Australia: a guide for foreign investors

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1 investing Introduction Australia: a guide for foreign investors

2 Introduction 1 Regulation of foreign investment 2 Regulation of public company takeovers 5 Energy & resources 8 Competition 10 Capital raisings 13 Securities regulation and funds management 16 Taxation 18 Employment and labour law 24 Contact details 26 3 Australia: a guide for foreign investors

3 This guide is a general summary of the areas of law and regulation relevant to foreign investment in Australia as at July 2012 and is not legal advice. Foreign investors should seek professional advice in relation to any proposed investment in Australia. Johnson Winter & Slattery would be pleased to provide you with advice in relation to any of the matters discussed in this guide. 1Introduction Australia has attracted a steady stream of foreign investment over many years, in particular from the United States, the United Kingdom, China, Canada and India. With its relative economic and political stability, transparent legal and regulatory system, highly skilled workforce, abundance of natural resources and close proximity to Asia-Pacific markets, Australia has much to offer foreign investors. The Australian economy proved resistant to the harshest impacts of the global financial crisis and Australia remains an attractive, low-risk destination for foreign investors. The Australian Government welcomes foreign investment and acknowledges the many benefits that foreign investment brings. Johnson Winter & Slattery is a corporate and commercial law firm that represents international and Australian clients on their most strategic, complex and demanding transactions and disputes throughout Australia. With offices in all major Australian business centres, we are well placed to meet the particular needs of multinational clients with operations in Australia. Our national team of senior practitioners has a wealth of experience in advising international clients on their investments in Australia and in successfully navigating the many areas of law and regulation that apply to such investments. This guide provides an overview for foreign investors of the key legal, regulatory and taxation issues applicable to an investment in Australia. For further information on any of the matters discussed in this guide and how we can assist you in relation to any foreign investment proposal, please contact one of our Partners listed at the end of this guide or visit our website at Peter Slattery Managing Partner Australia: a guide for foreign investors 1

4 Regulation of foreign investment Foreign investment in Australia is regulated primarily by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Federal Government s Foreign Investment Policy (Policy). Responsibility for decisions under the FATA and for administering the Policy lies with the Australian Federal Treasurer who is assisted by the Foreign Investment Review Board (FIRB), a non-statutory body which reviews foreign investment proposals and makes recommendations to the Treasurer. The Treasurer has broad powers under FATA to block or make divestment orders in relation to certain foreign investment proposals where the Treasurer considers the proposal to be contrary to Australia s national interest. The Treasurer may also issue a statement of no objection in relation to a proposal (known as a FIRB approval ) where the Treasurer considers the proposal is not contrary to Australia s national interest. FIRB notification and examination regime The notification of certain foreign investment proposals is compulsory under FATA and it is an offence to implement (or agree to implement) such proposals in the absence of requisite notice or receipt of a statement of no objection under FATA. Other proposals, while not compulsorily notifiable under FATA, should generally be notified to avoid the risk of the Treasurer subsequently making an adverse order. The formal notification of a foreign investment proposal to FIRB activates a 30 day review period. If the Treasurer does not decide to make an order prohibiting or imposing conditions on the proposal within that 30 day period and advise the applicant of that decision within a further 10 days, the Treasurer loses the ability to make such an order in relation to the proposal. However, the Treasurer may extend the 30 day review period by up to a further 90 days by publishing an interim order. The Policy sets out additional circumstances in which foreign investment proposals require notification to FIRB. While the Policy has no legislative force, compliance with the Policy is recommended including for the purposes of the foreign acquirer maintaining a good relationship with the Federal Government. Notifications made under the Policy are not subject to the statutory review period. To whom do FATA and the Policy apply? FATA applies to foreign persons which include: a natural person not ordinarily resident in Australia; and a corporation or trust in which a natural person not ordinarily resident in Australia or a foreign corporation holds a 15% or greater interest (or in which two or more such natural persons or foreign corporations hold in aggregate a 40% or greater interest). 2 Australia: a guide for foreign investors

