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New exemption certificate for low risk business acquisitions – relief in sight for private equity funds
On 9 May 2017, the Australian Treasurer announced that the Government would be introducing a new exemption certificate for certain ‘low risk’ business acquisitions.
Under the current law in Australia, virtually all acquisitions by ‘foreign government investors’ must be notified to the Foreign Investment Review Board, and may not proceed until the applicant has received a statement of no objection from the Australian Treasurer (FIRB approval). A foreign government investor includes:
- a foreign government;
- an individual, corporation or corporation sole that is an agency or instrumentality of a foreign country but is not part of the body politic of that foreign country (referred to below as a ‘separate government entity’);
- a corporation, trustee of a trust or general partner of a limited partnership in which (1) a foreign government, separate government entity or foreign government investor from one country holds a 20% or more interest, or (2) foreign governments, separate government entities or foreign government investors from more than one country hold a 40% or more interest.
The definition of foreign government investor captures not only state-owned enterprises and sovereign wealth funds, but also things like public sector pension funds, the investment funds into which state-owned enterprises, sovereign wealth funds and public sector pension funds invest and, due to tracing rules, portfolio companies for such investment funds.
These rules have had a significant effect on private equity funds, many of which are considered to be foreign government investors as a result of passive investment by public sector pension funds or sovereign wealth funds. A private equity fund that is deemed to be a foreign government investor will generally be required to obtain FIRB approval in respect of its Australian investments (regardless of value), and its Australian portfolio companies will be deemed to be foreign government investors and will also be required to seek FIRB approval for their smaller bolt-on acquisitions.
Aside from the delays associated with seeking FIRB approval, the application fees (usually A$25,300 per transaction, eligible for fee reductions for very small transactions) for all of these applications are a significant burden.
Announced changes – low risk business acquisitions
The Government has announced the introduction of a new exemption certificate for low risk acquisitions of securities. This certificate will allow foreign investors, including private equity funds that are deemed to be foreign government investors, acquiring securities to obtain pre-approval for multiple investments in one application, rather than having to apply separately for each investment. This is in line with the proposals we have advocated since the law changed in December 2015 and should provide relief for private equity funds and their portfolio entities that currently have to lodge a multiplicity of FIRB applications (and pay the associated fees) for low dollar value transactions. While it can take some time to negotiate exemption certificates for land acquisitions in our experience, we will continue to work with relevant industry bodies to ensure this new exemption certificate operates in a practical and effective manner. The application fee for the exemption certificate will be A$35,000. Further guidance on the types of transactions that will be eligible for the exemption certificate will be released prior to 1 July 2017.
Most of the other announced changes relate to land acquisitions, some of which come into effect immediately. Of most relevance to private equity:
- The concept of ‘commercial residential premises’ (which are treated as developed commercial land and generally benefit from higher monetary thresholds) currently excludes some kinds of property that are generally commercial in nature, such as student accommodation at the tertiary level and aged care facilities (which have a A$0 threshold). These will now be treated as developed commercial property rather than residential property, which should mean that acquisitions in these areas are more likely to be exempt (effective from 1 July 2017).
- Currently developed commercial land is subject to different thresholds depending on whether it is sensitive (and therefore subject to a low threshold of A$55m) or not (generally subject to a A$252m threshold). The range of properties subject to the low threshold is currently very broad, in particular due to the fact that any land under prescribed airspace is caught, which includes most developed commercial land in major Australian cities. This means a significant portion of the developed commercial land transactions are subject to the low threshold, which was not the intention when Australia’s foreign investment laws were amended in late 2015. The Government has announced that the range of land captured as ‘low threshold’ developed commercial land will be reduced (effective 1 July 2017).
Other changes relate to residential land, as noted below:
- Developers who have obtained a New Dwelling Exemption Certificate (authorising sales of new dwellings in a development to foreign persons) will be subject to a cap of 50% on the number of dwellings the developer can sell to foreign persons under the exemption certificate (effective for applications made after 7:30pm on 9 May 2017).
- The Government will introduce an annual ‘vacancy charge’ on new foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months each year (effective for applications made after 7:30pm on 9 May 2017).
- Two new Residential Exemption Certificates will be introduced (effective 1 July 2017) to deal with technical difficulties under the current law:
- first, an exemption certificate will be introduced to allow developers to re-sell off the plan dwellings that fail to settle and would as a result be considered to be established dwellings (and therefore generally ineligible for sale to non-resident foreign persons);
- second, an exemption certificate will be introduced to enable foreign persons to consider a number of residential properties with the intention to only purchase one. This exemption certificate is currently available for purchases of established dwellings and this will be extended to new dwellings.