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2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Foreign Acquisitions and Takeovers Amendment Bill 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
General outline and financial impact 1
Chapter 1 Improving the integrity of Australia's foreign investment
screening regime 3
Index 13
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Improving the integrity of Australia's foreign investment screening regime
The Foreign Acquisitions and Takeovers Amendment Bill 2009 improves
the integrity of Australia's foreign investment screening regime by
ensuring that the Government has the capacity to examine all
substantial investment proposals that could potentially raise
national interest concerns.
The use of innovative and increasingly complex financing
arrangements has been a growing feature of investment activity over
recent years. While these types of investment arrangements may
have a solid commercial basis, they can have the effect of
delivering influence or control over Australian companies through a
variety of new ways that were not envisaged when the Foreign
Acquisitions and Takeovers Act 1975 was being drafted more than 30
years ago.
The Bill clarifies the operation of the Act by explicitly requiring
foreign investors to notify the Government where there is a
possibility that the type of arrangement being used will deliver
influence or control over an Australian company, either currently
or at some time in the future. The amendments specifically include
transactions, agreements or arrangements that include debt
instruments having quasi-equity characteristics.
Date of effect: The amendments apply from 12 February 2009.
Proposal announced: These amendments were announced in the
Treasurer's press release No. 17 of 12 February 2009.
Financial impact: Nil.
Compliance cost impact: Low. The number of foreign investment
proposals that are likely to be affected by these amendments is
very small and any additional compliance costs will be largely
insignificant.
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Outline of chapter
1. The Foreign Acquisitions and Takeovers Amendment Bill 2009
improves the integrity of Australia's foreign investment screening
regime by ensuring that the Treasurer has the capacity to examine
all substantial investment proposals that could potentially raise
national interest concerns.
2. The screening regime is underpinned by the Foreign Acquisitions and
Takeovers Act 1975. The Act relies on the notion of control to
require investors to notify investment proposals, and to trigger
the Treasurer's powers to block, or place certain conditions upon,
those proposals determined to be contrary to the national interest.
Overall, the current provisions in the Act that deal with control
have worked well.
3. However, the use of complex financing arrangements has highlighted
that ownership and control events may potentially arise, either now
or in the future, in a variety of new ways other than through
traditional shares or voting power. While these types of
investment arrangements may have a solid commercial basis, they can
have the effect of delivering influence or control in ways that
were not envisaged when the Act was being drafted.
4. The Bill clarifies the operation of the Act by explicitly requiring
foreign investors to notify the Treasurer where there is a
possibility that the type of arrangement being used will deliver
influence or control over an Australian company, either currently
or at some time in the future. The amendments specifically include
transactions or agreements that involve instruments which
eventually convert into shares or share-like interests or voting
power.
Context of amendments
5. The Government's policy approach is to encourage foreign investment
because of the potential benefits it provides to the Australian
economy. It brings new job opportunities for Australians, new
innovation and skills development, new technologies and the
promotion of competition amongst our industries.
6. However, it is important to maintain the right balance between
encouraging investment into Australia and ensuring that the
regulatory regime is robust enough to allow the Treasurer to
examine foreign investment proposals that could potentially be
inconsistent with the national interest.
7. The procedures governing foreign investment in Australia are
underpinned by the Foreign Acquisitions and Takeovers Act 1975 and
Australia's foreign investment policy. The Act requires foreign
investors to notify the Treasurer of their transactions in certain
circumstances and provides the Treasurer with the power to block,
or place certain conditions upon, those proposals that involve a
foreign person obtaining control of an Australian company that
would be contrary to the national interest.
8. The Treasurer's powers do not apply to acquisitions of interests in
Australian corporations and businesses valued below the relevant
monetary thresholds. Accordingly, references to acquisitions which
are subject to the Treasurer's powers throughout this document
refer only to acquisitions of interests in those entities valued
above the relevant monetary thresholds.
