- Australia has entered into a number of investment treaties with other nations to reduce sovereign and political risks for foreign inbound and outbound investments.
- Typical treaty protections include protection against uncompensated expropriation, rights to fair treatment, protection against physical harm and non-discrimination.
- Modern investment treaties commonly allow foreign investors to sue the host state directly without the need to apply to their home state to vindicate their rights (investor-state provision). The Australian government has announced that it intends to discontinue this practice and the most recent free trade agreement, concluded by Australia (with Malaysia) signed on 22 May 2012, does not contain such investor-state provisions. Existing investment treaties containing investor-state provisions will continue to be enforceable.
- Investors may also wish to consider structuring investments through an Australian subsidiary to take advantage of treaty protections for investment into riskier countries e.g. by investing through Australia into Myanmar and taking advantage of the ASEAN Australia-New Zealand Free Trade Agreement.
Investing in a foreign country carries with it a certain amount of sovereign and political risk: the government of the day may change and may introduce measures (regulatory, tax or otherwise) which negatively affect foreign investors’ investments. This is true even where the host state is a sophisticated, “developed” country such as Australia.
In order to protect foreign investors from this sovereign risk and to attract foreign investment, Australia has entered into a number of investment treaties with other states.
Those investment treaties (bilateral investment treaties and other multi-national treaties) provide minimum standards which Australia has to observe when dealing with foreign investments and, in some cases, allow the investor to seek redress directly against the Australian government where a violation of these standards has occurred. Foreign investors can benefit from these rights if they are a national of a state with which Australia has entered into such an investment treaty. (Generally, a national of the foreign state is any natural or legal person (i.e., company) of that other state. The protection is reciprocal, i.e., Australian investors into the other contracting states will be afforded the same protections.)
Australia has entered into bilateral investment treaties with 22 states comprising Argentina, Chile, China, the Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Sri Lanka, Turkey, Uruguay and Viet Nam. In addition, Australia has entered into Free Trade Agreements which include investment protection provisions with the ASEAN countries and New Zealand, the United States of America, Malaysia and Singapore.
Substantive rights of investors into Australia
The minimum standards of protection included in those treaties typically are:
- Protection against (uncompensated) expropriation. This includes direct expropriation (ie the taking of investors’ property) by the state, but also includes indirect expropriation where the taking is not outright, but government measures have the indirect effect of rendering the investments useless. This is an absolute right, a standard not dependent on what is given to nationals of the host state;
- Right to fair and equitable treatment. This is a wide standard providing the investor with a right to be treated with good faith and without abuse of government power. This is also an absolute right;
- Right to full protection and security. This right requires the host state to exercise due diligence to protect foreign investors and investments from physical harm. This is also an absolute right;
- Right to national treatment. It prohibits the discrimination of foreigners in favour of nationals of the host state. It is a contingent right dependent on the protection given to national investors of the host state or other foreign investors; and
- Right to most-favoured nation treatment. This obligation prohibits the discrimination of investors from one foreign country in favour of investors from another country. This is another contingent right dependent on the rights given to other foreign investors.
If there is a breach of a treaty obligation, the standard for compensation and damages is typically ‘prompt, adequate and effective’ compensation.
Assertion of these rights
Obligations imposed on states through international treaties can generally only be enforced against that state by other contracting states. In principle, a state cannot be sued by a private person of another state. To give investment treaties more force and to encourage foreign investment further, modern investment treaties contain provisions which allow foreign investors to sue the host state directly without the need to apply to their home state to vindicate their rights. This is achieved by including a provision in the investment treaty through which each contracting state submits to the jurisdiction of international arbitral tribunals should an investor seek to make a claim against the host state for breach of any of the treaty obligations.
To assist with the administration of the resulting arbitration cases and ensure the enforceability of arbitral awards rendered against states, the Convention for the Settlement of Investment Disputes Between States and Nationals of Other States (the ICSID Convention) was agreed in 1965. Australia and over 140 other states are signatories to the ICSID Convention to date. Australia’s bilateral investment treaties of the 1990s and early 2000s contain investor-state-dispute resolution provisions.
Thus, if there is a relevant investment treaty, investors can initiate an arbitration against Australia even where there is no direct contract between the investor and the government of Australia in the underlying transaction. The only prerequisite is that the investor is a national of a state with which Australia has entered into a relevant investment treaty and that there is a relevant ‘investment’ pursuant to that treaty.
