Member Article

As a result of the COVID-19 changes to foreign investment in Australia announced on Sunday, investors that are now caught by the Foreign Investment Review Board (FIRB) regime will also be subject to scrutiny from other regulators. Our team explains what this means for investors and what they can do to manage this process.

As set out in our earlier alert, COVID 19: New blanket restrictions on foreign investment, temporary changes were announced to Australia’s foreign investment regime designed to ‘protect Australia’s national interest as we deal with the economic implications arising from the spread of the coronavirus’.

The FIRB application process involves mandatory engagement with relevant Federal Government agencies, as well as relevant State and Territory agencies. For all applications, this customarily includes engagement with the Australian Competition and Consumer Commission (ACCC) and the Australian Taxation Office (ATO). During the temporary changes to the regime, FIRB will continue to consult with other government agencies as required when assessing applications to ensure they are not contrary to the national interest. Early engagement with these and other consult agencies is critical to ensure that applications can be reviewed as quickly as possible.

Early engagement on ACCC and ATO matters alongside FIRB is key

As the ACCC and ATO are engaged as part of the FIRB process, and a no objection notification for a proposed transaction will not be issued until these agencies are satisfied, we recommend that clients consider competition and tax or structuring matters prior to lodgement of the FIRB application.

By considering tax or structuring matters early, we have found that the application process is smoother. This results in a reduction in requests for information, allowing applicants to best present their position on tax and competition matters relevant to the proposed transaction.

ACCC engagement

With the temporary reduction to $0 of the monetary screening thresholds for all transactions, all transactions will now be scrutinised by the ACCC and be pulled into their review process. This is regardless of whether it is directly notified by the parties, exceeds the ACCC's voluntary guidelines or raises any competition concerns.

Parties to a potential transaction should seek advice about the best way to manage the intersection of these two regulatory processes. It may be prudent to proactively approach the ACCC to seek clearance, typically by way of application for confidential pre-assessment. This approach mitigates the risk of a delay to completion as this early review by the ACCC will effectively mean the work has been done prior to FIRB notifying them of the transaction.

It is expected that FIRB’s engagement with the ACCC may further delay the FIRB application process. The ACCC's guidance outlines how the COVID-19 pandemic has and continues to impact their operational merger clearance response. It confirms that, while some merger reviews will need to be conducted on an urgent basis:

• Timelines for some reviews (including those with statutory timeframes under the merger authorisation process) may need to be extended if there are challenges in conducting and completing the necessary inquiries with merger parties and market participants due to COVID-19; and
  
  
• Certain matters may need to be prioritised if the situation worsens and parties should be responsive to potential requests by the ACCC.
  
  

Delays in the ACCC process can cause consequential delays in the FIRB process and hold up FIRB approvals which may otherwise have been granted.

Any suggestions that a light touch approach will be taken to 'failing firm' type arguments have been dismissed by the ACCC. Applicants relying on a 'failing firm' argument to justify potentially anticompetitive mergers have been advised that the ACCC will approach each assessment of each transaction on a case-by-case basis. Consideration of the longer term impact on competition of any market structure changes beyond the present impact of the crisis on profits and share value of merger parties, will be included in the assessment. Applicants should therefore understand that deal opportunities arising as a result of the COVID-19 crisis has not lowered the competition clearance bar by the ACCC and failing firms arguments will be carefully scrutinised and tested.

While it is not requesting parties delay merger clearance applications, the ACCC is encouraging parties to consider postponing non-urgent applications, particularly for mergers which are more speculative or at a very early stage with no sale agreements in place.

ATO engagement

We have recently seen a more hands-on approach taken by the ATO. This is especially where it has identified concerns about a transaction (or about an applicant’s tax structure more broadly), and has used the FIRB process as a means to either request certain information or impose bespoke tax conditions on the applicant.

It should be noted that FIRB has a standard checklist of tax questions which applicants are required to respond to regarding the funding for the proposed transaction, any inter-company arrangements and the details of any debt and / or equity funding.

While it is common for FIRB to request for all applicants to consent to the standard tax conditions, we are increasingly seeing applicants spend considerable time engaging with FIRB in relation to additional tax conditions as well.

Examples of tax conditions we have seen imposed include requirements to:

• Engage with the ATO in relation to acquisition structuring. These conditions are chiefly aimed at ‘treaty shopping’ by the acquirer;
  
  
• Keep debt levels within safe harbour debt amounts, even though the tax law permits alternative methodologies (such as arm’s length debt) to be used to determine the maximum allowable debt for thin capitalisation purposes;
  
  
• Provide details on intellectual property assets, including location of DEMPE functions;
  
  
• Advise the ATO/FIRB or any intended restructuring post-acquisition, including offshoring of any intellectual property;
  
  
• Engage with the ATO ‘in good faith’ to obtain an Advance Pricing Arrangement;
  
  
• Provide periodic forecasts of certain information, including tax payable, to the ATO; and
  
  
• Provide additional reporting signed by senior officers of the relevant entity and access to the background documents on request by the ATO.
  
  

Continued communication is important

The ACCC requests that merger parties provide it with regular updates regarding changes in the commercial timing or likelihood of pending deals with a view of present market conditions. For example, in cases where a merger is dependent on obtaining funding and this funding is unlikely in the current market environment, or the merger parties have decided to go-slow on a transaction. The ACCC expects to be kept apprised of any developments or doubts about a deal proceeding.

Providing this update to the ACCC in a timely way will also assist FIRB in reviewing and prioritising urgent applications.

Next steps

Foreign investors must consider whether prior clearance from FIRB is required before undertaking any transaction in Australia or transactions that involve downstream Australian companies and businesses.

If prior FIRB clearance is required, we recommend clients closely consider their approach to the ACCC and ATO prior to lodgement of the FIRB application, as well as during the screening process.

Contact us to find out how to successfully manage all aspects of these regulatory engagements.