5 What proposals require notification? Foreign investment proposals that require notification to FIRB either under FATA or the Policy include: direct investments by foreign governments or their related entities (including state-owned enterprises and sovereign wealth funds) irrespective of the value of the investment and including the establishment of any new businesses; acquisitions by foreign persons of a substantial interest (being 15% of actual or potential voting power) in an Australian corporation having total assets valued at, or which the proposal values at, above A$244 million (or A$1,062 million for acquisitions by US non-government controlled investors not involving a prescribed sensitive sector); acquisitions by foreign persons of a substantial interest (being 15% of actual or potential voting power) in a foreign corporation whose Australian subsidiaries or Australian gross assets are valued at above A$244 million (or A$1,062 million for acquisitions by US nongovernment controlled investors not involving a prescribed sensitive sector); acquisitions by foreign persons of assets comprising an Australian business valued at, or which the proposal values at, above A$244 million (or A$1,062 million for acquisitions by US non-government controlled investors not involving a prescribed sensitive sector); subject to certain limited exceptions, acquisitions by foreign persons of interests in Australian urban land (being land other than land used for primary production), or shares or units in companies or trust that have more than 50% of their assets in Australian urban land, regardless of the value of the acquisition. The Australian urban land provisions are complex and in certain circumstances capture interests in mining tenements as further discussed in Section 4; and investments by foreign persons of 5% or more in the media sector, regardless of the value of the investment. 1 The national interest The Treasurer assesses foreign investment proposals against a national interest test. National interest is not defined and the Treasurer must assess applications on a case-by-case basis. The Policy provides that the following factors are typically considered when assessing foreign investment proposals: the extent to which the investment affects Australia s ability to protect its strategic and security interests; whether the investment may result in an investor gaining control over market pricing and production of a good or service in Australia and the impact of a proposed investment on concentration within a global industry; the impact of the investment on Australian tax revenues and its consistency with other Australian Government policies including in relation to environmental impact; the impact of the investment on the general economy and the community including the level of Australian participation in the enterprise post-investment and the interests of employees, creditors and other stakeholders; and the character and corporate governance practices of the investor and the extent to which it operates under adequate and transparent regulation and supervision. Acquisitions by foreign governments The Policy requires notification of all direct investment by foreign governments or their related entities, irrespective of value. A direct investment is one having the objective of establishing lasting interest in, or a strategic long term relationship with, a target entity and which may allow a significant degree of influence in the management of the target entity. Passive investments of less than 10% generally need not be notified unless they are preparatory to a takeover bid. Related entities of foreign governments include a body politic of a foreign country and companies and entities in which foreign governments, their agencies or related entities have more than a 15% interest or which they otherwise control. 1 The monetary thresholds set out above are current as at 1 January 2012 and are subject to annual indexation. Australia: a guide for foreign investors 3

6 Where a proposal involves a foreign government or a related entity, then, in addition to the Policy factors related to the national interest test noted above, the Government will consider if the investment is commercial in nature or if the investor may be pursuing broader political or strategic objectives that may be contrary to Australia s national interest. This will involve assessing whether the investor s governance arrangements could facilitate actual or potential control by a foreign government and the extent to which the prospective foreign investor operates at arm s length from the relevant government. US investors The higher notification thresholds noted above for US investors were introduced under the Australia-US Free Trade Agreement (AUSTFA). They apply to US nationals and permanent residents and to US enterprises, being entities constituted in the US and branches of other entities located and carrying on business in the US. Importantly, the higher thresholds do not apply to Australian-incorporated subsidiaries of US enterprises. Prescribed sensitive sectors The prescribed sensitive sectors, investments in which generally attract greater scrutiny by FIRB and to which the higher monetary thresholds for US investors do not apply, are the media, telecommunications, transport, defence, encryption and security technologies and communication systems, and uranium and plutonium extraction and nuclear facilities operation sectors. Approvals under other legislation Certain foreign investment proposals may require approval under sectorspecific legislation in addition to approval under FATA. These include acquisitions in the mining, banking, media, aviation and airport sectors. Separately, authorisation or clearance may be required from the Australian Competition and Consumer Commission (ACCC) where an acquisition may have the effect of substantially lessening competition in a market in Australia, as further discussed in Section 5 of this guide. 3 4 Australia: a guide for foreign investors

7 Regulation of public company takeovers Chapter 6 of the Corporations Act 2001 (Commonwealth) regulates acquisitions of shares in (as opposed to assets of) companies that are listed on the Australian Securities Exchange (ASX) and companies that are unlisted but which have more than 50 shareholders. It also regulates acquisitions of interests in managed investment schemes (including trusts) that are listed on ASX. M&A transactions that are subject to Chapter 6 are typically referred to as regulated M&A transactions. Private treaty transactions are referred to as unregulated M&A transactions. The purpose of Chapter 6 is to ensure that the market for control of securities in such entities is efficient, competitive and informed, and that all security holders have a reasonable and equal opportunity to participate in, and are given adequate information and time to consider, proposals under which a person may acquire a substantial interest in the entity. This is achieved primarily through prohibiting acquisitions beyond a 20% threshold except where they occur through a limited number of exceptions and by requiring timely disclosure of substantial holdings to the market. The 20% prohibition Chapter 6 prohibits a person from acquiring, other than through an exception, a relevant interest in the voting securities of an ASX listed company or managed investment or an unlisted company with more than 50 members if the acquisition would result in any person s voting power in the entity increasing: to more than 20%; or between 20% and 90%. In broad terms, a person s voting power in an entity is the aggregate of the person s and their associates relevant interests in voting securities of the entity. A person generally has a relevant interest in securities if the person is the holder of the securities or has the power to exercise or control the exercise of the right to vote or dispose of the securities. In summary, persons will be associates if one controls the other or they are under the common control of another person. They will also be associates with respect to a particular target entity if there is an arrangement or understanding between them for the purpose of controlling or influencing the entity s board or its affairs or they are acting or proposing to act in concert in relation to the entity s affairs. Exceptions to the 20% prohibition There are a number of exceptions to the 20% prohibition, the key ones being: off-market takeover bids; schemes of arrangement; market takeover bids, being unconditional cash offers made on ASX to acquire all the Target s securities offered at a specified price during a minimum period of one month; acquisitions approved by the Target s securityholders who are not parties to the transaction or associates of such parties; acquisitions of up to 3% of the Target s voting securities every 6 months; acquisitions resulting from pro-rata rights issues offered equally to all securityholders; and acquisitions by an underwriter of an issue of securities made pursuant to a prospectus or other disclosure document. The structures most commonly used to effect change of control transactions in Australia are offmarket takeover bids and schemes of arrangement. These structures are discussed below. Australia: a guide for foreign investors 5

