The Memorandum of Advice - Chinese and Australian Companies - Case Study Example

MEMORANDUM OF ADVICE XXXXX M/S Board of Resource Co XXXXX XXXXX Ref: ABCD1234 EXECUTIVE SUMMARY This memorandum of advise is pursuant to the request of the Chinese company Board of Resource Co to advise on their proposal to acquire the shares of the domestic company Australian Ore Ltd which is worth $ A 250.million. On examination of the relevant law relating to the foreign investment, it has been found that the Governmental company’s proposal will require special treatment so as to make sure that they do not seek sovereign immunity and to ensure that they will conduct themselves in accordance with established business behaviour. Besides, the mining sector which was earlier prohibited has now been made available for foreign investment. And, as there is no limit as such for foreign government agency’s proposals, even if it is less than $100 million as applicable to others under FATA, it should go through the process of Government scrutiny on case by case basis. Further, the company is advised to inform the proposed levels of investments and percentage of shares to be acquired so that the proposal can be further examined within the perspective of the Corporation Act 2001and a suitable amended MOA can be tendered. 2. BACKGROUND M/S Board of Resource Co, the State owned company from China has evinced keen interest for their investment in the mining industry of Australia. They would like to acquire the shares of Australian Ore Ltd, a large mining company based in Western Australia. The company is said to be worth $ A 250 million at present. The company from China has approached this law office to tender its opinion on their proposal. This memorandum is to apprise the Chinese company of Australia’s general policy on entertaining investments from foreign countries with special reference to any bilateral agreement between Australia and China. This opinion is made on the basis of documents and information that were accessible to this office and is subject to the disclaimer that this office shall in no way be responsible for any consequences arsing out any possible decision to invest or not to invest in the said company based on this memorandum of advice. Australia is the largest island and the smallest continent nation in the world. Though it is as large as the continental United States, it has a population of only 20,000,000 with the large portion of the land uninhabited. The Government’s policy on hosting foreign investment has been to encourage investments consistent with community interests.1 Australia has since eased the restrictions on foreign investments which were subject to widespread controls brought into force in 1970s. During the mid-1980s, the country lifted capital controls and started floating the Australian dollar. The controls were mainly intended to restrict foreign direct investment flow and instead to stimulate demand for Australian equity by foreign companies especially in the mining sector. This forced foreign investors in Australia to fund their expansion by debt raised in Australia so as to increase the proportion of Australian equity. This situation relegated Australia to the tenth from seventh position at a global level as the most attractive foreign direct investment destination between 1999 and 2000. It will be pertinent that a survey held at the time showed that 80 percent of the companies worldwide had preferred acquisition route as the primary vehicle for foreign direct investment.2 Australia had ever since been experiencing growing proportion of portfolio investments and the inward investments contain nearly fifty percent of the portfolio investment as against just 10 percent in 1976.3 Foreign Investment Review Board (FIRB) which is non-statutory body in Australia was set up in 1976 to play an advisory role for the Australian Government on foreign investment policy and administration. It is expected to scrutinise foreign investment proposals from foreign sources for making direct investment in the country and submit its recommendations to the Government represented by the Treasurer, as to whether the proposals are consistent with the Government’s policy. Although there were restrictions on foreign ownership in financial institutions and media before World War II, other sectors had had been entertained liberally until the beginning of 1970s. It was only form 1972 that Government policy on hosting foreign investment began to be viewed from the national interest perspective. Hence FIRB was established in 1976 to vet large investment proposals especially in the mining sector. There was a stipulation that the mining projects should have at have at least 50 percent Australian equity and there were two tests namely “net economic benefits test” and the “Australian opportunities test” which however were abolished in 1986.4 Restrictions had already been relaxed in 1978 so as to enable the foreign companies to increase domestic equity in the future by making formal commitments. Subsequently, emphasis shifted from restricting foreign ownership to view the investments in national interest perspective, following floating of Australian dollar in 1983 Further, Government policy shifted to encourage foreign direct investment. The 50 percent equity requirement to be Australian in the mining projects was removed in 19925 and threshold level of investments requiring FBIR approval was enhanced to $ 50 million. Since 1996, Australia made a policy shift to give even financial incentives to for foreign companies to be located in Australia and the country is being promoted as an investment site with the result the foreign financial institutions have been encouraged by financial incentives and tax relief to start their regional headquarters in the country. Thus, at present foreign investment is welcome in Australia as it paves way for higher levels of economic activity and employment opportunities besides bringing in new technology, management skills, and overseas markets. The Government has retained power to block proposals that would be contrary to national interest. Thus the screening process of FIRB enables the Government to take the appropriate decision. It is well known that proposals in the sectors of media, developed residential real estate are contrary to national interest.6 3. Australian policy for investments in Australia As seen above, foreign investment policy of Australia as for any other country has been vibrant consistent with political expediency from time to time. The following advice is divided in to sections dealing with foreign government investment in Australia, Bilateral Agreement between Australia and China, Foreign Acquisitions and Takeovers Act 1975, and the Corporation Act 3.1. Foreign Government Investment in Australia Though foreign governmental investments are not within the purview of the Foreign Acquisitions and Takeovers Act 1975 (FATA), the prospective investors should give notice and obtain approval of such direct investments regardless of their size. Foreign Government includes their agencies such as the present Chinese company. These investments are examined on individual basis and consistent with the Treasurer’s public release on 18 February 2008 containing certain principles.7 They are, how far the investor’s operations would be independent of the relative foreign government, how far