9. The Act provides for compulsory notification of acquisitions of
'substantial shareholdings'. However, the use of innovative and
increasingly complex financing arrangements that involve a
component of control or influence has been a growing feature of
investment activity over recent years. In such cases, the
ownership interest can be held in a variety of forms other than
through traditional shares and voting power. While these
arrangements may have a solid commercial basis, they can have the
effect of delivering influence or control in ways not originally
envisaged when the Act was being drafted more than 30 years ago.
10. On 12 February 2009, the Treasurer announced that the Government
would amend the Act to 'clarify the operation of the foreign
investment screening regime ... to ensure that it applies equally
to all foreign investments irrespective of the way they are
structured'.
11. These amendments will not change the screening and examination
procedure undertaken by the Foreign Investment Review Board. The
screening and examination procedure is a well established process,
and the decision to block or impose conditions on foreign
investment proposals will continue to be exercised by the Treasurer
and based on whether an investment has altered the control of an
Australian business or corporation and whether the investment is
contrary to the national interest.
Summary of new law
12. The amendments are structured to include foreign investments that
have the potential, whether now or in the future, to provide some
measure of influence or control over the business or assets of an
Australian company.
13. The amendments clarify the operation of the Act by explicitly
providing for compulsory notification to the Treasurer where there
is a possibility that the type of arrangement being used will
deliver influence or control, including transactions that involve
instruments that eventually have the same effect.
14. The Bill also provides transitional arrangements to ensure that
foreign investors will not be adversely impacted by the amendments.
Comparison of key features of new law and current law
|New law |Current law |
|Substantial interest is |Substantial interest is |
|holding at least 15 per |holding 15 per cent or |
|cent of one or more of: |more of the voting power |
|voting power; |or the issued shares in a|
|potential voting power; |corporation. |
|issued shares; or | |
|rights to issued shares. | |
|Aggregate substantial |Aggregate substantial |
|interest is two or more |interest is two or more |
|persons holding at least |people holding |
|40 per cent of one or |40 per cent or more of |
|more of: |the voting power or the |
|voting power; |issued shares in a |
|potential voting power; |corporation. |
|issued shares; or | |
|rights to issued shares. | |
|An interest in a share |An interest in a share |
|has been clarified so |includes a right to |
|that it is clear that a |acquire a share or have a|
|right to a share includes|share transferred to |
|a right to acquire a |them. |
|share or have a share | |
|transferred under an | |
|instrument, agreement or | |
|arrangement, whether the | |
|right is exercisable | |
|presently or in the | |
|future and whether on the| |
|fulfilment of a condition| |
|or not (such as | |
|convertible notes). | |
|Definition of voting |Voting power is the |
|power has been clarified |maximum number of votes |
|so that it explicitly |that can be cast at a |
|includes potential voting|general meeting. |
|power. Potential voting | |
|power is the number of | |
|votes that could be cast | |
|if it is assumed that a | |
|future right is | |
|exercised. | |
|The Treasurer also has |The Treasurer has the |
|the power to prohibit a |power to prohibit a |
|proposed acquisition of |proposed acquisition of |
|an interest that would |shares that would result |
|result in a foreign |in a foreign person |
|person having control of |having control of the |
|the potential voting |voting power in a |
|power in a corporation if|corporation if it is |
|it is considered contrary|considered contrary to |
|to the national interest.|the national interest. |
|Compulsory notification |Compulsory notification |
|for proposals involving |for proposals involving |
|the acquisition of a |the acquisition of a |
|substantial interest. |substantial shareholding.|
Detailed explanation of new law
15. The Foreign Acquisitions and Takeovers Act 1975 provides the basis
for the Treasurer to examine proposed foreign investments in
Australian businesses and assets to ensure they are not contrary to
the national interest. It requires foreign investors to notify the
Treasurer of their transactions in certain circumstances (where the
target is valued above the relevant monetary threshold) and
provides the Treasurer with the power to block, or place conditions
upon, those proposals involving a foreign person obtaining control
of a company where it is considered contrary to the national
interest.
16. The notion of control is a fundamental concept and described as
being 'in a position to determine the policy of the corporation'.