8 Off-market takeover bids In an off-market takeover bid, the Bidder sends to all Target securityholders a formal written offer to acquire all or a stated proportion of each securityholder s Target securities on identical terms. The consideration offered under an off-market bid may be cash, securities or a combination of both. It must be equal to, or more than, the amount or value of the highest consideration for the securities which the bidder or its associates have provided in the four months before the bid. An off-market bid may be subject to conditions which, where the Bidder is foreign, typically include a FIRB approval condition. Other typical conditions include a minimum acceptance condition which is often set at 90% to enable the Bidder to compulsorily acquire the remaining Target securities or 50% where at least majority control is required. The Bidder s offer must be accompanied by a Bidder s Statement that sets out a range of prescribed information in relation to the Bidder s offer and which must also be sent to the Target, ASX and the Australian Securities & Investments Commission (ASIC). In response, the Target must prepare and send to Target securityholders, the Bidder, ASX and ASIC a Target s Statement which must also contain prescribed information including the Target Board s recommendation in relation to the Bidder s offer and, where the Bidder s voting power in the Target is 30% or more or the Bidder and the Target have common directors, a report of an independent expert stating whether the Bidder s offer is fair and reasonable. The Corporations Act contains detailed provisions governing the procedure of takeover bids including the timeframes for announcing bids, lodging and dispatching Bidder s Statements and Target s Statements and, closing, varying and withdrawing bids. As takeover bids do not require the cooperation of the Target, they may be used to effect hostile takeovers. They may also be used to effect friendly takeovers, that is, transactions that are recommended by the Target Board. Takeover bids allow the Bidder flexibility to improve the offer terms throughout the course of bid, including to respond to rival bids. If during or at the end of the takeover bid, the Bidder and its associates have a relevant interest in 90% of the Target s securities then, subject to certain other requirements, the Bidder may compulsorily acquire the balance of the Target s securities on the terms that applied under the bid. An uncontested off-market takeover bid typically takes a minimum of three months from announcement to completion. Schemes of arrangement A scheme of arrangement (a scheme ) is a Court-approved contract between the Target company and its shareholders which can be used to effect a change in control of the Target through either the transfer of all the shares in the Target to the Bidder (a transfer scheme ) or the cancellation of all the shares in the Target other than those held by the Bidder (a cancellation scheme ). A Bidder, while not a party to a scheme of arrangement, is bound to perform its obligations in connection with the scheme under a deed poll that it executes in favour of the Target shareholders. For a scheme to proceed, it must be approved both by Target shareholders at a Court-ordered scheme meeting (by a majority in number of Target shareholders present and voting who between them hold at least 75% of votes cast) and the Court. Once approved by Target shareholders and the Court, a scheme becomes binding on all Target shareholders and is therefore an effective mechanism where a Bidder requires an all or nothing outcome. A scheme requires the cooperation of the Target company in preparing and sending to Target shareholders a Scheme Booklet that provides material information in relation to the scheme (similar to the information that would be contained in a Bidder s Statement and Target s Statement were the transaction to be effected under a takeover bid) and in seeking, at separate Court hearings, that the Court convenes the scheme meeting and approves the scheme. Accordingly, a scheme can generally only be used to effect a transaction that is friendly or recommended by the Target Board. While schemes involve a more formal procedure than takeover bids and their terms cannot as easily be varied as those of an off-market bid, they can offer a lower effective approval threshold to compulsory acquisition than takeover bids and provide a greater degree of transaction structuring flexibility at the outset. For example, multiple schemes can be combined as part of a single transaction to effect, say, an acquisition concurrently with a demerger or spin-out. A scheme typically takes about four months to proceed from agreement of an implementation agreement between the Bidder and the Target (setting out the terms upon which the scheme will be proposed to Target shareholders) to final approval and implementation. Substantial holder disclosure While, subject to any approvals required under FATA or other legislation, a Bidder is free to acquire up to 20% of a Target s securities without launching a takeover bid or relying on another exception to the 20% prohibition, the Bidder must disclose the details of its and its associates relevant interests in the Target s securities to ASX and the Target generally within two business days of the Bidder s voting power in the Target reaching 5% and for every 1% movement in the Bidder s voting power above the 5% level. 6 Australia: a guide for foreign investors

9 The Takeovers Panel The primary forum for resolution of disputes in relation to takeovers during the bid period is the Takeovers Panel, a non-judicial body, with part time members appointed from the active members of Australia s takeovers and business communities. The Panel has power to declare circumstances to be unacceptable having regard to their effect on the control or potential control of an entity to which Chapter 6 applies or the acquisition by a person of a substantial interest in such an entity. In exercising this power, the Panel must have regard to the purpose of Chapter 6. Where the Panel makes such a declaration, it is empowered to make a range of orders as the Panel considers appropriate. Decisions of the Panel are subject to a merits review by a separately convened review Panel and can be subject to judicial review by the Courts. ASIC ASIC regulates compliance with the Corporations Act, including the takeovers provisions in Chapter 6. It also has the power to modify and grant exemptions from compliance with particular provisions of the law which are often required in the context of takeovers. ASIC also reviews many of the documents issued by parties involved in a takeover. Other regulators As outlined in Sections 1 and 5 of this guide, the approvals of the Treasurer and the ACCC may be required to takeover or acquire substantial interests in Australian entities in certain circumstances. Australia: a guide for foreign investors 7