Unfortunately, the current government is seeking to put some limits on access to this dispute resolution process. In April 2011 the Gillard Government announced that it will discontinue the practice of including investor-state dispute resolution provisions in trade agreements. As a result, the most recent free trade agreement concluded by Australia (with Malaysia) signed on 22 May 2012 does not contain any investor-state dispute resolution mechanism.
Existing investment treaties containing these provisions will however continue to be enforceable. Hence, foreign investors will still be able to benefit from the investment treaty protections within existing agreements if they are a national of a relevant state. Investors may also want to structure investors through an Australian subsidiary to take advantage of treaty protections for investment into riskier countries e.g. by investing through Australia into Myanmar and taking advantage of the ASEAN Australia-New Zealand Free Trade Agreement.
- The article below presents Gilbert + Tobin’s tips and forecasts for M&A in Australia in 2013. The key to successful M&A is simplicity and speed. Acquiring pre-bid stakes outright up front gives bidder a strong strategic advantage. Cash is preferable to scrip consideration. Avoid deal structures which will attract regulatory scrutiny and lengthy approval processes, and obtain a target board recommendation early.
- Shareholder activists will continue to increase their activity. The tip for companies may be to engage early and constructively with them. Often activists and dissenters just want to have their view or opinion heard and taken into account.
- A rebound in the Chinese economy should reignite demand for resources. Expect greater Chinese and other Asian interest in other sectors including infrastructure, agribusiness and companies in the broader industrials section.
- In companies burdened by highly geared structures of yesteryear the equity can be worth little. That is not to say the company doesn’t have a strong business. Under the right financial structure, owners of the debt can take control and make a killing by threatening to kill i.e. threatening to put the company into liquidation or receivership.
- Some of the considered changes to takeover law, such as a “put up or shut up rule”, may inhibit M&A activity by putting more constraints on bidders and frustrated minority shareholders, making it harder to get a successful bid up. Given the difficult financial and economic conditions, it would not help to further regulate bids. There is a real need for bright line rules and guidance on the “Truth in Takeovers” policy.
- M&A in these times may require even greater planning to give acquirers confidence to deal with uncertainty and regulatory red-tape. Regulatory scrutiny appears to be increasingly active.
Read the full article here.
- The Australian government is planning to introduce a foreign ownership register for agricultural land to provide the community with better information about foreign agricultural landholdings.
- The government has also published guidance as to factors that it will consider when assessing foreign investment applications involving Australian agriculture.
Foreign investment in the Australian agricultural sector is increasing. Recent mergers and acquisitions activity in the agricultural sector includes the acquisition of a large Australian cotton farm, Cubbie Station, by a consortium led by Shandong Ruyi, and Archer Daniels Midland’s proposal to acquire Graincorp, both in October 2012.
Foreign investment in agricultural land and agribusinesses has attracted controversy in Australia, partly fuelled by a lack of adequate information as to the extent of foreign ownership in the Australian agricultural sector.
Australia’s government has reiterated that it strongly supports foreign investment in the agricultural sector in its National Food Plan Green Paper 2012 and in the Australia in the Asian Century White Paper 2012.
Under Australia’s current system, certain types of proposed acquisitions by foreign persons are subject to review by the Foreign Investment Review Board (FIRB) and may be rejected if they are considered not to be in the national interest.
For these purposes, land is classified as either ‘rural land’ which is land that is used wholly and exclusively for carrying on a business of primary production or ‘urban land’ which covers all land that is not rural land. Although acquisitions of urban land are subject to a separate notification and approval regime, acquisitions of rural land are assessed under the rules for general business acquisitions.
This means that for most agriculture sector acquisitions, FIRB approval is only required where the value of the business or agricultural land exceeds AUD248 million (or AUD1,078 million for acquisitions by United States residents), or where the acquirer is a foreign government or related entity.
In January 2012, the Australian government released a Policy Statement on Foreign Investment in Agriculture. This policy statement provides guidance to foreign investors as to specific factors that FIRB will consider when assessing whether an acquisition in the agricultural sector is in Australia’s national interest. These factors include the effect of a proposal on:
- the quality and availability of Australia’s agricultural resources, including water;
- land access and use;
- agricultural production and productivity;
- Australia’s capacity to remain a reliable supplier of agricultural production, both to the Australian community and its trading partners;
- biodiversity; and
- employment and prosperity in Australia’s local and regional communities.
