Member Article

Investments or acquisitions in convertible notes and options are now subject to the same approval requirements as investments or acquisitions in shares.

The monetary thresholds applicable to private business investment have been raised with effect as of 1 January 2010 to total assets of the investee of A$231m and, for U.S. investors, A$1004m.

The changes do not target Chinese acquirers, but Chinese acquirers remain concerned about the Australian foreign investment approval process.

Convertible notes and options

On 12 February 2010 the Foreign Acquisitions and Takeovers Amendment Bill 2010 received Royal assent (2010 Act), and therefore came into operation. The legislation applies retrospectively to proposals received from 12 February 2009, when the proposed Bill was announced by the Commonwealth Treasurer.

The 2010 Act amends the Foreign Acquisitions and Takeovers Act 1975 by expanding the concept of 'voting power' to include a new concept of 'potential voting power'. Other amendments are to similar effect. This means that securities conferring a contingent right to receive voting shares will now be treated, for the purposes of the 2010 Act, in substantially the same way as voting shares. Relevantly, as noted above, investments or acquisitions in convertible notes and options are now subject to the same approval requirements as investments or acquisitions in shares. In the language of the 12 February 2009 announcement: '… the amendments will ensure that any investment, including through instruments such as convertible notes, will be treated as equity for the purposes of the Act.'

As a result of the 2010 Act, the position now is that a party must notify the Treasurer (through FIRB) if:

• the party is acquiring securities which will takes its holding in the entity that issued the securities through the 15% (or 40% when aggregated with the holdings of associates) threshold calculated on a diluted basis (i.e. treating any convertible securities as though they were shares), and
  
  
• the investee entity is over the applicable threshold in size (see below).

Equity investments structured using convertible securities will now in effect be treated as though the conversion event had already occurred. Of course, the previous rules also continue to apply so there is no avoiding notification of a non-convertible acquisition just because other people hold convertible securities.

Monetary thresholds

The changes to the thresholds give effect to indexation for inflation.

The thresholds:

• are calculated on the basis of the gross assets of the business or corporation in which an interest is being acquired, not, for example, the net assets or (in some circumstances) value of or imputed by the relevant acquisition,
  
  
• do not apply to acquisitions by sovereign wealth funds or state-owned entities. Such acquirers do not have the benefit of any threshold, and must seek approval for acquisitions in businesses or corporations with gross assets below or above the thresholds.

Chinese acquirers remain concerned

Minter Ellison is actively assisting potential acquirers of Australian assets from the People's Republic of China to understand and successfully work through the Australian foreign investment approval process. An article in our November 2009 Mergers and Acquisitions note (Finding consistent messages in FIRB’s approach to Chinese investment) addressed this topic. We have published several bilingual guides and a number of case studies on the topic: www.minterellison.com.cn

Feedback from our contacts in China is that there is continuing interest in Australian assets, but some confusion exists about the Australian process. In our experience, carefully considering how an acquisition proposal is structured, having regard to FIRB's key policy concerns, and early consultation with FIRB, can facilitate a successful outcome.