10 Energy & resources The Australian energy and resources sector is subject to both industry and jurisdiction specific regulation. General regulatory requirements, such as those under the FATA, can also have particular implications for energy and resources transactions and projects. FATA and Australian urban land The Australian urban land provisions of the FATA are of particular significance to the energy and resources sector. For this purpose, Australian urban land is all land that is not used for the purpose of agriculture. Under the provisions, the acquisition of an interest in a mining or petroleum project, or of a company which owns an interest in a mining or petroleum project, may be subject to prior compulsory notification regardless of the value of the acquisition. The notification requirement arises where the acquisition involves a mining or petroleum title that grants rights to occupy Australian urban land, where the term of the title (including extensions), at the time of the acquisition, is likely to exceed five years. Whether a title provides a right to occupy Australian urban land will depend upon the legislation that governs the title and the rights that attach to the title under the legislation. FIRB considers that the rights granted by offshore petroleum exploration permits generally do not provide such a right to occupy Australian urban land. As a result, foreign investors should be aware that notification may be required for the acquisition of: an interest in an exploration or production title for minerals or petroleum; an interest in an arrangement involving the sharing of profits or income from the use of, or dealings in, exploration or production titles (such as farm-ins and joint ventures); and the acquisition of shares or units in companies or trusts that have more than 50% of their assets in such titles, regardless of the value of the interest. This notification requirement will not apply where the title is acquired through the grant of an interest by the Commonwealth or a State or Territory. FATA and exploration projects Further notification requirements under FATA may arise when exploration projects convert into producing assets. This can occur where: the Treasurer has imposed conditions on a FIRB approval which requires the notification of conversion of the interest to a producing project; and FATA and the Policy require notification. The first circumstance may arise where the acquisition of the interest in an exploration project was subject to a FIRB approval. Under the FATA, the Treasurer has the power to impose conditions on a FIRB approval if, at the time of making the decision, the Treasurer considers such conditions to be necessary in order that the proposal, if carried out, will not be contrary to the national interest. If the Treasurer is concerned that an acquisition may be contrary to the national interest if and when the project reaches production, the Treasurer may impose conditions requiring the further notifications. 8 Australia: a guide for foreign investors

11 The conversion of an exploration project to a commercial development often involves the acquisition of ancillary interests in land for the purposes of equipment and transport. The acquisition of these interests may be subject to notification under the FATA and the Policy, allowing the Treasurer to consider the national interest in the context of the development. Sector specific investment approvals Investments in energy and resources projects may also be subject to approval requirements under sector specific legislation. For example, acquisitions of certain interests in petroleum titles are subject to approval and registration requirements under Commonwealth, State and Territory mining and petroleum legislation. In considering whether to approve such acquisitions, the relevant Government departments may consider the technical and financial standing of the acquiring party. Registration fees on acquisitions are also payable in some jurisdictions, or alternatively stamp duty may be payable under State or Territory legislation (which is not uniform) in each case determined as a percentage of the consideration for the acquisition. Similarly, certain dealings involving interests in mining or petroleum tenements do not have legal effect until they have been registered under the applicable State or Territory legislation. Where an investment involves the transfer of regulatory approvals to a new entity, further approvals may also be required. For example, acquisitions in the electricity sector may require approvals for the transfer of licences such as generating licences. Environmental approvals may also be subject to transfer requirements. Ongoing project approvals Energy and resources projects often involve ongoing regulatory approvals and licensing requirements. The regulatory requirements for a project will depend on its nature and location, but may include: environmental approvals and clearances; works approvals; land access requirements, including compensation to landholders; Native Title and Aboriginal heritage requirements; licences for operations; approval and registration of agreements relating to the project; and carbon tax requirements. The mineral exploration and development sector was the largest industry destination by value, with approvals in of A$54 billion FIRB Annual Report Australia: a guide for foreign investors 9

