Private equity funds often count foreign governments among their investors, alongside public sector pension funds and sovereign wealth funds. As a result, the private equity fund itself may be considered a “foreign government investor” under Australia’s foreign investment approval regime, necessitating FIRB approval for its Australian investments. It’s a complex picture: exemptions – and significant penalties – apply.
Broadly speaking, Australia’s foreign investment regime encourages foreign investment, and has stood largely unchanged for the past four years. The federal Foreign Acquisitions and Takeovers Act (FATA) is its main pillar, along with regulations and policy. Responsibility for approving foreign investment proposals rests with the Treasurer, advised by the Foreign Investment Review Board (FIRB).
Under the current regime, many private equity funds will be considered to be a “foreign government investor” (FGI) and will be required to obtain FIRB approval for Australian investments (regardless of value) as a result.
What is a foreign government investor?
Foreign government investors include:
1. foreign governments and their separate agencies and instrumentalities (e.g. public sector pension funds or sovereign wealth funds); and
2. corporations, trusts and limited partnerships (through their trustees, general partners and limited partners) in which:
a. a foreign government or a separate agency or instrumentality of a foreign government (alone or together with one or more of their associates) holds an interest of at least 20%; or
b. foreign governments or the separate agencies or instrumentalities of more than one foreign country (together with any one or more of their associates) hold an aggregate interest of at least 40% (even if those interests are unrelated).
The definition of FGIs under the current regime is broad and can be traced through ownership structures. For example, an Australian subsidiary lower down in an ownership structure may be considered to be an FGI for the purposes of the Australian regime, merely due to the presence of an FGI higher up in the chain of the ownership structure (regardless of whether the higher FGI is in a position to effectively control that lower Australian subsidiary).
In the case of private equity funds, their FGI status is primarily due to the fact that their investor bases will often include foreign governments, public sector pension funds or sovereign wealth funds. Consequently, their Australian portfolio companies will also be deemed to be FGIs, meaning that FIRB approval will be required for smaller bolt-on acquisitions.
Importantly, when determining the percentage interest held by a foreign holder (including an FGI), the interests held by “associates” of that foreign holder are aggregated. In addition, the definition of associates under FATA specifically provides that FGIs are deemed to be “associates” of all other FGIs originating from the same country, even if they are unrelated (e.g. if a private equity fund has two unrelated FGIs from Germany, then the entities will be considered “associates” for the purposes of the regime and will be considered when determining whether the relevant thresholds have been exceeded).
When does an FGI require approval?
Generally, regardless of the monetary value of an investment, an FGI requires FIRB approval to:
1. acquire a direct interest (this will usually involve an acquisition of an interest of 10% or more, but will be less if the acquirer is in a position to control the target or has entered into an arrangement in relation to the target’s business) in an Australian corporation, Australian unit trust or Australian business;
2. start an Australian business;
3. acquire an interest in Australian land (including an interest in a lease or licence where the unexpired term is 5 years or more); or
4. acquire a legal or equitable interest in a mining, production or exploration tenement, or an interest of at least 10% in securities in a mining, production or exploration entity.
Exemptions from approval
There are very limited exemptions which apply to the requirement for an FGI to seek approval. However, a new exemption was introduced in 2017, which allows the Treasurer to issue exemption certificates allowing FGIs to undertake multiple acquisitions of Australian businesses and securities in Australian entities without having to obtain individual approval for each transaction.
FIRB approval generally takes thirty days (which starts once the application fee has been paid), though in practice it can take longer, especially if national interest is an issue. It’s a criminal offence to proceed without approval and liability extends to any third party who knowingly assists in contraventions of the Act.
Implications of not seeking approval
Certain breaches of the FATA are criminal offences, and significant penalties apply (including a fine of up to $787,500 for a company).
There’s also a risk of adverse orders (such as disposal) if the Treasurer decides the proposed transaction will contravene the “national interest”, a concept that’s not defined in the legislation but is determined by them on a casebycase basis. The Treasurer has broad powers to prohibit an acquisition involving an FGI which is contrary to public interest, approve an acquisition (with or without conditions), or, in the event that the acquisition has completed, require the disposal of any interests in securities, assets or land that were acquired under the acquisition.
The penalties for failing to obtain FIRB’s approval for a proposal involving an FGI (and limited exemptions) are severe, and non-compliance with the regime represents a serious transactional and reputational risk for both Australian and international private equity funds alike.
If you or your clients are looking to invest in Australia and may be classed as an FGI, we would be pleased to speak to you about implementing a strategy to obtain FIRB approval.