Your restructuring strategy and goals may derail if you don’t consider up front, at least at a preliminary level, whether you will need FIRB approval.
Formal insolvency appointments in Australia have dropped significantly by almost 45% since before the pandemic. A mix of legislative protections against the economic effects of the global pandemic, stimulus measures and access to cheap capital has allowed companies to refinance and restructure.
Foreign investment is one of the sources of cheap capital flowing into Australia. During the pandemic and in the face of an uncertain economic outlook, the Australian government took swift action to tightly control foreign investment by lowering monetary approval thresholds for “notifiable stocks” to $ 0. While these thresholds have returned to pre-COVID levels, this year, the government introduced a broad “national security” test that is expected to increase the bureaucratic burden of concluding certain transactions by foreign entities.
The Australian government tightly regulates inward foreign investment primarily through its foreign investment screening regime, headed by the Australian Federal Treasurer, which in turn is guided by the Foreign Investment Review Board (FIRB). If the Treasurer determines that certain foreign investments are contrary to the “national interest”, the transaction may be prohibited or approved but subject to conditions (and in cases where the investment has already taken place, the disposal of that investment ordered ).
The concept of “national interest” is broad and indefinite, but based on the Australian government’s foreign investment policy, we would expect it to include the following factors:
- national security;
- competition, especially if the acquisition can make it possible to control the supply of a product on the domestic market;
- fiscal and environmental impacts of investments;
- impact on the economy and the community, including employees, creditors and other stakeholders; and
- the character of the investor, including whether it operates on a transparent business basis and is subject to transparent regulation and supervision in its home country.
Foreign investment in Australia is worth at least $ 4 trillion and is a key source of capital for some of Australia’s largest industries, including mining, real estate, finance and insurance. Foreign investment can be an important line of capital for restructuring and making deals. In 2020, foreign bidders accounted for around 45% of transaction volume for ASX-listed companies with an aggregate value of $ 21.9 billion. The top 5 investors in Australia are:
FIRB approval will generally need to be sought when a transaction results in a foreign entity meeting the new FIRB thresholds, and increased interest from foreign players in financing, investing and acquiring positions. and distressed assets in Australia, it is inevitable that there will be a greater FIRB review of a restructuring transaction.
The recognized benefits of foreign direct investment, which are particularly relevant in the direction of restructuring, include increased engagement of multinationals (including the use of their intellectual property, international logistics networks and management expertise) . These benefits must be weighed against possible negative spillover effects such as increased competition and fears that sources of foreign capital may not comply with Australia’s social and environmental regulations.
Notable announced deals that did not get approval from FIRB included Baogang Group’s proposed $ 20 million investment in Northern Minerals and a $ 14 million investment by Yibin Tianyi Lithium in AVZ Minerals (in circumstances where AVZ had no real estate owned by AVZ in Australia and the principal asset was in the Democratic Republic of the Congo).
It is likely that there were other (unannounced) deals that were proposed, but ultimately withdrawn based on an indication from the FIRB that approval was unlikely to be given. Examples include China Mengniu Dairy (in which the Chinese government has a 16% stake) has apparently been informed that its proposed $ 600 million acquisition of Lion Diary and Drinks would be unlikely to be approved and China State Construction Engineering Corporation which withdrew its ~ $ 300 million proposed acquisition of Probuild after receiving an indication that the treasurer would reject its FIRB request.
When the acquisition concerns a distressed asset, there is a significant exemption from FIRB requirements for a secured creditor. Where a foreign entity holds or acquires an interest by virtue of the performance of its collateral held solely for the purpose of a money-lending agreement, it may be exempt from requiring approval from the FIRB. The exemption does not apply, however, if the interest relates to national security lands or to a national security enterprise, unless the execution is by appointment of a receiver or receiver. -administrator.
In the realm of restructuring, another area where FIRB approval needs to be carefully considered is where a transaction contemplates the use of a convertible note. A convertible note may constitute an “interest” in the underlying securities. If the entity financing the notes were to obtain approval from the FIRB, that approval would be required prior to entry into the convertible note (in other words, it is not sufficient to impose an FIRB condition prior to the exercise of the conversion).
In our experience, FIRB approvals have now returned to their pre-COVID processing times, meaning that a restructuring transaction will typically take at least 45 days to assess. Additionally, in light of the new voluntary notification regime, it is expected that FIRB approval will be required with increased frequency when a foreign investor provides funding.
When considering the restructuring strategy and goals, it is important to determine up front, at least at a preliminary level, whether you will need FIRB approval and the prospects and drivers of that demand, because failure to do so can derail this strategy late in the part and explode in time and considerable wasted costs.
In our experience, the FIRB investigation process goes well beyond the corporate veil and is a rigorous process that takes time and may require a significant investment of resources.