12 Competition / Antitrust Any acquisition by a foreign investor of Australian assets or shares in an Australian body corporate is subject to the provisions of the Competition and Consumer Act 2010 (Cth) (CCA). Section 50 of the CCA prohibits any acquisition of shares or assets that would, or be likely to, have the effect of substantially lessening competition in a market in Australia. The CCA is administered by the Australian Competition and Consumer Commission (ACCC), an independent statutory body with broad investigative powers. Unlike many other jurisdictions with merger control laws, there is no mandatory pre-merger notification requirement in Australia. That is, there are no statutory turnover or market share bright line thresholds which determine whether or not seeking clearance for a proposed merger from the ACCC is required. However, if the ACCC considers that a proposed acquisition would be likely to have the effect of substantially lessening competition in a market (and the parties have not obtained clearance for the acquisition from the ACCC), the ACCC may seek an injunction from the court to prevent the parties from completing the acquisition. Moreover, if parties complete an acquisition without ACCC approval and the ACCC holds the view that the acquisition would be likely to have the effect of substantially lessening competition in a market, the ACCC has the power to seek penalties and divestiture orders from a court. Given the risk of ACCCinitiated court proceedings, there is a well developed practice of seeking informal clearance from the ACCC for proposed mergers that may raise competition concerns in Australia. In its Merger Guidelines (2008), the ACCC encourages parties to notify it of a proposed merger well in advance of completion where: the products of the merger parties are either substitutes or complements; and the merged entity will have a postmerger market share of greater than 20% in the relevant market/s. Processes for obtaining approval of a proposed merger There are three processes for obtaining approval of a proposed merger informal clearance, formal clearance and authorisation. (A) Informal clearance Process, Timeline and Fees While parties generally approach the ACCC to seek informal clearance, the ACCC may also commence an informal review of its own accord if it becomes aware of a proposed merger and considers that the merger may raise competition concerns in Australia. Where an informal review process is commenced, parties provide information to the ACCC about the proposed merger and its likely effects on competition in the relevant markets. Confidentiality is maintained by the ACCC in respect of any information provided to it that is genuinely of a commercially sensitive nature and marked as such. The ACCC generally conducts market enquiries to test the information provided by the parties and to obtain the views of market participants about the proposed merger s competitive effects. If the proposed transaction is confidential, the ACCC will undertake its competition analysis on publicly available information and the information provided by the parties. Its view about the competitive effects of the transaction will be heavily qualified but it will undertake comprehensive market enquiries and provide a more definitive view once the transaction is publicly announced. While there are no fixed time periods in relation to the market enquiries process, the initial review period typically takes six eight weeks and concludes with the ACCC deciding whether to grant informal clearance or to enter into a second phase review by publishing a Statement of Issues paper on its website. The Statement of Issues is not a final decision but identifies the ACCC s competition concerns in respect of the transaction and seeks further information from the parties and the public on those issues. 10 Australia: a guide for foreign investors

13 The second phase review typically takes between two four months, but may take longer in complex matters or where merger remedies are required to allay the ACCC s competition concerns. Prior to accepting an undertaking, the ACCC will usually conduct further market enquiries to test the effectiveness of the remedies offered by the parties. The informal review process concludes with the ACCC making a final determination whether or not to clear the proposed merger. The ACCC publicly announces its decision and publishes a summary of the reasons for its decision, the Public Competition Assessment, on its website. While parties are not prohibited by law from completing a proposed merger while the ACCC considers the informal clearance application, it is usual practice to await the ACCC s informal clearance decision before completing a merger. The ACCC may request the parties to give a court-enforceable undertaking not to complete the proposed merger until the ACCC has concluded its review. The ACCC has broad powers that it can use to obtain information (including board papers and internal reports) from the parties (or other persons) if it believes that it has not received adequate information from those parties (or other persons) about the competitive effect of a proposed merger. It can also interrogate executives and employees for the same purpose. Although informal clearance by the ACCC does not provide statutory protection from proceedings and does not prevent third parties from challenging a merger in court, such challenges are very rare and unlikely as a matter of practice. Accordingly, the informal clearance process provides parties with significant comfort that an acquisition can proceed without competition law challenge. There is no appeal available against informal clearance decisions by the ACCC but a party (including a third person) may seek a declaration from the Federal Court that the proposed merger does not contravene section 50 of the CCA. Alternatively, the parties may choose to complete a transaction and compel the ACCC to institute injunction proceedings. There is no fee for an informal clearance application. The Substantive Test In determining whether or not to grant informal clearance for a merger, the ACCC must be satisfied that the transaction would not be likely to have the effect of substantially lessening competition in a market. Australia: a guide for foreign investors 11

