Elisabeth EllisParliamentarians and others who support the new Law on Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance (Strategic Investment Law) have been quick to say that Mongolia’s new regime to regulate foreign investment is very similar to Australia’s Foreign Investment Review Board (FIRB) regime.
Whilst several of the concepts incorporated into the Strategic Investment Law have been adopted from Australia as the table [below] shows, there are also fundamental differences.
Australia’s current foreign investment law has been operating for nearly fifty years. Because of this, the transparency of Government policy underpinning the approvals process, the bipartisan composition of the FIRB and the very few proposals that are rejected, international investors have faith in the integrity of the process.
There are also other aspects of the Australian system – aspects that are not features of the proposed Mongolian law – that lead to Australia being seen as very accommodating to foreign investment. These include:
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Notification vs approval: Under the Australian system, Government approval is not required. Rather, the system requires compulsory notification of certain proposed investments and the Australian Government has the right, within 30 days (which can be extended), to determine that the proposed investment is contrary to the national interest. In contrast, Mongolia’s Strategic Investment Law requires that any transaction that falls within the scope of the law must be approved by Cabinet or, in some cases, by Parliament. The regulations containing the detailed procedures for that approval process have not yet been formulated, but the Strategic Investment Law indicates that this will be a 95-day process.
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Threshold: In Australia, foreign investors can make smaller-sized investments without having to notify the Government as a general rule, because thresholds apply for most types of investment. So, smaller investments (eg,
• Consequences of breach: Where an investment is made in breach of the foreign investment law, the Australian Government has power to make an order that the investment be unwound. This can result in a better outcome for the investor, because it allows for the investment to be sold to another investor (eg, a local investor or a foreign investor who can obtain Government approval) rather than having all rights held by the investor terminated so that its investment becomes valueless (which is what occurs under the proposed Mongolian law).
The challenge for Mongolia, or indeed for any country introducing new investment laws, is to ensure that the laws does not lead to uncertainty for existing or potential investors or create a climate of uncertainly that the Government will continue to support new investment.
Lessons from Australia’s approach to Chinese SOE investment
Australia’s investment screening law and policy applies the same rule to Chinese buyers as it does to other foreign investors. Like Mongolia’s new Strategic Investment Law, however, it does distinguish between investments by any ‘foreign governments or their related entities’ and other investments.
Under Australia’s foreign investment approval regime, State-owned enterprises (SOEs) and their subsidiaries are treated as related entities of a foreign government. SOEs must notify the Australian Government and get prior approval of their investment proposal, regardless of value, through the FIRB. Again, this is similar to the Strategic Investment Law, which requires cabinet approval for investments by foreign SOEs and their affiliates in all sectors, irrespective of value.
The Australian Government’s assessment of foreign investment applications, including Chinese SOE investments, is guided by legal and policy elements. The Australian Treasurer can prohibit proposals that he or she decides would be contrary to the national interest. When considering the ‘national interest’, some of the things that FIRB and the Treasurer take into are account are very, very similar to those matters which the Strategic Investment Law provides for FIFTA to verify before any investment by an SOE or any other transaction that falls within the scope of the Strategic Investment Law is approved:
Australia: Criteria for ‘National interest’
National security
Competition
Government revenue (tax) or other policies
Impact on the economy or community
Character of the investor (adherence to law/independence from Government)
Mongolia: Matters to be verified
National security
Competition
Effect on national budget revenue or other policy
Is there a negative effect on the sector?
Corporate governance
Australia welcomes Chinese investment, as is shown by the rapid growth of Chinese investment in Australia in recent years. Since 2007, the Australian Government has approved over AUD $170 billion of proposed Chinese investment into Australia, through more than 220 individual proposed transactions. Only 5 of those transactions had any overly onerous conditions placed on them as a condition of approval.
By adopting a case-by-case approach to decisions, the Australian Government is demonstrating how it is likely to apply its policy to new applications. As the following case studies show, past Chinese SOE applications to FIRB for acquisitions of resources assets have presented two key challenges for the Australian Government:
- will Chinese SOEs act in an organised way with one another and with downstream users of commodities to distort the market for those commodities; and
- does the application have national security or strategic implications.