The Treasurer's powers operate according to the nature of the
investment, including acquisitions of shares, acquisitions of
assets, agreements relating to directorate of corporations and
arrangements relating to control of Australian businesses.
17. While the Act specifically provides for compulsory notification of
acquisitions of 'substantial shareholdings', it is unclear whether
these extend to include other types of financing arrangements that
involve a component of control or influence. The use of these more
complex financing arrangements has been a growing feature of
investment activity over recent years. In such cases, the
ownership interest can be held in a variety of forms other than
through traditional shares and voting power.
18. The amendments clarify the operation of the Act by explicitly
requiring foreign investors to notify the Treasurer - and thereby
trigger his condition-making powers - where there is a possibility,
whether now or in the future, that the type of arrangement being
used will deliver influence or control over an Australian company.
Entering into an arrangement
19. Section 5(4) provides that a reference to entering into an
arrangement in the Act includes a reference to entering into an
agreement, creating a trust and entering into a transaction. Item
7 inserts a new limb to the definition of entering into an
arrangement so that it now explicitly includes acquiring an asset
or a share. [Schedule 1, item 7, paragraph 5(4)(d)]
20. The reason this provision is required is to ensure that the
Treasurer's existing powers to make orders in relation to
'arrangements' are clarified with respect to share and asset-type
arrangements. These forms of arrangements may currently be
implied, but the proposed amendment removes any uncertainty in this
area.
Substantial interest and aggregate substantial interest
21. For the Treasurer to exercise his powers under section 18 of the
Act, he must first be satisfied that a foreign person (or persons)
has acquired or will acquire a controlling interest in an
Australian corporation. The notion of control relies on the person
(or persons) holding a substantial shareholding and being in a
position to determine the policy of the corporation.
22. Section 9(1) currently provides that:
. a 'substantial interest' means a person (together with
their associates) holds 15 per cent or more of the 'voting
power' or the 'issued shares' in a corporation
(paragraph (a)); and
. an 'aggregate substantial interest' means two or more
persons (together with their associates) hold an aggregate
of 40 per cent or more of the 'voting power' or the
'issued shares' in a corporation (paragraph (b)).
23. Item 8 expands these definitions so that they capture the concepts
of potential voting power and interests that arise from a right
(discussed below in 1.29 and 1.22 respectively). The 15 per cent
and 40 per cent control thresholds that currently apply remain
unchanged. [Schedule 1, item 8, subsection 9(1) and 9(1A)]
Rights and other interests in shares
24. Section 11 provides what is considered an 'interest in a share'.
It includes 'rights' and 'options' to acquire shares (paragraphs
11(2)(b) and 11(2)(c) respectively) but it is unclear whether these
extend to include other types of financial instruments or
commercial arrangements which may provide an interest in the
corporation, but which are not in the legal form of a share, or
which could be converted to newly issued or to existing shares in
the future (such as convertible notes).
25. To remove doubt, item 9 clarifies the definition of an interest in
a share so that it is clear that a right includes a right under an
instrument, agreement or arrangement, whether the right is
exercisable presently or in the future and whether on the
fulfilment of a condition or not. The Bill provides a convertible
note as an example of the type of arrangement that would be
captured by section 11. A convertible note is a term to describe
funding made available to a company with the right to be either
redeemed for cash or converted into ordinary shares at a
predetermined date or within a certain period. [Schedule 1, item
9, subsection 11(2A)]
26. While it is now clear that convertible notes are captured by the
Act, item 9 has been included to ensure that the Act is
sufficiently broad enough to capture all financing arrangements
that involve a component of control or influence, regardless of the
way they are structured. Other types of financing arrangements
that would now be captured by the Act include special warrants, as
well as other specialised instruments which may be created in the
future.
27. Items 8 and 9 are key amendments in the Bill because they provide
that the compulsory notification provisions in section 26 (as
amended in this Bill) explicitly require foreign investors to
notify the Treasurer where there is a possibility that the type of
arrangement being used will deliver future influence or control
over an Australian company which is subject to the Act.
1.