14 This test is a forward looking test which compares the state of competition in the relevant market with the proposed merger and without the proposed merger. The ACCC will consider the following matters in making its assessment of the competitive effect of a merger: the actual and potential level of import competition; the height of barriers to entry to the market; the level of market concentration; the degree of countervailing power; whether the acquirer would be able to significantly and sustainably increase prices or profit margins, post acquisition; the extent to which substitutes are, or are likely to be, available in the market; the dynamic market characteristics (e.g. growth, innovation and product differentiation); whether the merger would remove a vigorous and effective competitor; and the nature and extent of vertical integration in the market. (b) Formal clearance Process, Timeline and Fees The formal merger review process was introduced in January 2007 but, as at the date of publication, the ACCC has not received an application for formal clearance. Under the formal clearance process, parties are required to provide detailed information to the ACCC. The process is a public process and the ACCC will publish on its website any document provided to it, including clearance applications and third party submissions (subject to redactions of genuinely confidential information). The ACCC has 40 business days in which to undertake a formal review of a transaction. This period can be extended by 20 business days if the matter is complex or due to other special circumstances. If the ACCC has competition concerns, it may issue a Statement of Concerns within 25 business days of receiving an application (or within 55 business days where the review period has been extended). Formal clearance from the ACCC provides statutory immunity from legal action under section 50 of the CCA. If the ACCC does not clear the transaction, the applicant may apply to the Australian Competition Tribunal (Tribunal) for a review of that decision on the papers. The fee for a formal clearance application is A$25,000. The Substantive Test The substantive competition test under the formal review process is effectively the same as the informal review process as described above. to take place, i.e. the public benefit of the merger must outweigh the public detriment resulting from it (in particular, the anti-competitive effects). Courtesy letter (c) Authorisation Process, Timeline and Fees The authorisation process enables parties to apply to the Tribunal for an authorisation of a proposed acquisition which raises competition concerns. The Tribunal is required to issue its decision within three months of receiving an application, but the time limit can be extended by up to a further three months in complex matters. The authorisation process is a public process. An authorisation provides the applicant with statutory immunity from the application of section 50 of the CCA. There is no merits review for authorisation decisions made by the Tribunal. The fee for an authorisation application is $A25,000. The Substantive Test Public Benefit The Tribunal may not grant authorisation unless it is positively satisfied that the acquisition would result or would be likely to result in such a benefit to the public that the acquisition should be allowed In addition to the above three processes, parties can inform the ACCC about a proposed merger as a matter of courtesy. This option is generally adopted by parties where a merger is considered unlikely to raise competition concerns, but there are other commercial or strategic reasons for pro-actively bringing the transaction to the ACCC s attention, such as a foreign investment review by the FIRB, an in-depth review by other competition regulators (in particular, the EU Commission or the US Department of Justice), or where parties are likely to have ACCC dealings in the future. Other competition laws In addition to the merger control rules, the CCA contains prohibitions relating to cartel conduct (potentially carrying both criminal and civil penalties), misuse of market power, exclusive dealing and other anticompetitive agreements and arrangements. 12 Australia: a guide for foreign investors

15 6Capital raisings This Section overviews the legal and regulatory framework that applies to equity and debt capital raisings in Australia as well as listings on the Australian Securities Exchange (ASX). Equity capital raisings (a) Regulatory framework Fundraising activity within Australia is regulated by the Corporations Act which provides the following fundraising regimes: Chapter 6D of the Corporations Act which applies to corporate securities (for example, shares, options and debentures); and Part 7.9 of the Corporations Act which applies to financial products other than securities (for example, units in a trust, partnership interests and derivatives). The Corporations Act applies to all securities and financial products offered within Australia whether or not the securities and financial products are issued by an Australian or a foreign issuer. (b) Disclosure requirements Offers of securities for issue or sale must be made under a prospectus, profile statement or offer information statement (OIS) lodged with ASIC. A prospectus must be used for any initial public offering (IPO) undertaken by a company and must disclose all information that investors would reasonably require to make an informed assessment of the rights and liabilities attached to the securities offered and the financial position and performance of the company. A profile statement can only be given to investors instead of a prospectus in certain limited circumstances determined by ASIC and is rarely used in practice. An OIS can be used instead of a prospectus for an offer of securities if the amount raised from the issue is A$10 million or less, but cannot be used for an IPO. Offers of financial products, other than securities, must be made under a product disclosure statement (PDS) lodged with ASIC that has similar disclosure requirements to a prospectus, although differing in a number of respects. The liability regime applying to a PDS also differs from the regime applying to a prospectus. (c) Exceptions to disclosure An offer of financial products does not require disclosure if the offer is excluded under the Corporations Act or if disclosure relief is granted by ASIC. Offers that do not require disclosure include offers to: up to 20 investors to raise up to A$2 million in a 12 month period (the 20/12 rule ); sophisticated investors, including where the investor: invests more than A$500,000 in the securities; or provides an accountant s certificate stating that their gross income for each of the last two years has been at least A$250,000 or that they have net assets of at least A$2.5 million; professional investors (for example, an investor who controls at least A$10 million or a person who holds an Australian financial services licence authorising them to advise on securities); related parties or persons associated with the company; and investors for no consideration. In addition, some limited exemptions from disclosure exist for security issues in specific circumstances including in the context of certain employee share schemes and share purchase plans that follow placements undertaken in compliance with disclosure requirements. Australia: a guide for foreign investors 13