As Mongolia seeks to implement the Strategic Investment Law, it will be interesting to see whether it draws on the depth of policy and precedent from the Australian FIRB regime to give certainty to the criteria that have been identified in the law.
Sinosteel and Midwest
Minter Ellison advised on the off-market takeover of Midwest Corporation by a wholly owned subsidiary of China’s Sinosteel Corporation. Sinosteel was the first PRC state-owned entity to make an unsolicited takeover bid for a listed Australian resources company. FIRB approval was required and obtained for the transaction.
A number of aspects made the transaction complex:
• Sinosteel’s existing joint venture with Midwest in Midwest’s principal iron ore project
• a proposal by Murchison Metals during the Sinosteel bid for a Midwest/ Murchison merger by scheme of arrangement
• Murchison and New York hedge fund harbinger Capital Partners building strategic stakes in Midwest
• issues relating to the proposed development of port and rail infrastructure by either a partnership between Midwest and Sinosteel or Murchison and Mitsubishi.
FIRB decision: Key issues to note
In the related but subsequent Murchison Metals/ Sinosteel FIRB application, Sinosteel was restricted to a 49.9% interest in Murchison Metals because it was already acquiring the neighbouring Midwest, and control of Murchison Metals would have given it control of most of the West Australian “mid west” iron ore province; an emerging new iron ore province rich in magnetite iron ore.
Key issues:
Government will have regard to the impact on the acquisition on relevant markets – in this case the Midwest market for the development and export of magnetite iron ore.
Minmetals and Oz Minerals
On 16 February 2009, China Minmetals Corporation (Minmetals) and Oz Minerals Limited (Oz Minerals) jointly announced that Minmetals’ sought to acquire all the shares in Oz Minerals under a scheme of arrangement. Completion of the transaction was subject to, among other things, FIRB approval.
The Treasurer released a media statement on 27 March 2009 indicating that an important part of FIRB’s assessment is whether proposals conform with Australia’s national security interests.
Oz Minerals’ Prominent Hill mining operations are situated in the Woomera Prohibited area in South Australia, where a weapons testing range for the Australian Defence Force is located. The Treasurer informed Minmetals that the proposal would not be approved if it included Prominent Hill.
FIRB decision: Key issues to note
Minmetals subsequently obtained FIRB approval after revising its application by removing Prominent Hill from its proposal. FIRB approval was conditional on the following undertakings given by Minmetals, that it would:
• operate the acquired mines as a separate business with commercial objectives
• operate the mines using companies incorporated, headquartered and managed in Australia under a predominantly Australian management team
• price all off-take on arm’s-length terms by a sales team headquartered in Australia, with reference to internationally observable benchmarks and in line with market practice
• maintain or increase production and employment at Century, Rosebery and Golden Grove mines, pursue growth in Century and Rosebery mines, reopen Avebury mine and develop Dugald River, subject to economic conditions
• comply with Australian industrial relations laws and honour employee entitlements
• maintain and increase levels of Indigenous employment in local operations and honour agreements with Indigenous Australian communities.
The Treasurer indicated that these undertakings, which are designed to protect around 2,000 Australian jobs, ensure consistency with Australia’s national interest principles.
Key issues:
• Investments in projects situated in strategic defence areas are unlikely to be approved unless those assets are excised from the deal.
• Where FIRB initially blocks approval, it is usually prepared to consider alternative proposals.
• The Government will have a preference for proposals that maintain Australian participation and management of Australian projects.
• The Government wants to limit the ability of commodity buyers to control prices. Offtake and sales contracts are likely to be required to be priced by reference to international benchmarks.
Valin and Fortescue
On 25 February 2009, Hunan Valin Iron and Steel group (Valin) agreed to acquire a 16.5% stake in Fortescue Metals group (Fortescue) through the subscription of 225 million new shares in Fortescue and the purchase of 275 million shares from American hedge fund Harbinger Capital Partners (an existing Fortescue shareholder).
On 9 March 2009, Fortescue agreed to issue an additional 35 million Fortescue shares to Valin, such that Valin would acquire a 17.4% stake in Fortescue.
