Regulatory burdens eased for foreign government and other investors in low-risk business acquisitions

The regulatory burden on some private equity funds, investment, pension, or other types of funds, and corporations has been significantly eased as of 1 July 2017, following changes to the Foreign Acquisitions and Takeovers Regulation to introduce a new exemption certificate for programs of acquisitions of interests in assets or securities by foreign persons, including foreign government investors.

Foreign investors who could benefit from the new regime should be considering their eligibility for an exemption certificate now.

Why is the new exemption certificate significant?

There are two main reasons why the new exemption certificate is significant:

• because many funds that contain foreign government investors have to notify all acquisitions they make - ie. none of the usual thresholds for notification apply because of their foreign government investment; and
• whether or not they are a foreign government investor, foreign funds can now embark on a program of investment with the pre-approval of the Treasurer.

This is part of the Australian Government's push to simplify the approval process for foreign government investors, which has also seen changes to FIRB New Dwelling Exemption Certificates, the Foreign Resident CGT Withholding Tax regime, and a review of the Foreign Investment Review Framework.

The business exemption certificate at a glance

Under the new regime, foreign investors (including those classed as foreign governments investors) will be able to apply for an exemption certificate allowing pre-approval for multiple investments in the one application, rather than having to apply separately for each investment.

Basically:

• the proposed acquisition must be one that can be assessed using the national interest test;
• the investor is very low risk and/or the proposed target company, business, industry, sub-sector or sector typically does not raise national interest issues;
• all applications will be assessed on a case-by-case basis;
• it is unlikely that an exemption certificate will be granted to first-time investors to Australia or to individuals;
• the certificate will operate for a limited period;
• the application time might be longer than standard applications, given the complexity of the issues being considered;
• foreign government investors are eligible but their track record in investing in Australia and the nature of the proposed investments will be carefully considered;
• the certificate will generally set a maximum monetary limit both for each transaction and a total limit for the certificate, and the kinds of interests that can be acquired (for example, one or more of assets or securities). Acquisitions relating to a particular kind of interest or specific targets may be subject to specific limits;
• applicants will need to report periodically on the acquisitions made during the period under their exemption certificate; and
• the Treasurer retains the power to issue divestment orders (albeit very rarely exercised) or impose conditions.

What won't be "low risk" or "low sensitivity" transaction?

Any acquisition involving "sensitive" entities and businesses won't be eligible for an exemption certificate. This is determined on a case-by-case basis, but the Foreign Investment Review Board (FIRB) has said that examples of problematic acquisitions include:

• businesses designated as sensitive businesses in the Regulation (media, telecommunications, transport, etc.);
• critical infrastructure assets and sectors, public infrastructure and public utility as defined with the Regulation;
• business or assets in sectors likely to raise competition issues, or where the applicant already has significant interests identified.

How much detail is needed on an application?

In short, quite a lot.

The guidance sets out four main headings of information needed from an applicant:

• applicant information - including ultimate ownership, business activities in Australia, and (if a fund) details on its structure, foreign government investors, and fund governance rights;
• the length of the certificate - FIRB expects applicants to seek terms of over 12 months. Generally, the longer the term sought, the more restrictions will be placed on any certificate;
• statements about the character of the applicants/investors; and
• scope and value of proposed investment.

How precise must you be about the scope and value of a proposed investment?

FIRB says "as much information should be provided as possible to enable an assessment of the proposed acquisitions". This includes:

• where the specific entity or assets are unknown, a list of proposed sectors or industries that the applicant proposes to acquire interests;
• where possible, sufficient information about the sector/market they wish to acquire interests in, the size of the proposed acquisitions relative to their existing market share and/or the purpose of the investment; and
• the maximum amount in monetary terms and the breakdown for individual acquisitions.

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