Company A (which is 100 per cent foreign owned) proposes to
acquire an interest in Company B (an Australian corporation
valued at $1 billion) by way of convertible notes which may
be converted to shares in three years. Company A will not
immediately acquire shares or have any voting power in
Company B, but in three years' time it will have the option
to convert the notes into shares. Upon conversion,
Company A would hold a 15 per cent interest in Company B.
Section 11 would now treat these instruments as interests in
shares. Accordingly, Company A would be required to notify
the Treasurer of the proposal before acquiring the
convertible notes.
28. It should be noted that these amendments are not designed to
capture genuine money-lending agreements. Subsection 11(5) removes
from the scope of the Act an interest in a share held by 'a person
whose ordinary business includes the lending of money' if 'he holds
the interest solely by way of security for the purposes of a money-
lending agreement.' Subsection 11(5) will continue to operate as
it currently does to ensure that genuine money-lending agreements
do not need to be notified to the Treasurer.
29. However, if a money-lending agreement includes quasi-equity
characteristics, such as options to acquire shares or potential
voting rights, it would not be exempt under subsection 11(5) and
would require notification.
Potential voting power
30. The Act relies on interests in shares or voting power to determine
whether a person has control of a company. Generally, it would be
expected that the proportions of shares and voting power would be
broadly equivalent. However, as this may not always be the case
(the proportion of voting power may be disproportionate for
whatever reason) it is necessary to have a separate limb in the
substantial interest test that considers voting power.
31. Section 14 provides that voting power refers to the 'maximum number
of votes that might be cast at a general meeting of the
corporation'. Item 12 clarifies the definition of voting power so
that it explicitly includes potential voting power. Potential
voting power is the number of votes that could be cast if it is
assumed that a future right is exercised. This means that if an
agreement has the potential to provide some measure of influence or
control, either now or in the future, this would be captured by the
Act and the investor would be required to notify if the proposal is
above the relevant thresholds. [Schedule 1, item 12,
subsection 14(2)]
1.
Company A (which is 100 per cent foreign owned) proposes to
acquire a 14.9 per cent shareholding in Company B (an
Australian corporation valued at $1 billion). However, the
proposal includes an agreement between the parties whereby
Company A would have special voting rights (equivalent to
15 per cent) in the future upon the fulfilment of certain
conditions precedent.
Section 14 would now treat this proposal as potential voting
power that, at 15 per cent, would trigger the substantial
interest threshold contained in the Act. Accordingly,
Company A would be required to notify the Treasurer of the
proposal before entering an (unconditional) agreement with
Company B.
Treasurer's power in relation to acquisitions of shares
32. The Act provides the Treasurer with the power to prohibit a
proposal involving a foreign person obtaining control of a company
(valued above the relevant monetary threshold) conducting an
Australian business, or of the assets of a business, where he
considers this would be contrary to the national interest. The
Treasurer's powers operate according to the nature of the
investment, including acquisitions of shares, acquisitions of
assets, agreements relating to directorate of corporations and
arrangements relating to control of Australian businesses.
33. Section 18 specifically deals with acquisitions of shares and
allows the Treasurer to make an order prohibiting a proposed
acquisition of shares, or where the proposal has already occurred,
the power to order divestment of the shares. This section also
allows the Treasurer to make an order prohibiting a person from
acquiring more than a certain percentage of the issued shares or
the voting power in a corporation.
34. Item 13 amends this section so that it also captures the concept of
potential voting power. The clarification of what is considered an
'interest in a share' is already captured by the current wording in
the provision. [Schedule 1, item 13, paragraph 18(3)(aa)]
The ability to determine the policy of the corporation or business
35. The notion of control relies on the person (or persons) being in a
position to determine the policy of the corporation or business.
