The FIRB position needs to be settled at the start of a transaction not after the deal is agreed.
Foreign persons or entities acquiring interests in assets in Australia generally require approval under the Foreign Acquisitions and Takeovers Act 1975 (Cth) before taking the interest.
Getting a cross-border acquisition wrong by overlooking FIRB approval can delay settlement, place the parties in breach of their transaction documents and, in serious cases, result in the acquisition needing to be unwound. Where a foreign person, including an offshore company, intends to acquire an Australian asset such as a business, shares in a company, units in a Unit Trust or an interest land (including a Lease of real estate), advice must be sought as to whether FIRB approval is required.
The FIRB position needs to be considered at the outset of the transaction, and if required, should form a precondition to settlement of the transaction. Whether approval is required will depend on the purchaser, the target business, the interest being acquired and the value of the transaction.
If a foreign purchaser is looking to acquire an Australian business or shares in an Australian company, key considerations are:
- Whether the purchaser is a foreign person for FIRB purposes;
- Whether the transaction exceeds the applicable monetary threshold;
- Whether the purchaser is acquiring a substantial interest, direct interest or rights that give it practical influence over the target;
- Whether the target operates in a sensitive sector or holds sensitive assets;
- Whether the target owns, leases or otherwise holds interests in Australian land;
What Is FIRB Approval?
FIRB approval is the term commonly used for the foreign investment review process in Australia. The Foreign Investment Review Board reviews applications and makes recommendations to the Treasurer, who ultimately decides whether the transaction may proceed.
The Treasurer may allow the acquisition to proceed, impose conditions, prohibit the transaction, or in certain circumstances require action to be taken after completion.
In practicality, FIRB approval is a condition that can stop a transaction from completing. It should therefore be treated in the same way as finance approval, shareholder approval or any other major completion preconditions.
WHEN IS FIRB APPROVAL REQUIRED?
FIRB approval is not required for every acquisition involving a foreign purchaser. However, it may be required where a foreign person acquires shares, business assets, units or other interests in an Australian entity or business above the applicable threshold.
For many private foreign investors, the issue arises where they acquire 20 per cent or more of an Australian company or business and the target exceeds the relevant monetary threshold. The general threshold for many business acquisitions is currently $347 million, although a higher threshold may apply to certain private investors from countries with relevant free trade agreements.
That is not the end of the analysis. The applicable threshold can differ depending on the purchaser and the nature of the target business. A lower threshold, or no monetary threshold at all, may apply to businesses operating in certain sectors or to foreign government investors.
The transaction value is also not necessarily the only relevant figure. FIRB may look at the value of the target’s assets or issued securities, meaning that a purchaser should not assume that a lower purchase price removes the need for approval.
Does a Minority Interest Create a FIRB Issue?
It can. A purchaser does not always need to acquire a controlling interest before FIRB issues arise.
A minority shareholding may still require consideration where it is accompanied by board appointment rights, veto rights, funding rights, management rights or other arrangements that give the purchaser influence over the target’s affairs.
For example, a purchaser may acquire less than 20 per cent of the shares in a company but still negotiate the right to appoint a director or approve major business decisions. Depending on the circumstances, those rights may affect the FIRB analysis.
The focus should not be limited to the percentage of shares being acquired. The sale agreement, shareholders agreement, funding documents and governance arrangements should all be reviewed together.
Which target businesses can attract closer FIRB scrutiny
Some businesses require closer FIRB analysis because of the sector in which they operate or the assets they hold.
This can include businesses involved in:
- Agirbusiness;
- Media;
- Critical infrastructure;
- Energy, transport, or telecommunications;
- Defence-related technology or services;
- Government contracts;
- Sensitive personal, commercial, or government data;
- Australian Landholdings.
National-security issues can arise even where the transaction is below the usual monetary threshold. In some circumstances, a transaction that does not require mandatory approval may still be capable of being reviewed after completion.
That creates a practical problem for purchasers. Completing without a clear FIRB position can leave the purchaser exposed to a later review, conditions being imposed, or in more serious circumstances, divestment requirements.
How should FIRB approval be dealt with in the sale agreement
Where FIRB approval may be required, the sale agreement should deal with the issue clearly.
The parties should agree to:
- Who is responsible for preparing and lodging the FIRB application;
- Who will pay the relevant application fee;
- What information must the seller provide about the target business;
- How long will the parties wait for approval before either party can terminate;
- Whether the purchaser must accept approval subject to conditions;
- What happens if approval is refused or granted on terms that are commercially unacceptable.
FIRB approval should usually be a condition precedent to completion. This protects the purchaser from being required to complete a transaction it is not permitted to complete, while giving the seller a clear process if approval is delayed or not obtained.
The seller should also be conscious that FIRB applications often require detailed information about the target business. This can include details of its operations, assets, customers, contracts, land interests and regulatory position. That information should be managed carefully, particularly where the parties are competitors or the transaction does not ultimately proceed.
What should foreign purchasers do before signing?
Foreign purchasers should identify FIRB risk before signing a term sheet, heads of agreement or sale contract.
Some practical steps include:
- Reviewing the purchase’s ultimate ownership and control structuree;
- Identifying existing interests held by the purchaser or its associated entities;
- Confirming the shares, assets, voting rights, and governance rights being acquired;
- Reviewing whether the target owns or leases Australian land;
- Identifying any sensitive business activities, data, infrastructure, or government contracts;
- Allowing sufficient time in the transaction timetable for FIRB approval; and
- Including clear FIRB conditions and termination rights in the sale agreement.
The more the FIRB position depends on assumptions about the purchaser’s ownership structure, the value of the target or the nature of the target’s business, the greater the risk.
Are you considering buying an Australian business?
FIRB approval can be a manageable part of a cross-border acquisition, but only if it is addressed early and properly documented. Leaving the analysis until late in the transaction can create pressure around settlement, increase negotiation costs and give rise to disputes between the purchaser and seller.
If you are a foreign purchaser considering an acquisition of an Australian business or shares in an Australian company, FIRB issues should be considered before the transaction documents are signed. The transaction structure, target business and proposed governance rights should all be reviewed to ensure the approval requirements and completion risks are properly understood.