When notifying FIRB of a proposed acquisition, foreign investors now need to address these specific factors as well as addressing the impact of the proposal on the following national interest considerations which apply to foreign acquisitions generally:
- national security;
- the economy and community;
- other government policies including tax revenue and environmental impact; and
- the character of the investor.
Proposed foreign ownership register
Reliable information about foreign ownership of Australian agricultural land is currently limited as most Australian states do not maintain a register of foreign owned land.
In October 2012, the Australian government announced that it will introduce a foreign ownership register for agricultural land following consultation with stakeholders.
The purpose of the register will be to improve the transparency of foreign ownership by providing the community with a comprehensive picture of the location and size of foreign agricultural landholdings.
The design of the register is still to be determined with the consultation process ongoing, but the consultation paper makes it clear that the register will be a record system only and will not form part of the foreign investment approval process.
Although increased foreign investment activity in the agricultural sector has attracted controversy, policy responses have been measured, with the Australian government:
- seeking to provide additional transparency to foreign investors as to the policy considerations that it takes into account when assessing agriculture sector acquisitions; and
- proposing measures designed to provide additional information about the levels of foreign ownership of agricultural land, so as to better inform public debate.
Nevertheless, with food security and access to agricultural resources becoming increasingly important global issues, foreign investment in the Australian agricultural sector will likely be the subject of ongoing policy and regulatory developments.
AUSTRALIAN UPDATE – Deal Landscape, Deal Structures and Foreign Bidders in Australian Public M&A in 2012
- The Australian public M&A market has seen more restrained activity in the 12 months to 30 June 2012, in line with global trends.
- The energy and resources sectors continue to dominate public M&A in Australia, accounting for about 50% of transactions.
- Success rates for transactions increased to 81% in FY2012, while the percentage of transactions involving competition between bidders dropped to 5%.
- Levels of inbound cross-border public M&A activity decreased moderately with 46% of bidders in FY2012 being based offshore, down from 51% in FY2011.
- Cash only transactions predominated with about 63% of transactions overall being cash-only. Foreign bidders, in particular, favoured cash bids, with 81% of foreign bidders offering cash only in FY2012.
Posted in: Australia, M&A (General), Trends & Statistics
After a return to pre-2008 activity levels in 2011, Australian public merger and acquisition activity dropped in the 12 months to 30 June 2012 (FY2012), with 83 deals announced and $63 billion committed by bidders, down from 104 deals and $79 billion committed in the previous 12 months (FY2011). This is in line with the trend in global merger and acquisition activity over the corresponding periods, with global deal volumes having fallen from USD2,848 billion in FY2011 to USD2,265 billion in FY2012.
Number of transactions by deal value
The energy and resources sectors continue to dominate public M&A in Australia, accounting for about 50% of transactions (by number).Consolidation in the coal sector accounted for a significant proportion of transaction volume, with total transaction volumes exceeding $20 billion. As coal sector consolidation nears an end, it remains to be seen whether energy and resources transactions will continue to dominate Australian public M&A activity in the future.
Private equity participation in public M&A activity also continued to increase in FY2012, with transaction numbers recovering to pre-2008 levels.
Success rates have continued to increase with 81% of announced public M&A transactions completing, up from 70% in FY2011.
The proportion of ‘hostile’ deals launched without initial target board support increased in FY2012 – 48% of all transactions were announced without target board support, up from 37% in FY2011. While initial recommendation by a target board remained a significant factor in success rates, success rates for both friendly and hostile transactions improved in FY2012.
Success rates in ‘hostile’ and friendly deals
Public competition for assets decreased, with only 5% of public M&A transactions in FY2012 involving a contest between rival bidders (down from about 15% in each of FY2010 and FY2011).
Overall, there was a moderate decrease in the level of inbound cross-border public M&A activity with bidders headquartered overseas being involved in 46% of transactions in FY2012, down from 51% in FY2011. Asia-based bidders accounted for an increased proportion of foreign bidders, with a relative decline in the number of bids originating in North America.