The deal involved a Standstill Agreement preventing Valin from acquiring an interest of more than 17.55% of Fortescue. Concurrently with the Share Agreement, Fortescue and Valin also entered into a Cooperation agreement to increase iron ore sales to Valin and to research new technologies to process lower grade resources from some of Fortescue’s iron ores.
The agreement involved the establishment of a 50:50 joint venture to develop low grade resources from some of Fortescue’s tenements and to give Valin the option to participate in any additional new projects Fortescue undertakes.
The original Share Subscription Agreement was structured to provide for a number of requirements to address FIRB. It provides that:
• the maximum relevant interest which Valin can have in FMG shares is 17.5% (this is set by the Standstill Agreement)
• one board representative from Valin, which must be the Valin Chairman
• FMG will establish corporate governance protocols in relation to Valin’s board representation. The protocols will include a requirement that Valin will not have representation on any of Fortescue group board committees or management committees
• Valin will not be involved in any marketing arrangements that affect supply or price.
FIRB Approval: Key issues to note
On 31 March 2009, Hunan Valin Iron and Steel group received approval from FIRB and the Treasurer to acquire a share of up to 17.55% in Fortescue. FIRB approval was conditional on the following undertakings given by Valin (and agreed to by Fortescue) that:
• any person nominated by Valin to Fortescue’s board will comply with the director’s Code of Conduct maintained by Fortescue
• any person nominated by Valin to Fortescue’s board will submit a standing notice under the Australian Corporations Act of their potential conflict of interest relating to Fortescue’s marketing, sales, customer profits, price setting and cost structures for pricing and shipping
• Valin and any person nominated by it to Fortescue’s board will comply with the information segregation arrangements agreed between Fortescue and Valin.
The Treasurer stated that these undertakings ensure consistency with Australia’s national interest principles, ensure the appropriate separation of Fortescue’s commercial operations and customer interests, and support the market-based development of Australia’s resources.
Key issues:
• Acquisition of a non-controlling shareholding will raise less issues than a controlling shareholding.
• Standstill Agreements can support obtaining FIRB approval.
• Clearly defined corporate governance measures and limits on the powers of directors will conform with Australia’s national interest principles for investments by foreign government entities.
• The Australian Government does not want commodity buyers setting prices, so pricing will almost always be subject to international benchmark pricing, without any significant discounts being applied.
Yanzhou and Felix
On 13 august 2009, Yanzhou Coal Mining Company Limited (Yanzhou) announced its intention to acquire all the shares in Felix Resources Ltd (Felix) under a scheme of arrangement.
Yanzhou was asked to submit its FIRB application a second time (before FIRB’s 30-day review period lapsed). Approval was granted in October 2009. FIRB approval was conditional upon the following undertakings given by Yanzhou:
• Felix’s assets must be run by an Australia-based company,Yancoal Australia (Yancoal).
• Yanzhou must list Yancoal on ASX by 2012 and reduce its ownership to less than 70%.
• Yanzhou’s economic ownership of the existing underlying assets must be at or below 50% following the listing of Yancoal (this requires a sell down by Yanzhou of other assets in Australia).
• Yancoal’s CEO and CFO must reside in Australia.
• Yancoal must be headquartered locally and have a predominantly Australian management and sales team.
• Yancoal must market coal produced at all of its Australian mines on arm’s-length terms with reference to international benchmarks.
FIRB Approval: Key issues to note
Key issues:
• Yanzhou’s commitment to retaining Felix’s existing management and workforce, as well as maintaining staff at the Austar coal mine in New South Wales, was an important part of the FIRB approval.
• A strong Australian management presence can assist in ensuring an application for foreign investment is approved
• the Australian Government has a preference for Australian participation in resource projects. The Government also has a preference to participation by way of the Australian Securities Exchange.
• Opting to resubmit an application with FIRB (before the 30-day consideration period lapses), rather than allowing a 90-day extension of the review, may result in a decision sooner.
• Australian government officials have since rejected comments that the Yanzhou decision could serve as a precedent for future state-owned foreign investment, stating that it ‘should only be read as a decision on the case at hand’.
Elisabeth Ellis