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The Department of Home Affairs has issued its draft guidance “Modern Slavery Act 2018: Draft Guidance for Reporting Entities” (Draft Guidance) for the new Modern Slavery Act 2018 (Cth) (the Act).
The Foreign Acquisitions and Takeovers Amendment (Exemptions and Other Measures) Regulations 2017 (Amending Regulations) introduce a number of changes to the existing foreign investment framework, designed to address deficiencies in the existing legislation and cut red tape.
The main legislation containing Australia’s foreign investment include the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Foreign Acquisitions and Takeovers Regulation 2015 (FATR). Under these rules, the Treasurer has the power to make orders in relation to certain transactions (called significant actions) which he or she considers to be contrary to the national interest. Some significant actions (called notifiable actions) must be notified and cannot proceed until a statement of no objection is received. Other significant actions do not strictly speaking have to be notified, but doing so cuts off the Treasurer’s power.
The biggest change to these rules relates to the introduction of a new exemption certificate for business acquisitions (Business EC), which has particular relevance for the private equity (PE) industry. Currently, many PE funds (even domestically managed ones) are deemed to be foreign government investors due to passive upstream ownership by sovereign wealth funds and public pension funds. This means virtually all investments by those funds in Australia, as well as bolt on acquisitions by their portfolio companies in Australia, require FIRB approval regardless of value. This has meant that the government’s resources have been tied up reviewing high volume, low risk transactions.
The new regulation 42 allows a foreign person to cover multiple acquisitions in one approval. It is intentionally broad – it enables the Treasurer to grant a Business EC over any number of acquisitions, to be made by the applicant or another foreign person (including foreign government investors), of any dollar value, for any duration of time, if the Treasurer determines that to do so is not contrary to the national interest. While the Treasurer is given broad powers under this regulation, the more narrowly tailored the application in terms of entities, intended acquisitions and duration, the more likely a Business EC will be granted.
Some key features of the Business EC are as follows:
Much remains to be seen about how the Business EC regime will work in practice. The regime was designed in large part to enable investment funds that include low risk foreign government investors as passive investors (and who therefore have to notify a high volume or low risk transactions) to make multiple acquisitions below the normal thresholds, but it is not yet clear whether PE funds will be able to provide the level of specificity required for the Business EC to work well in practice. Applicants are encouraged to engage early (prior to lodging an application) in order to define an appropriate scope.
It is expected that the Business EC will in most cases only exempt transactions from being considered to be ‘notifiable actions’, meaning they will still be ‘significant actions’ over which the Treasurer retains powers (such as to order divestments) if no specific approval is sought. While this is not ideal, in practice, the Treasurer has not historically exercised these powers in relation to business acquisitions.
The application fee for a Business EC will be $35,000 for the 2017-18 financial year (indexed annually).
The current regulations provide that the offshore acquisition by a foreign government investor (including a PE fund) of another offshore entity, which results in the indirect acquisition of 10% or more (and in some cases less than 10%) of an Australian entity or business, must be notified unless the Australian gross assets of the target are less than $10m, constitute less than 1% of the global gross assets of the target and do not constitute the assets of a sensitive business. The new regulations increase these figures to $55m and 5%, respectively.
At present, acquisitions of aged care facilities and tertiary student accommodation are currently treated as acquisitions of residential land, which have a zero dollar threshold. The Amending Regulations introduce a new regulation 38(5), which has the effect of treating these acquisitions as if they were acquisitions of developed commercial land (which may have a $55m or $252m threshold). This will not apply to foreign government investors and so will not necessarily assist PE funds investing in this sector.
The Amending Regulations make a number of other reforms to address inadvertent side effects of the substantial amendments to Australia’s foreign investments rules that came into effect in December 2015. These include: