15 June 2020

Impacts of FIRB changes on ECM deals during COVID-19

This article was writte by Rhys Casey, Malcolm Brennan, Karim Issa and Anthony Boogert

Much has been made of the temporary changes to Australia’s foreign investment regime in response to COVID-19, which reduce the relevant monetary thresholds to $0 and extend the statutory deadlines from 30 days to up to 6 months.

While the majority of reporting has framed the changes as posing a significant barrier to foreign investment into Australia, this is not the case, particularly in the context of equity capital market (“ECM”) transactions which continue to be facilitated by the regime.

The proportionate thresholds still apply

Despite the reduction of the monetary thresholds to $0, the usual proportionate ownership thresholds remain in place.  So, a privately-owned foreign investor acquiring less than 20% in a non-land rich entity or less than 10% in a land rich entity, or a foreign government investor acquiring a passive interest of less than 10% in an Australian entity, will not need FIRB approval (this article will refer to these as the “Proportionate Thresholds”).

In an ECM context, this applies equally to foreign investment in listed entities.  For example, a privately-owned foreign investor will be free to participate in any equity capital raising by a non-land rich listed company without the need for FIRB approval provided its interest will be less than 20% (consistent with the takeovers threshold).

The pro rata rights issue exemption remains intact

In addition, the exemptions under the regulations remain unaffected.  In an ECM context, this includes an exemption from the need to obtain FIRB approval where a foreign investor seeks to participate in a pro rata rights issue.  The foreign investor will be free to take up its full pro rata entitlement, even where doing so would result in it exceeding the Proportionate Thresholds should there be non-participation by another investor.  However, a foreign investor would not be able to acquire any shortfall securities or effectively sub-underwrite the issue where this would result in its interest exceeding the Proportionate Thresholds without FIRB approval.

Placements and cornerstone investments are still possible

In the context of placements of securities to specific investors or investor groups, a foreign investor will only need to obtain FIRB approval where the transaction would result in its shareholding exceeding the applicable Proportionate Threshold.  This also captures issues of convertible securities, as the FIRB regime effectively assesses these on an as-converted basis, meaning the assessment needs to be made upfront.

A word of caution for issuers

While the regime affords issuers considerable scope in structuring ECM deals, where the aggregate ownership of their substantial (>5% or more) foreign shareholders is 40% or more, the issuer itself will be deemed to be a “foreign person” for the purposes of Australia’s foreign investment regime.  Accordingly, any future acquisitions or investments by the then foreign issuer will be subject to the same FIRB regime (which might be problematic to the extent part of the capital raising proceeds are earmarked to fund those acquisitions or investments).

Review times

The lowering of the monetary threshold to $0 will undoubtedly increase the volume of applications submitted to FIRB and we expect this will in turn increase review times.  Fortunately, Treasury has boosted its internal resourcing in anticipation of this.

Notwithstanding the extension of the statutory deadline, our current expectation is that FIRB will not take the full 6 months to examine non-controversial and non-urgent applications, and that these will likely be dealt with in 3 to 4 months (which is not substantially longer than previously the case for many applications by foreign government investors, and some sovereign wealth funds consider this to be a “levelling of the playing field” to an extent).

In addition, FIRB continues to make good on its commitment to prioritise urgent applications which protect Australian businesses and jobs, as evidenced by the swift and pragmatic manner in which FIRB has dealt with a number of urgent applications brought after the changes were implemented.  With this in mind, issuers should not be put off by FIRB’s 6-month review period where their capital raising will protect or create Australian jobs.

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