To avoid any doubt, items 14 and 15 clarify that the ability to
determine the policy of the corporation or business applies in
relation to any matter. [Schedule 1, items 14 and 15, paragraphs
20(5)(a) and 21(5)(a)]
Acquiring a substantial interest
36. Section 26 of the Act currently provides for compulsory
notification of acquisitions of 'substantial shareholdings'. To
ensure that the compulsory notification provisions are broad enough
to capture other financing arrangements (other than traditional
shares), all references to 'shares' and 'shareholding' throughout
section 26 have been replaced by references to 'substantial
interest' or 'rights' as appropriate (items 16-19 and 21). This is
consistent with the policy intent of the amendments of clarifying
the Act to ensure that it applies equally to all foreign
investments irrespective of the way they are structured. [Schedule
1, items 16 - 19 and 21, paragraphs 26(2)(a) and (b), (3)(b), and
subsections (5A) and (7)]
37. Subsection 26(6) provides that the compulsory notification
requirements apply to any acquisition of shares (not just an
acquisition of a substantial interest), where that acquisition
would result in the foreign person:
. increasing an existing substantial interest
(paragraph (a)); or
. holding a substantial interest (paragraph (b)).
38. Item 20 amends this provision to incorporate the expanded
definition of substantial interest (amended at item 8). [Schedule
1, item 20, subsection 26(6)]
Application and transitional provisions
Commencement
39. The provisions contained in Schedule 1 apply from 12 February 2009.
The Treasurer's Press Release indicated that these amendments
would apply from the date of announcement. This ensured that
proposals entered into after that time would be captured by the
amendments.
Transitional provisions
40. As the amendments in Schedule 1 apply retrospectively from
12 February 2009, a transitional period will apply from 12 February
2009 to the date of Royal Assent to ensure that foreign investors
are not adversely affected by the start date of these amendments.
41. During the transitional period, there will be no criminal penalties
for failure to notify the Treasurer of a proposed investment of the
type covered by the amendments. Retrospective criminal prosecution
for an offence under subsection 26(2) is expressly excluded by the
transitional arrangements. The offences excluded will not be able
to be prosecuted retrospectively as they are contingent upon the
Treasurer having the power to issue an order that can not be
exercised until the Bill receives Royal Assent. [Schedule 2, item
1]
42. The Treasurer will still have the power to impose conditions upon
such proposals or transactions if notified following Royal Assent
to the Bill, and criminal penalties will apply if the conditions
are not complied with. [Schedule 2, item 1]
43. The transitional arrangements provide that foreign investors will
have 30 days to notify the Treasurer if, during the transitional
period, they entered into a transaction of the type covered by
these amendments and have not already provided notification to the
Treasurer. Consistent with the broader approach adopted elsewhere
in the Act, criminal penalties apply where investors fail to notify
the Treasurer within the 30 day period. [Schedule 2, item 2]
44. It is not expected that many investors will be caught by the
transitional arrangements. The Foreign Investment Review Board has
been monitoring compliance with the announced changes and it
appears that, as the proposed amendments have been broadly
anticipated, investors are voluntarily complying with the changes.
Consequential amendments
45. Items 1-6, 10 and 11 are consequential amendments related to the
substantive amendments outlined above, or minor technical
amendments reflecting current drafting practices. [Schedule 1,
items 1-6, 10 and 11, subsection 5(1), paragraph 5(4)(a) and (c),
and section 14]
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Schedule 1: Amendments
|Bill reference |Paragraph |
| |number |
|Items 1-6, 10 and 11, subsection 5(1), |1.45 |
|paragraph 5(4)(a) and (c), and section 14 | |
|Item 7, paragraph 5(4)(d) |1.19 |
|Item 8, subsection 9(1) and 9(1A) |1.23 |
|Item 9, subsection 11(2A) |1.25 |
|Item 12, subsection 14(2) |1.31 |
|Item 13, paragraph 18(3)(aa) |1.34 |
|Items 14 and 15, paragraphs 20(5)(a) and |1.35 |
|21(5)(a) | |
|Items 16 - 19 and 21, paragraphs 26(2)(a) |1.36 |
|and (b), (3)(b), and subsections (5A) and | |
|(7) | |
|Item 20, subsection 26(6) |1.38 |
Schedule 2: Transitional provisions
|Bill reference |Paragraph |
| |number |
|Item 1 |1.41, 1.42 |
|Item 2 |1.43 |
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