp Limited, 29 November 2013, available here.
8. As above.

For further information, please contact:

Belinda Fan, Partner, Herbert Smith Freehills

[email protected]

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