16 (d) ASX listings The ASX is the primary securities exchange in Australia and is among the 10 largest securities exchanges in the world measured by market capitalisation. Entities may apply for listing on ASX either under: an ASX Listing for entities who wish to have their primary listing on ASX; or an ASX Foreign Exempt Listing for entities listed on another securities exchange who wish to have a secondary listing on ASX. Primary ASX Listings To apply for a primary ASX Listing, an entity needs to comply with various admission requirements, the key requirements being: ensuring that the issue price or sale price of the securities for which the entity seeks quotation are at least A$0.20; satisfying the initial minimum spread requirements of: 500 holders, each holding a parcel of securities with a value of at least A$2,000; or 400 holders, each holding a parcel of securities with a value of at least A$2,000, and persons who are not related parties of the entity must hold at least 25% of the total number of securities; satisfying the asset test, which requires (among other things) the entity to have: a market capitalisation of at least A$10 million or net tangible assets of $2 million (after deducting the costs of fund raising); and either less than half of its total tangible assets (after raising any funds) in cash or a form readily convertible to cash or, if half or more of the its total tangible assets (after raising any funds) are cash or in a form readily convertible into cash, commitments consistent with its business objectives to spend at least half of such cash or cash-like assets; and satisfying the profits test which requires (among other things) that the entity s aggregated profit for the last three full financial years must have been at least A$1 million and the consolidated profit for the 12 months prior to listing must have exceeded A$400,000. As at the time of publication, ASX had proposed certain changes to the above requirements but the changes had not come into force. Entities having an ASX Listing are subject to the ASX Listing Rules, even if they are listed on another securities exchange. The ASX Listing Rules operate as a contract between the entity and ASX and are also enforceable under the Corporations Act. The ASX Listing Rules impose a range of rules on the entity including as to continuous and periodic disclosure, the terms of securities, changes in capital and new issuances, related party and significant transactions and various on-going requirements that the entity must meet to maintain its listing. ASX Foreign Exempt Listings To apply for an ASX Foreign Exempt Listing, an entity needs to comply with various admission requirements, the key requirements being: having an overseas home exchange that is a member of the World Federation of Exchanges and satisfying ASX that the entity complies with the listing rules of that home exchange; having at least A$200m million operating profit before tax for each of the last 3 years or net tangible assets of at least A$2 billion; having at least 1,000 holders each having a parcel of securities in the class for which the entity seeks quotation with a value of at least A$500; and if the entity is a company, it must be registered as a foreign company under the Corporations Act. Entities having a Foreign Exempt Listing are expected to comply with the listing rules of their primary exchange and are exempt from most of the ASX Listing Rules. CHESS Depositary Interests As trading of securities on ASX occurs under an uncertificated, electronic clearance system, the ASX Listing Rules and related market clearance rules provide for trading of a type of depositary receipt (a CHESS Depositary Interest or CDI ) which can be used for securities of a foreign company that is incorporated in a jurisdiction whose laws do not recognise uncertificated security holdings or electronic transfers. Debt capital raisings Australia s banking market is well-developed, stable and readily accessible. Australia has a more limited bond market, dealing in Australian-dollar denominated bonds (with foreign investors generally issuing what are colloquially known as kangaroo bonds or Matilda bonds ). Approximately $US4.2 billion (A$3.9bn) in Kangaroo bonds have been issued so far in 2012, compared with $US12.2bn in the same period last year. Debt financing in Australia is provided by both the bank and the non-bank sectors, with the greatest majority of lending activity being accounted for by Australia s big four banks (Australia and New Zealand Banking Corporation, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation). There are also a large number of international and foreign banks who are active in the Australian corporate debt market, although activities of many of them have been constrained by the continuing dislocation and volatility of international debt markets. The finance sector in Australia is regulated by a number of statutory bodies and laws, which in summary consist of: the Reserve Bank of Australia (Australia s central bank, independently responsible for Australia s monetary policies such as the base interest rate and payment settlement systems); the Australian Prudential Regulatory Authority ( APRA ) and ASIC statutory bodies established and empowered under legislation to regulate, monitor and enforce banking and finance laws, regulations and policies, primarily with the goal of protecting consumer interest and maintaining financial market stability; the Banking Act, which regulates the activities of banks and deposit taking institutions in Australia; and 14 Australia: a guide for foreign investors

17 the Corporations Act, which regulates the provision of and dealing in of financial services and products, as well as corporates generally. APRA imposes capital adequacy requirements (including regular reporting obligations) on all banks and authorised deposit taking institutions and insurance companies, and Australia is a signatory to the Basel III guidelines. Australia has imposed strong anti-money laundering and counterterrorism requirements on financial institutions, largely through the Anti-Money Laundering and Counter- Terrorism Financing Act. These requirements place strict know your client obligations on lenders, and apply to individual, domestic and foreign borrowers and third party security providers. A loan arrangement provided by a financial institution in Australia will typically be made by way of a cash advance facility or a facility for the acceptance and discounting of bills of exchange. The most typical form is the single financier cash advance facility. Other types include bill facilities and syndicated facilities, either with solely domestic lenders, or a mix of domestic and foreign lenders. In summary: Cash Advance Facility This common form of finance agreement involves a domestic Australian dollar borrowing by way of cash advances, at a floating interest rate, for a fixed term; Bill Facility Commonly used in the Australian market, under which the financier accepts and discounts bills of exchange drawn by the borrower, and makes the discounted proceeds available to the borrower. Although different in legal structure, the result is commercially equivalent to a cash advance facility; and Syndicated Facility Syndicated facilities are common, under which a group of lenders provides financing to a borrower, under a single financing document, with an agent bank being appointed to act as a conduit between the syndicate of lenders and the borrower. Secured debt financing in Australia has recently been significantly affected by the introduction of the Personal Property Securities Act (PPSA), which is largely modelled on the New Zealand and Canadian systems of security registration, priority and enforcement. These laws only became operative in January 2012, and market practice is still developing. The new law was not expected to have any material effect on the willingness of financiers to provide financing (either positively or negatively), and experience to date suggests this expectation will be correct. Secured debt financing for foreign borrowers can also raise a number of FIRB issues, in addition to those discussed in previous sections. For example, the Federal Government s Foreign Investment Policy requires that foreign governments and their related entities notify FIRB and obtain prior approval to enforce a security interest over the assets or shares of an Australian entity. This is an important consideration for both lenders and borrowers in a secured funding transaction. The US was the largest source country for proposed investment in Australia in , followed by the UK, China, Canada and India FIRB Annual Report Australia: a guide for foreign investors 15

