The Australian Government recently updated its foreign investment policy (FI Policy), which will be applied by the Foreign Investment Review Board (FIRB) when reviewing investment proposals. This article highlights the key changes to the FI Policy relating to investments by State-Owned Enterprises (SOEs).

The Government's general position in relation to SOE investments was that "a foreign government or a related entity" must notify FIRB and obtain prior approval before any "direct investment" in an Australian company regardless of the size of the investment.

This position contrasts investments permitted by non-SOE investors, who must notify FIRB and obtain prior approval under the Foreign Acquisitions and Takeovers Act 1975 (FATA), for investments where the non-SOE intends to acquire an interest of 15% or more in an Australian business or company that is valued above $231 million.

The FI Policy update clarifies, in the context of SOE investments:

  • the meaning of "direct investment";
  • the meaning of "foreign government or a related entity"; and
  • considerations made by FIRB when assessing SOE investment applications.

Meaning of "Direct Investment"

Previously, under the FI Policy, investments by SOEs required FIRB notification and prior approval regardless of the size of the investment. Under the updated FI Policy, a direct investment is defined to mean an investment which involves:

  • acquiring an interest of 10 per cent or more in an enterprise;
  • acquiring an interest of less than 10 per cent in an enterprise where that interest grants the investor influence or a controlling interest in the enterprise (including preferential, special or veto voting rights, the ability to appoint directors, and otherwise enter into contractual agreements such as loans, provision of services, and off take agreements);
  • investments which are preparatory to a takeover bid; and
  • the enforcement of security interests over a business' assets or shares.

Meaning of "Foreign Governments and their Related Entities"

Before its most recent update, the FI Policy applied to "foreign governments and their related entities" without any clear definition of the scope of its application. Under the updated FI Policy, "Foreign Governments and the Related Entities" are defined to mean:

  • a body politic of a foreign country;
  • companies or other entities in which foreign governments, their agencies or related entities have more than a 15 per cent interest;
  • companies or entities that are otherwise controlled by foreign governments, their agencies or related entities.

Removal of the "Six Principles"

The Government previously applied six principles when assessing whether proposed investments by Foreign Governments or their agencies were contrary to Australia's national interest.

The FI Policy update removed the six principles, and the Australian Government will now consider whether a proposed investment is commercial in nature or whether the investment is in pursuit of broader political or strategic objectives potentially contrary to Australia's national interest. In making its determination, FIRB will measure a Foreign Government's ability to exert actual or potential control (including through funding) via the investor's governance arrangements.

Commercial independence and arms-length transactions are less likely to raise national interest concerns. However, where investment proposals are not fully arm's length and commercially independent, FIRB will consider the following mitigating factors when measuring whether the investment is contrary to the national interest:

  • the existence of external partners or shareholders in the investment;
  • the level of non-associated ownership interests;
  • the governance arrangements for the investment;
  • ongoing arrangements to protect Australian interests from non-commercial dealings; and
  • whether the target will be, or remain, listed on the Australian Securities Exchange or another recognised exchange.

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