Origin of bidders
As in previous years, in FY2012 bidders in transactions exceeding $1 billion were predominantly based offshore, although the proportion of foreign bidders involved in such transactions dropped.
Origin of bidders in transactions over $1 billion
Foreign bidders were successful in 79% of transactions. Bidders based in China (including Hong Kong), in particular, had a successful year in executing Australian public M&A transactions, with the overall number of bids increasing and a success rate of 83% in FY2012.
Success rates for Chinese bidders
Cash only transactions continue to be more popular than ones involving a scrip component, with about 63% of transactions overall being cash-only and 72% of transactions over $1 billion being cash-only. Foreign bidders, in particular, favoured cash bids, with 81% of foreign bidders offering cash only in FY2012.
Debt funding was the main funding source in 49% of all deals with cash consideration in FY2012, up from 32% in FY 2011. This indicates a continuing willingness by financiers to extend credit for Australian assets.
Public M&A transactions remained highly conditional with about 95% of transactions in FY2012 being made subject to conditions.
A number of relatively high-profile transactions involving overseas regulatory approval conditions were the subject of lengthy delays while relevant overseas regulatory authorities conducted their review processes, and in some cases were unable to be consummated. In light of this experience, if a bidder requires that their bid be conditional on the bidder obtaining overseas regulatory approval, Australian boards are likely to seek greater certainty as to the status of the approval process before committing to the transaction.
Deal protection mechanisms, including no-shop/no talk provisions, break fees, lock-ups (eg, commitments by shareholders to accept a bid) and toe-holds (eg, acquisitions of pre-bid shareholdings) continued to play an important role in negotiated transactions.
Forms of deal protection in negotiated transactions
Executive Summary: Recently, as part of its foreign exchange reforms, the People’s Bank of China signed a bilateral currency swap agreement with the Reserve Bank of Australia. This report discusses the currency swap agreement and the introduction of PRC laws relating to the internationalisation of the RMB.
- The currency swap agreement
- Major PRC regulations concerning RMB internationalisation
How does it affect you?
- In line with the objectives of China’s 12th Five Year Plan, the execution of the Australia-China currency swap agreement is an important step for the Chinese Government’s foreign exchange reform and the expansion of cross-border use of RMB.
- The currency swap agreement will increase opportunities for Australian companies to settle trade between the two countries in RMB and make RMB-denominated investments.
- For companies conducting bilateral trade and investment between China and Australia, the currency swap agreement may present new opportunities to effectively avoid exchange rate risk and reduce conversion costs by settling or investing in RMB.
It is widely believed that RMB internationalisation is an inevitable long-term trend. According to press reports, in 2011, the PRC’s cross-border RMB trade settlement had grown by more than 400 per cent on a year-on-year basis and accounted for approximately 10 per cent of China’s total foreign trade amount. HSBC estimates that, by 2015, RMB will become one of the top three trade settlement currencies.
Since 2009, the PRC Government has formulated various regulations in relation to RMB settlement of cross-border trade and RMB-denominated foreign investment.
To date, the PRC Government has signed more than 20 bilateral currency swap agreements with other countries. However, the currency swap agreement with Australia is the first that China has signed with a developed economy and it is therefore a significant development.
The currency swap agreement
The People’s Bank of China (PBOC) and the Reserve Bank of Australia (RBA) signed the bilateral currency swap agreement on 22 March 2012. The agreement allows exchange of local currencies between the two central banks of up to A$30 billion or RMB 200 billion. It is for an initial period of three years.
China has become Australia’s largest trading partner and the largest export market for iron ore, coal and gas. PRC enterprises are active in investing in Australia, particularly in the energy and resources sectors.
According to the RBA’s media release, the main purposes of the swap agreement are to support trade and investment between Australian and China, particularly in local-currency terms, and to strengthen bilateral financial cooperation. The swap agreement reflects the increasing opportunities available to settle trade between the two countries in RMB and to make RMB-denominated investments.
According to an official of the RBA, under the currency swap agreement, an Australian importer may contract with a PRC exporter in RMB and the RBA may acquire RMB under the swap agreement and lend it to the Australian importer’s bank. Given the existence of this swap agreement, Australian importers would be more confident in contracting in RMB than previously. The RBA official also confirmed that the swap agreement may be used for other purposes (eg cross-border investment), if agreed to by both the RBA and the PBOC.
