Foreign investment decisions lack consistency

Two controversial decisions were made regarding foreign investment in the lead up to the holidays – one was highly publicised by Treasurer Joe Hockey, including through a televised press conference.  The other was announced quietly via an emailed media release to a selected audience.

You may have missed the announcement on 11 December that China’s state-owned Yanzhou Coal Mining Company doesn’t need to cut its stake in local unit Yancoal Australia Ltd to below 70% and instead can move to 100% ownership.

By contrast the decision that “Australia’s national interest” will be protected by rejecting Archer Daniels Midland Company’s (ADM) proposed acquisition of GrainCorp Limited was highly publicised.

It could be assumed that public perception rather than issues of competition was the significant factor in the Treasurer’s decision.  The Graincorp acquisition had already obtained ACCC approval (indicating competition concerns were not determining factors), while the Yanzhou decision basically overturns restrictions on ownership and conditions set by the Foreign Investment Review Board (FIRB) four years ago.

The Government has continued to express its encouragement of foreign investment, but the GrainCorp decision is hard to understand in that context.  Interestingly, the issue of food security was not mentioned as a factor, while it was one of the main focuses of the recent Senate enquiry into foreign investment in the agribusiness sector.

In explaining his decision, the Treasurer referred to concerns expressed by grain growers in eastern Australia that the proposed acquisition by ADM could reduce competition, while acknowledging that a “more competitive network” is currently emerging.  The Government’s significant consideration was the “high level of concern from stakeholders and the broader community.”  It is unclear who these other stakeholders are but Hockey went on to say: “I therefore judged that allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally.  This would not be in our national interest.”

The Yanzhou decision raised a difficult problem for the Government.  In allowing this acquisition, there is a risk that the Government is seen as weak by not enforcing its own conditions.  The perception that foreign investors are dictating terms to the government could also undermine public support for the foreign investment regime and ongoing foreign investment more generally.  However, as the Treasurer points out, since the original conditions were imposed on Yanzhou, significant challenges have emerged for the Australian coal industry – changing the nature of play completely.

Changing circumstances require revision and flexible decision making.  In the case of the Yancoal takeover, it is now not so clear that allowing 100% holding is contrary to the national interest.

It will be interesting to observe the Government’s position evolve in 2014.

Media release: Foreign investment application: Archer Daniels Midland Company’s proposed acquisition of GrainCorp Limited
Media release: Foreign investment decision

Duncan Bedford
Duncan is a Partner at McCullough Robertson and an expert in business and transaction structuring and taxation.