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Do the Covid-19 foreign investment restrictions mean opportunities for local buyers of distressed assets?

May 8, 2020

About a month ago, the Australian Government took steps to protect vulnerable Australian assets (including private land and business assets) from being snapped up for bargain prices by foreign investors during the Covid-19 crisis. This was in line with the Government’s publicised intention of placing Australia’s economy into hibernation. 

 

It is also highly likely that over the coming months, the number of distressed asset sales is likely to increase as businesses and individuals seek to urgently free up funds or enter into external administration. 

 

In circumstances where the pool of potential buyers/investors of these distressed assets would normally have included foreign investors (which includes any company/trust/partnership that is at least 20% owned by a single foreign person, or at least 40% is owned by foreign persons), then we expect that this economic hibernation may not affect all players equally, and cashed-up local investors may be the real winners.

 

What has changed?

 

The changes that have been introduced to the Australian foreign investment framework are:

 

  1. all monetary investment thresholds that determine whether foreign investors are required to seek Treasurer approval through the Foreign Investment Review Board (FIRB) have been reduced to $0; and

  2. foreign investment approval times have been blown out from within 30 days, to within 6 months. 

 

What does this mean?

 

In a nutshell, it means all foreign investors will be treated as if they are foreign government investors. Notably, any proposed purchase by a private foreign investor of the following assets will require an application for approval to FIRB:

 

  1. Businesses: 20% or more of any Australian company or trust (regardless of the size or industry of the target business – ie not only media businesses); and

  2. Land: any interest in land (regardless of value, type of the land (eg agricultural, commercial, residential, or mining or production tenement), or whether the land is a vacant land or developed land), and which also includes entering into leases that have a term of 5 years or more. Note on residential land: the rules for acquiring interests in residential land acquisitions have not really changed, as the monetary threshold was already $0, and there remains an exemption for residential real estate for new or near-new dwelling purchased from developers certified to sell to foreign persons. 

 

It also means that proposed foreign investment in these assets is going to be subject to significant delays and possible conditions imposed by Treasury.

 

Failure to comply with notice requirements to FIRB may result in criminal and civil penalties.

 

So how is this an opportunity?

 

It is no doubt that distressed sellers of assets and creditors/shareholders of companies in external administration will not see opportunities in these changes and may lament the decreased foreign competition for their assets and business investment.

 

However, the changes may present an opportunity for local investors in industries and sectors where foreign investment competition has in the past been significant. According to statistics from DFAT, the mining industry has received the most direct foreign investment (apprx 40% of 2018 direct foreign investment in Australia), and the manufacturing, finance/insurance and real estate industries also each received approx. 10% of Australia’s 2018 foreign investment. 

 

Sellers or companies seeking investment in those industries (and others) may be forced to consider the following factors when assessing proposals from foreign investors against competing local proposals:

 

  1. delays to completion for up to 6 months following application to FIRB (although the Treasury has committed to prioritising urgent foreign investment applications that directly protect and support Australian businesses and employment); and

  2. the likelihood Treasury may impose conditions on the foreign investment, such as keeping the target business’s operations in Australia or employees retained during economic downturn, and how this may affect price and conditions for the foreign investment.

 

This all means that cashed-up local investors ready to act quickly on distressed asset and investment opportunities are likely to be the real winners.

 

If you require any assistance navigating the foreign investment framework in Australia, please contact John Nash or Tom Morgan of our Commercial & Corporate Team.

 

This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.

 

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