Details of the agreement are not available to the public
Major PRC regulations concerning RMB internationalisation
The PRC Government has promulgated a number of regulations in respect of RMB internationalization since 2009. Details of such regulations (particularly the inbound/outbound investment related regulations) were set out in our previous Focus: Liberalising cross border investment in RMB. For the purpose of illustrating the ‘step by step approach’ taken by the PRC Government to achieve RMB internationalisation, which is the background of the aforementioned currency swap agreement and the clear thread in all of the trade and inbound/outbound investment related regulations, we set out below a brief summary of the key features of some milestone regulations in chronological order.
Measures for the Administration of Trial Program of RMB Settlement in Cross-Border Trade (the measures).
The measures were jointly promulgated by the PBOC, the Ministry of Finance (MOF), the Ministry of Commerce (MOC), the General Administration of Customs (GAC), the State Administration of Taxation (SAT) and the China Banking Regulatory Commission (CBRC) on 1 July 2009.
The measures unveiled the ‘trial program’ of cross-border RMB trade settlement between:
- certain regions (ie Shanghai and four cities of Guangdong province) of mainland PRC; and
- Hong Kong/Macau/ASEAN states.
According to the measures, enterprises that are located in such regions and approved by the state may settle cross-border trade with overseas enterprises in RMB. The ‘approved’ enterprises may conduct RMB settlement either through commercial banks in Hong Kong or Macau who are permitted to conduct RMB business or through commercial banks in the mainland PRC acting as agents of overseas commercial banks.
Notice on Issues Relating to the Expansion of the Trial Program of Cross-Border Trade RMB Settlement.
This notice was promulgated by the PBOC, the MOF, the MOC, the GAC, the SAT and the CBRC on 17 June 2010.
It extended the geographical coverage of the ‘trial program’ of cross-border RMB trade settlement. Under the notice, RMB settlement is permitted for cross-border trade between enterprises in:
- 20 provinces/autonomous regions/central government administered municipalities of the mainland PRC; and
- all overseas countries and regions.
In August 2011 it was further extended to the whole of mainland PRC.
Notice on Issues Related to RMB Settlement of Cross-Border Trade Conducted by Services Outsourcing Enterprises.
This notice was promulgated by the General Office of MOC and the General Office of PBOC on 22 October 2010.
It specified that outsourcing services enterprises of the PRC may conduct RMB settlement for the provision of outsourcing services to overseas customers.
Inbound investment-related regulations
Notice of the MOC on Issues Relating to RMB Foreign Direct Investment.
This notice was released by the MOC on 12 October 2011.
It permitted foreign investors to invest in the PRC by using their legally obtained overseas RMB funds. In summary, foreign investors can legally obtain overseas RMB funds by:
- settling cross-border trade in RMB;
- issuing RMB bonds or RMB shares outside of the PRC or legally obtaining RMB outside of the PRC through other avenues; or
- obtaining RMB funds in the PRC according to law (mostly derived from the foreign invested enterprises set up in the PRC by such foreign investors) and remitting such RMB funds out of the PRC.
Foreign investors must provide evidence or documents to the MOC (or its local branches) to prove the legality of how the overseas RMB funds were obtained.
The overseas RMB funds must not be directly or indirectly invested in securities or financial derivatives in the PRC, except in a few special circumstances. Nor can such RMB funds be used to provide entrusted loans (ie lending funds to PRC entities through a bank acting on behalf of the lender) to other entities in the PRC.
Outbound investment-related regulations
Measures for the Administration of the Pilot Scheme for Settlement of RMB for Overseas Direct Investment.
This measure was promulgated by the PBOC on 6 January 2011 and enables PRC entities to use RMB in overseas investment projects (including greenfield investment, M&A or acquisition/subscription of shares in overseas companies).
The execution of the currency swap agreement between China and Australia is widely perceived as a significant step towards the internationalisation of the RMB.
The summary of the relevant PRC regulations set out above demonstrates the PRC Government’s intention to expand the use of the RMB in cross-border trade and investment, which is also an inevitable trend given the growing economic strength of the PRC.
Australian companies should be aware of these developments and evaluate the implications and opportunities presented to them under the currency swap agreement and the relevant PRC regulations.