the investor will be able to subject itself and adhere to Australian law and observe the general standards of behaviour consistent with business, whether the particular investment will adversely impact on competition and result in concentration of monopoly power or control in the relative industry sought for investment, whether the investment will have a negative impact on Australian government revenue and policies, whether it will affect Australian national security, and whether it is likely to affect the operations and general directions of domestic business and its positive role being played on Australian economy and the community in general.8 The Chinese company is also advised that it cannot claim sovereign immunity from local taxation unlike a foreign government and it must pay all taxes and charges leviable. The company should be also aware that the government of Australia has implemented measures to prevent cross-border tax avoidance and evasion. It must ensure that all financing arrangements resulting from the acquisition proposal if approved, should be consistent with normal business practice. For more information, the company may find information on Australia’s tax laws at the taxation office website.9 It may be encouraging to find that FIRB cleared Chinese FDI amounting to $ A10 billion in 2005-06 and 2006-07 and 80% of this figure i.e $ A 8 billion accounts for investment in minerals and resources. Another important factor to be noted is that majority of Chinese investments in Australia is from Chinese Government owned and related agencies. Some of the recent acquisitions by the Chinese Government related agencies are mentioned in the Appendix 1 below.10 3.2 Bilateral agreement with China Australia has been negotiating free trade agreements with several countries. Currently, it is negotiating with China, Malaysia, Japan, Gulf Cooperation council and the Republic of Korea.11 Hence the outcome of such an agreement with China will have an impact of the proposal now under consideration as it is in the early stage of even conception since it has been informed that the seeking of advice is part of its investment options overseas. Bilateral agreement gives more certainty for prospective overseas investors to treat Australia as a desirable destination and reduce compliance costs and cost of capital.12,13 Australia-China Free Trade negotiations which started in April 2005 underwent the thirteenth round of discussions in December 2008.14 More information on bilateral free trade agreements can be seen in the government website.15 3.3 Foreign Acquisitions and Takeovers Act 1975 The prescribed statutory period for approval of proposals is 30 days and another ten days to advise the applicants. The statutory period begins from the date of receipt of the notice under section 25, 26 or 26 A. The Act also has options to issue interim order in which case the examination period can extend up to 90 days. The interim order’s purpose is to enable applicant to provide more information for assessment of their proposal. However, since this is a foreign governmental agency’s proposal not under the purview of FATA, 30 days deadline is generally followed for approval. As said earlier, the examination of the proposal is to ensure that the proposal is not contrary to national interest. When considering the proposal, the FIRB is likely to hold consultations on confidential basis with the Federal, State and Territorial government departments and other authorities connected with the proposed activity mainly to make sure that the proposal is consistent with national interests. The confidentiality of the consultations is for the purpose of protecting the applicant-provided information. The Board may also consult with the third parties especially when the proposal is concerned with the public domain.16 It may also be relevant to state that the treasurer has powers to prosecute a foreign person that fails to comply with the terms and conditions of the approval of the proposal.17 The related mining sector was the largest approved sector by value summing up to $ 64.3 billion in 2007-08 as against $ 32.3 billion in 2006-07. There were 173 approvals in 2007-08. 18 Of these, 168 were for acquiring existing businesses and 83 of the 173 approved exceeded investment of $ 100 million or more. The mining sector consisted of activity in Bauxite, Copper-gold, Iron ore, Nickel, Uranium, Zinc, Coal, Oil & gas in which there were 168 acquisitions of existing businesses. 19 At present, as per the Annual Report of 2007-08 of the FIRB to the Treasurer, an acquisition of interests for more than $ 100 million needs to be notified to the Government for approval.20 However for a foreign governmental proposal, it will not apply as already mentioned above. Such proposals must be notified for approval regardless of value. 3.4 Corporations Act As this proposal involves acquisition of shares of the Australian company, provisions of the Corporations act 2001 will be attracted. As tis does not involve bidding for acquisition, “creep provisions” of the Corporation act will not attract. On the hand, as this is likely to involve agreements for purchase of shares, prior approval is required and the option to purchase should be exercised within 12 months of approval. It can be varied if it is shown that additional time is necessary for the successful implementation.21 Application for approval and other details as to how to apply can be had from the FIRB website. No charges are applicable for applications.22 4. CONCLUSION This memorandum advice has gone into the details of foreign investment law applicable for a foreign investor in Australia. The Chinese company as a governmental agency though not coming under the purview of FATA, should still apply for approval. As the there is no threshold limit prescribed, even if it is less than the $ 100 million as seen above, the company should seek approval. The company is advised further to inform as to how much percentage of the shares is proposed to be acquired so that relevant provisions under the corporations act can be examined before a suitable advice can be given. If the proposal is to purchase 100 % and how the existing employees are going to be treated under the new management since these issues involve national interests and the Government is committed to approve on case by case basis, an amended MOA will be made on receipt of additional information. Appendix 1 Bibliography Books Christian Campbell, 2007, Legal Aspects of doing business in Asia and the Pacific [2007], Lulu.com, page 31 Louise Fleming, 2004, Excel HSC Business Studies, Pascal Press, P 176-77 Others Adams , R, Dee, P, Gali J and McGuire G, 2003, The Trade and Investment Effects of Preferential Trading Arrangements – Old and New Evidence, Productivity Commission Staff Working Papers, Canberra, May Chapter 3 Overview of the Foreign Acquisition and Takeovers Act 1975, Annual Report 2007-08, Foreign Investment Review Board, pp 50-51, available at accessed on 26 Jan 2010 Peter Drysdale and Christopher Findlay, 2008, Chinese Direct Foreign Investment in Australia: Policy Issues for the Resource Sector, Draft Paper for Presentation to Crawford School Public Seminar, Seminar Room 1, Crawford Building, Australian National University, 12.30 pm, Thursday, 4 September 2008 Websites www.ato.gov.au, www.dfat.gov.au/trade/ftas.html www. firb.gov.au Read More