18 Securities regulation and funds management Investment funds in Australia are usually established as unit trusts which are regulated as managed investment schemes. Subject to certain specific exceptions (such as bodies corporate), a managed investment scheme covers a wide variety of investment vehicles; it is defined as a scheme that has the following features: people contribute money or money s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); and the members do not have day-today control over the operation of the scheme (whether or not they have the right to be consulted or give directions). Generally, a managed investment scheme must be registered with ASIC unless: there are fewer than 20 members in the scheme; the promoter of the scheme (and its associates) are not in the business of promoting schemes; or the issue of all of the interests in the scheme did not require the operator to give a product disclosure statement (PDS) to the members before they invested in the scheme. The most common reason a PDS is not required to be given to investors is because the investors are wholesale clients. In order to register a managed investment scheme, a person must apply to ASIC and satisfy the following requirements: A public company that holds an AFSL (Australian Financial Services Licence) with the authorisations to operate registered schemes must agree to be the responsible entity (RE) of the scheme; The RE must file with ASIC prescribed forms (which are signed by each director of the RE), as well as a constitution and a compliance plan for the scheme, both of which must comply with the requirements of the Corporations Act and published ASIC policy; If a majority of the directors of the RE are not external (which, in effect, means independent), as defined in the Corporations Act, then the RE would need to appoint a compliance committee composed of a majority of persons who are external to the RE; and There must be an auditor of the RE and a separate auditor of the compliance plan. The two auditors may be from the same audit firm, but must not be the same individual. From the date an application is filed with ASIC to register a scheme, ASIC has 14 days to process the application and register the scheme or notify the applicant that it is not satisfied that the constitution or compliance plan comply with the requirements of the Corporations Act and therefore it will not register the scheme. Chapter 5C imposes a number of obligations and duties on a company (as well as its directors and employees) that acts as an RE. Generally, these duties are similar to fiduciary duties imposed on a trustee, and include the duty to act in the best interests of members of the scheme and to treat members of the same class in the scheme equally. 16 Australia: a guide for foreign investors

19 Generally, if a foreign company wishes to establish and operate an investment vehicle that must be registered as a managed investment scheme, the foreign company will engage an Australian company to act as the RE of the scheme. This will mean that the foreign company will not need to obtain an AFSL with the authorisation to operate a registered scheme, and, indeed, the foreign company may also rely on an exemption from holding an AFSL to provide any financial services in Australia. The foreign company will also not need to concern itself with complying with the duties and other regulatory requirements imposed on the operator of the scheme under Chapter 5C of the Corporations Act; the company engaged as the RE is responsible for these matters. Approvals in involved proposed investment of A$176 billion, representing a 27 per cent increase on the previous year FIRB Annual Report Australia: a guide for foreign investors 17

20 Taxation Various taxes and charges are imposed by the 3 tiers of government in Australia the Federal government, the six State and two Territory governments and municipal and local councils. Federal taxes are generally administered by the Federal Commissioner of Taxation Income Tax Income tax is levied by the Federal Government. It is payable on the taxpayer s taxable income for the income year (the year ended 30 June or substituted accounting period allowed by the Commissioner, with subsidiaries of foreign parents generally being allowed to adopt the accounting period of their parent) and is reduced by any allowable tax offsets (rebates). (a) Taxable income Taxable income is assessable income minus allowable deductions. The assessable income of an Australian resident is all of their non-exempt ordinary and statutory income derived during the income year from all sources (including net capital gains. Some types of foreign source income and gains are exempt for some types of taxpayers and tax offsets are generally available for foreign tax paid on non-exempt foreign income. Individuals who are temporary residents (i.e. holders of temporary visas, subject to some exceptions) are exempt from Australian tax on certain foreign source income and capital gains. A non-resident is only assessable on income from sources in Australia (excluding amounts that are subject to a final withholding tax) and capital gains on taxable Australian property. Allowable deductions include expenditure incurred in gaining or producing assessable income or in carrying on a business for that purpose (other than capital, private or domestic expenditure and certain specific exclusions) and various specific deductions, such as repairs, bad debts, borrowing expenses, depreciation and other capital allowances. A tax loss for a year can be carried forward and deducted in later years, subject (in the case of companies and trusts) to a continuity of ownership or same business test and antiavoidance rules. From , companies will be able to carry back losses of up to A$1 million for up to two years (with a one-year carry back in ). (b) Entities and taxpayers Income tax is levied on individuals, companies and entities that are taxed as companies (e.g. public trading trusts and limited partnerships) and superannuation funds. Certain foreign hybrid entities are treated as partnerships in some circumstances. The income of partnerships (other than limited partnerships that are taxed as companies) is taxed in the hands of the partners. The income of a trust (other than a trust that is taxed as a company or a superannuation fund) is taxed in the hands of the beneficiaries or, in some circumstances, the trustee. A consolidation regime is available for wholly owned resident company groups. The Australian resident head company can choose to form a consolidated group with all of its wholly owned Australian resident subsidiaries, including partnerships and trusts. A multiple entry consolidated (MEC) group can be formed where the Australian resident group has a non-resident parent 18 Australia: a guide for foreign investors