Proposed exemptions to the definition of ‘Foreign Government Investor’ welcome news for private equity funds and institutional investors.
We have been unpacking the upcoming changes to the Foreign Investment Review Board (FIRB) regime in our FIRB Reforms Article Series. This article considers the proposed amendments surrounding the definition of foreign government investor (FGI) which are being considered in order to streamline the review of certain non-sensitive investments.
Managed investment funds and the definition of FGIs
The current definition of an FGI is broad and includes entities in which:
1. foreign governments or their agencies (including other foreign government investors from the same country) hold an interest of at least 20%; or
2. multiple foreign government investors collectively hold an aggregate interest of at least 40%.
Foreign investors who are FGIs are subject to lower screening thresholds from FIRB, including $0 thresholds for certain acquisitions such as land and certain interests in Australian entities or businesses.
Some privately controlled and managed investment funds are regularly screened under these lower thresholds due to significant participation by FGIs (such as pension funds) in their investment vehicle. Investment from FGIs is common amongst managed funds, however it is standard for investment decisions to be undertaken entirely by the general partners or trustees of the funds which are typically private, non-government entities.
The treatment of these types of funds as FGIs can cause a significant investment delay and cost for those funds, and is seen as a barrier to investment in Australia in circumstances where the structure of the investment appears to pose no real risk to Australia’s national interest. Specifically, these types of investments are generally structured in such a way so as to make it very difficult for the foreign government to exert any type of sovereign influence or control over the investment decisions or operational and financial policies of the investment fund. As such, the additional scrutiny and approval hurdles are considered unnecessary in certain circumstances.
Proposed streamlined process for less sensitive investments
In the recent reform announcements a measure has been proposed that is intended to streamline the handling of non-sensitive cases and reduce red tape for investors. The Commonwealth Government is proposing to exempt certain investments made by funds who are currently classified as FGIs, but are effectively independent from foreign government influence or control, from the FIRB approval requirements.
Certain managed investment funds will no longer be treated as FGIs under the foreign investment regime where no FGI has management rights and all of their FGIs have no influence or control over the investment or operational decisions of the entity or any of its underlying assets. Specifically, the reforms propose to implement the following exemption:
1. entities which have more than 40% foreign government ownership in aggregate (without influence or control) but less than 20% from any single FGI will no longer be deemed FGIs under the legislation; and
2. entities which have a single foreign government with at least 20% ownership (without influence or control) will still be deemed FGI, however they will be able to apply for a broad exemption certificate on a case-by-case basis for a specified time period.
The investors will still be subject to screening at the thresholds for private investors and the new national security test (which we have written about here) will also apply where the investment raises national security concerns, regardless of the value of the investment.
The proposed changes have been welcomed by institutional investors and private equity funds and should go someway to making Australia’s foreign investment regime more flexible while also ensuring sufficient oversight of FGI investment into Australia is retained.
It is worth noting that these proposed changes have not been included in the first tranche of draft legislative amendments that were released for consultation on 31 July 2020, so the details of how the change will be implemented is still unclear. A second tranche of draft amendments is expected to be released in September which should contain the details of these proposed changes.
If you would like to be emailed the subsequent parts to this FIRB series please click here.
Please reach out to one of McCullough Robertson’s FIRB specialists if you would like to discuss how the proposed reforms could impact your investments.