What is a "foreign government investor"?

Approval requirements for an inbound foreign investment by a body categorised as a 'foreign government investor' are stricter than those applicable for an investment by a non-government foreign investor. For example, the foreign government investor is required to obtain approval of the Foreign Investment Review Board (FIRB) regardless of the target's value so long as the investment entails an acquisition of a certain percentage of the target (which is also lower than the percentages applicable to an investment by a non-government foreign investor).

Therefore, when a foreign investor intends to invest in an Australian business or land, it is important for the investor to assess whether they are categorised as a foreign government investor for the purpose of the Foreign Acquisitions and Takeovers Act 1975 (FATA) and the Foreign Acquisitions and Takeovers Regulation 2015. While a government department or agency, or a state-owned enterprise, is an obvious example of a foreign government investor, other types of investors are less obvious.

Definitions under FATA and Regulation

Under section 17 of the Regulation, a foreign government investor is defined as:

1. a "foreign government" or "separate government entity";
2. a corporation, trustee of a trust, or general partner of a limited partnership in which:
   1. a foreign government or separate government entity, alone or together with one or more associates, holds a substantial interest, i.e. an interest of at least 20%; or
   2. foreign governments or separate government entities of more than one foreign country (or parts of more than one foreign country), together with any one or more associates, hold an aggregate substantial interest, i.e. interest of at least 40% in aggregate; or
3. a corporation, trustee or partner of a kind described in 2 above, assuming the references to foreign government (or foreign governments) in 2 above included references to a foreign government investor (or foreign government investors) referred to in 2 above.

The terms "foreign government" and "separate government entity" are defined in section 4 of the FATA.

This provision can have some unintended consequences. For example, where a foreign government or foreign government entity steps in and takes an ownership interest in, for example, a bank within its jurisdiction. For example this occurred in the US during the global financial crisis in 2008/9 where the US government bailed out a number of US companies. For a period of time, the US government became a controlling shareholder in Citigroup, AIG, Bank of America, Fannie Mae, Freddie Mac, General Motors, GMAC, and a host of other financial institutions in order to sure up the US financial system. During that time, many of these financial institutions were categorised as a foreign government investor.

Definitions of "foreign government" and "separate government entity"

Section 4 of the FATA defines "foreign government" as an entity that is:

• a body politic of a foreign country, or part of it; or
• a body politic of part of a foreign country, or part of it.

The above definition means that a foreign government includes not only a central government body at the national level, but also includes sub-national levels of governments, such as state, provincial, prefectural and council level governments.

Further, section 4 of the FATA defines "separate government entity" as an individual, corporation or corporation sole that:

• is an agency or instrumentality of a foreign country or a part of a foreign country; and
• is not part of the body politic of a foreign country or of a part of a foreign country.

While the FATA does not define the meaning of "instrumentality" for the purpose of the definition of a "separate government entity", it is inferred from case law (PT Garuda Indonesia Ltd v ACCC [2011] FCAFC 52) that an instrumentality " is created by the State for the purpose of carrying out functions on behalf of the State and is not available to carry out any functions for any other State, person or corporation" and may "function separately and apart from the State and … outside of any direct control of the State or its executive". Therefore, a sovereign wealth fund such as the Government Pension Fund of Norway and Singapore's Temasek Holdings (to name a few), is categorised as an instrumentality of a foreign government and hence is a foreign government investor.

In the same vein, a private body or entity can be categorised as a foreign government investor for the purposes of the FATA if the body or entity proposes to acquire an Australian business or land as an agent or instrumentality of a foreign government.

Associate

In determining whether a corporation, trustee or general partner held by a foreign government or separate government entity is a foreign government investor, the percentage of the interest held by associates of the foreign government or separate government entity need to be taken into account.

The definition of an "associate" of a person includes:

• any relative of the person;
• any person with whom the person is acting in concert;
• any person with whom the person carries on a business in partnership;
• any entity of which the person is a senior officer, including a shadow director or de facto director;
• any holding entity of the person or senior officer, including a shadow director or de facto director, of the person;
• any corporation or the trustee of a trust in which the person holds at least 20% interest;
• a person who holds a substantial interest in the corporation or the trust;
• any other person that is a foreign government, foreign government investor or non-government agent of a foreign government in relation to that country.

For example, where a foreign government holds 25% of shares in JVCo and a private company, ParentCo, holds the remaining 75%, JVCo is considered as a foreign government investor as the holding of a substantial interest in JVCo by the foreign government. If JVCo holds 17% of shares in SubCo and ParentCo holds 8% of shares in SubCo, SubCo is also a foreign government investor as:

• ParentCo is an associate of JVCo due to its holding of a substantial interest in JVCo;
• JVCo (as a foreign government investor, which is assumed to be a foreign government) and ParentCo (as JVCo's associate) in aggregate hold a substantial interest in SubCo.

Certain additional classes of persons are considered to be an associate of a person where an interest in residential land is involved:

• An unlisted entity is an associate of a person for that purpose if the person's relative holds a substantial interest in the entity or is a senior officer of the entity.
• If an individual owns a substantial interest or is a senior officer of one entity, and the individual's relative owns a substantial interest or is a senior officer of another entity, then the entities are associates to each other.

The FATA also provides for a number of exclusions to the definition of an associate. Examples of relationships which are not taken to be associates to each other include:

• a professional adviser and client where the adviser advises in its capacity as an adviser;
• a bidder of a takeover bid for securities in a company and existing shareholder of that company;
• a principal and proxy or representative to vote for valuable consideration;
• a holder of a substantial interest in a registered scheme and the responsible entity of that scheme; and
• partners of a partnership of certain kinds of professions.

Tracing of interest

Under the FATA, a substantial interest (or aggregate substantial interest) in an investor can be traced to a foreign government investor which is its ultimate holder. This means that indirect subsidiaries of a foreign government investor which can be traced through holding of a substantial interest (or aggregate substantial interest) are deemed to be foreign government investors themselves.

Consequence – What if an investor is categorised as a foreign government investor?

If an investor is taken as a foreign government investor for FATA purposes, approval by FIRB will be required for a range of actions in respect of which such approval would not otherwise be required if the investor was not a foreign government investor.

For example, if an investor is taken as a foreign government investor:

• the size of the value of the target business is not a factor to determine if a proposed investment requires the FIRB approval – a transaction or target value below certain monetary thresholds by a non-government foreign investor does not require the approval;
• starting a business in Australia by it requires the FIRB approval – starting a business in Australia (as opposed to acquiring an existing Australian business) by a non-government foreign investor does not require the approval;
• acquisition of an interest in an exploration tenement by it requires the FIRB approval – acquisition of an interest in an exploration tenement in itself does not trigger the application of the FATA (although acquisition of an interest in the underlying land may trigger the application of the FATA.