If you are an Australian business seeking foreign investment, you will likely need to comply with temporary changes resulting from COVID-19. From 29 March 2020, if a foreign person or company is acquiring 20% or more of your company, they must gain approval from the Government’s Foreign Investment Review Board (FIRB) approval. This article explains when foreign investment rules might apply to your capital raise and the requirements that you need to meet if they do.

Do the Foreign Investment Rules Apply?

From 29 March 2020, all proposed foreign investments into Australia will require approval from FIRB. This is regardless of the value of the investment if the proposed investment is a:

  • significant action; or
  • notifiable action.

These temporary changes do not apply if you entered into agreements before 10.30 pm AEDT on 29 March 2020, even if the investment has not completed.

1. What Is a Significant Action?

A significant action will occur if a foreign person acquires control in an Australian business. This is regardless of whether they control it alone or with any associates. Being in control over a business means that they are in a position to determine the policy of the company.

A business is considered to be an Australian business even if it is only partly carried on in Australia. 

2. What Is a Notifiable Action?

A notifiable action will occur if a foreign person acquires a substantial interest in an Australian business. A substantial interest is at least 20% of the voting rights or share capital, including rights to acquire shares. Where more than one foreign person is acquiring an interest in an Australian entity, a substantial interest is one in at least 40% of the voting rights or share capital on issue.

This will also capture existing foreign shareholders of Australian companies who are looking to increase their shareholdings above 20%.

What Do I Do If The Foreign Investment Rules Apply?

The foreign person making the proposed investment must apply to FIRB for approval of their proposed action. They will need to pay a fee when making this application. It is not clear how the fee will be calculated, as this is normally based on the investment’s value.

The investment cannot complete until the Treasurer notifies you that the Commonwealth does not object to the action. Due to COVID-19, there has been an increase in applications. As such, the Treasurer has extended the time they have to make their decision from 30 days to six months. If an application for FIRB approval is submitted and no decision has been made after six months, the investment can proceed after a further ten days. 

Applications which support Australian businesses and Australian jobs will be prioritised. FIRB is permitting applicants to advise them of any commercial deadlines to help them to prioritise applications.

The Treasurer also has the power to prohibit the action if it would be contrary to the national interest. It may also impose conditions on the investment. 

For example, a condition could be that the foreign person cannot increase their voting rights in the company after they make their initial investment.

Practical Steps You Can Take

As FIRB now has six months to process applications, you will need to factor this into the decision of whether to raise capital from foreign people. As it may cause significant delay to your business, it may be impractical to gain foreign investment.

An investment will fall outside these parameters if the investor is acquiring less than 20% of the shares or voting rights in your company. This is provided that this investor does not have the power to determine the policy of your company.

If there are multiple foreign investors, they will need to acquire less than 40% of the shares or voting rights to fall outside this framework. As such, if you can restructure the investment so that the foreign person falls below these thresholds, you will not need FIRB approval. This means that you can complete the investment in a shorter time frame.

If the foreign investment exceeds these limits, the investment could be restructured to be completed in two tranches. The first portion would be for under 20% of the company. Then, the remaining investment can follow once you have obtained FIRB approval. This will provide your business with some of the investment funds in the meantime.

You should also make sure that if an investment into your company will fall within the scope of the foreign investment rules, your investment contract should be conditional on FIRB approving the transaction. This ensures that the investment does not breach the rules.

Key Takeaways

The changes to the foreign investment rules due to COVID-19 could have a large impact on the ability of your company to raise capital. If you were planning on having a foreign investor gain control over part of your company, you may need to wait six months until gaining FIRB approval. If you have any questions about complying with these changes to the foreign investment rules, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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Sarah Aldersley
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