New CTH Regulations Amend Threshold Test for Foreign Investment Review

Tuesday 21 April 2020 @ 2.32 p.m. | Corporate & Regulatory | Legal Research

On 17 April, the Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020 (Cth) (‘the Amending Regulations’) were registered on the Federal Register of Legislation. The Amending Regulations commenced on 18 April. However, the Amending Regulations apply to agreements entered into on or after 10:30pm AEDT on 29 March 2020 and are intended to be enforced for the duration of the COVID-19 crisis.

Purpose of the Amending Regulations

The Explanatory Statement states that the economic impact of the COVID-19 pandemic requires legislative safeguards against the increased risk of foreign investments in Australia which are contrary to national interest. The purpose of the Amending Regulations are to widen the threshold tests for investments that require notification to the treasurer for approval. The Amending Regulations allow a greater number of investments to be scrutinised by the Treasurer. 

Effect of the Regulations

The Amending Regulations repeal and replacePart 4 of the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (‘the Principal Regulations’) which specifies the values for the threshold test outlined in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (‘the FATA’). More specifically, the new Part 4 inserted by the Amending Regulations specifies a nil monetary threshold for all relevant acquisitions and investments which includes actions relating to entities, businesses, and agricultural land. The Amending Regulations also prescribe all kinds of land other than agricultural land as land without a threshold value.

What is the significance of the ‘threshold test’?

The threshold test is one requirement for the test to determine whether a proposed action is a 'significant action' under the FATA.
While the test varies according to whether the action relates to businesses, entities or land, in general if an action:

  1. is an action to acquire interests in securities, assets or Australian land, or otherwise take action in relation to entities (being corporations and unit trusts) and businesses, that have a connection to Australia,
  2. satisfies the threshold test and 
  3. results in a change in control involving a foreign person or be taken by a foreign person,

the action is considered a ‘significant action’. 

Moreover, the FATA states that if a proposed action satisfies the threshold test and is an action:

  1. to acquire a direct interest in an Australian entity or Australian business that is an agribusiness; or
  2. to acquire a substantial interest in an Australian entity; or
  3. to acquire an interest in Australian land,

the action is considered a ‘notifiable action’.

What is the effect of a proposed action being classified as a ‘significant action’ or ‘notifiable action’?

A significant action provides the Treasurer with certain statutory powers with regards to that action which are outlined in Part 3 of the FATA. In general, these powers are conferred on the Treasurer to provide oversight over foreign acquisitions and investments by allowing the Treasurer to prohibit or limit a proposed action. For instance, the Treasurer through notifiable instrument, may prohibit a proposed significant action if it “would be contrary to national interest”. This prohibition may apply to the whole or a part of the acquisition. The Treasurer is provided a clearly defined statutory scope for the nature of these orders. For example, the Treasurer may make orders which direct a specified foreign person not to increase the proportion of the total voting power that the person is in a position to control or direct the person to acquire interests only to a specified extent or require the person to dispose of the interest entirely within a specified period. The Treasurer may also impose conditions “that the Treasurer is satisfied is necessary to ensure the action, if taken, will not be contrary to the national interest”.
Furthermore, a notifiable action will require a foreign person to give notice to the Treasurer before taking the action. A person who engaged in conduct amounting to failure to give notice before taking a notifiable action or contravention of an order made by the Treasurer may commit an offence of contravene a civil penalty provision under the FATA.
Thus, the Amending Regulations effectively abolish the threshold test as a requirement for the tests to identify significant and notifiable actions. Thus, a broader scope of proposed actions will be subject to scrutiny, oversight and approval by the Treasurer.

Public Scrutiny and Government Response

In a media release, the Treasurer stated, “This is not an investment freeze. Australia is open for business and recognises investment at this time can be beneficial if in the national interest.” In a March interview, the Treasurer was asked to a question with reference to the need for a buyer for Virgin Australia and the interest of China Southern Airlines, the Treasurer replied stating:

“Look we don’t comment on individual Foreign Investment Review Board matters, whether they are before the Board or whether they are not, we just don’t add to that speculation in the media. We have a very strict national interest test and as you know, during the course of this coronavirus crisis we have removed that threshold on foreign investment so that every dollar of foreign investment is appropriately scrutinised and I think that’s been a welcome announcement.”

Similarly, in another March interview, the Treasurer was asked to comment on the validity of “the conspiracy theories out and about that this is constructed by China to try and get hold of some investments here in Australia.” The Treasurer stated that, “this (referring to legislative change) is not directed at one particular country. What it is directed at, is preserving and enhancing the national interest”. The Treasurer cited the fact that China is Australia’s fifth largest foreign investor after the United States, Canada, Japan and Singapore. In the same interview, the Treasurer was asked whether there was known and detected evidence of attempts to buy up Australian assets and companies under the cover of COVID-19. The Treasurer asserted that the changes to the foreign investments framework are a precautionary and temporary measure to ‘reduce the possibility of predatory behaviour by certain purchasers from overseas that are not in the national interest.” The Treasurer also articulated that assessments of ‘national interest’ involve assessments of the character of the investor, tax and competition implications and national security grounds.

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