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Foreign Takeovers Bill 1975  


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1975

THE AUSTRALIAN PARLIAMENT

HOUSE OF REPRESENTATIVES

FOREIGN TAKEOVERS BILL 1975

EXPLANATORY MEMORANDUM

(Circulated by the Acting Treasurer,

The Hon, Bill Hayden)

Pirated by Authority by the Government Printer of Australia

FOREIGN TAKEOVERS BILL 1975

EXPLANATORY MEMORANDUM

The Bill contains detailed provisions fors-

• the screening of proposed acquisitions and

arrangements which would give foreign persons control

(ie. result in foreign persons being in a position to

determine the policy) of Australian businesses,

• the prohibition of such proposals that are determined

by the Treasurer to be against the national interest,

. the "unscrambling" of such acquisitions and the

"unwinding" of such arrangements which are completed

without due notice having been given to the Treasurer

and which are determined by the Treasurer to be

against the national interest.

The Government's proposals for new foreign takeovers

legislation were outlined in a public announcement made by

the then Treasurer on 10 Dec 1974 (copy attached).

2# The character of the machinery provided for in the

Bill has been particularly influenced by the consideration

that the question whether a particular proposed acquisition

or arrangement would result in a foreign person or persons

being in a position to determine the policy of a business:-

# often cannot be settled by the application of

absolutely precise rules,

e instead, must often be settled ultimately by the

exercise of a judgment.

The Bill accordingly distinguishes sharply between:-

. proposed acquisitions and arrangements which the

Treasurer may examine, and

. examinable proposals which the Treasurer may prohibit.

EXAMINABLE PROPOSALS

3. The range of proposals which the Treasurer may

examine under the provisions of the Bill comprise the

following:-

. A proposed acquisition of voting or non-voting

shares which would have the effect that (sub-clause

18(7)):-

(i) a foreign person, either alone or together with

associates, would acquire or increase an

interest of 15% or more in the ownership or

voting power of a corporation; or

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3*

(ii) 2 or more foreign persons, either alone or

together with associates of any of them, would

acquire or increase an aggregate interest of

40% or more in the ownership or voting power

of a corporation

PROVIDED THAT the acquisition is of voting or non-voting

shares in a corporation which is (sub-clauses 13(1), 18(1)

and 18(2))s-

(i) a corporation incorporated in Australia which,

directly or through a subsidiary, carries on

an Australian business;

(NOTE: Sub-clause 13(1) defines such a corporation

with careful regard to constitutional considerations*

It is considered that the clause 13 (1) definition as

elaborated by clause 18(1) effectively encompasses

corporations of the kind indicated in (i) above*)

(ii) a corporation incorporated outside Australia

which:-

(a) has an Australian subsidiary or subsidiaries

which carry on an Australian business and

the subsidiary or subsidiaries have

consolidated total assets valued at more

than $3 million;

(b) carries on an Australian business and owns

Australian assets comprising land, mineral

rights or shares in Australian corporations

valued at more than $3 million?

(c) has an Australian subsidiary or subsidiaries

which carry on an Australian business and

which have consolidated total assets equal

in value to 50% or more of the value of the

consolidated total assets of the foreign

corporation concerned ? or

(d) carries on an Australian business and owns

Australian assets comprising land, mineral

rights or shares in Australian corporations

equal in value to 50% or more of the

consolidated total assets of the foreign

corporation concerned.

A proposed acquisition by a foreign person of any

interest in the assets of an Australian business,

whether or not the business is carried on by a

corporation (clause 4 and sub-clauses 19(1) and

19(2)).

A proposed agreement which would enable increased

representation on the board of an Australian

corporation, which directly or through a subsidiary

carries on an Australian business, by a foreign

person who has an interest of 15% or more in the

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5.

ownership or voting power of the Australian

corporation concerned (sub-clauses 20(1) and 20(2)).

• A proposed arrangement under which a foreign person

would lease or be granted other rights to use the

assets of an Australian business (whether or not

carried on by a corporation or would be entitled to

participate in the management or profits of such a

business (sub-clauses 21(1) and 21(2)).

4. The new legislation will apply only to acquisitions

made and arrangements entered into after the date of the

commencement of the Bill when it becomes law (clause 15).

The Bill does not apply to an acquisition made after the

date of commencement pursuant to an arrangement (eg. an

option) entered into before that date if the Government

has indicated in writing that it has no objections to the

arrangement being entered into. Moreover, sub-clauses 3(2)

and 3(3) provide that the Companies (Foreign Take-overs) Act

1972-1974 continues in force in relation to any foreign

takeovers which were subject to the provisions of that Act

and were

. made before the date of commencement of the Bill

when it becomes law,

. made without notice having been given to the

Treasu

rer, and

. determined by the Treasurer to be against the

national interest.

5. Acquisitions of shares or assets are defined

(sub-clause 5(1)) so as to exclude acquisitions:-

(i) by will or by devolution by operation of law? or

(ii) by way of enforcement of security held under a

mortgage agreement entered into in good faith in

the ordinary course of carrying on a business of

lending money.

6. Agreement is defined (clause 5(1)) to mean any

agreement, whether formal or informal and whether express or

implied, other than a moneylending agreement.

7. Associates are broadly defined (clause 6) to

encompass family, business, partnership, employer - employee

and inter-company relationships.

8. Foreign person is defined (sub-clause 5(1) and clause

9) as:-

a natural person not ordinarily a resident of

Australia and

unless the Treasurer is satisfied that in fact

foreign person(s) are not in a position to determine

545S

the policy of the corporation concerned, a

corporation in which:-

(i) a natural person not ordinarily a resident of

Australia or a corporation incorporated outside

Australia, either alone or together with

associates, holds an interest of 15% or more in

the ownership or voting power of the corporation

concerned; or

(ii) 2 or more persons, being natural persons not

ordinarily residents of Australia or

corporations incorporated outside Australia,

have aggregate interests of 40% or more in the

ownership or voting power of the corporation

concerned.

(NOTE: In the determination of interests in

ownership and voting power, a corporation, which is

controlled by another corporation (whether

incorporated in Australia or overseas) which is a

foreign person, is also a foreign person (sub-clause

9(3)).

9. Australian business is a business carried on in

Australia in anticipation of profit or gain (sub-clause

7(1)). Australian business includes the holding of a

mineral right (sub-clause 7(2)). Australian business does

not include a business carried on by Australia, a State, a

statutory authority or a local governing body (sub-clause

7(3)).

10. Interests in shares and assets are defined (clause 11)

to include any legal or equitable interests. See also the

note at the end of paragraph 8.

11. Mineral right is defined (sub-clauses 5(1) and 7(2))

to include an authority, licence, permit, lease or right to

prospect or explore for or to recover minerals and any

interest in such an authority, etc.

12. A corporation is a subsidiary of another corporation

if the latter corporation is in a position to control more

than 50% of the voting power of the former corporation or

owns more than 50% of the shares of the former corporation.

If a subsidiary of a corporation in turn has a subsidiary,

the second subsidiary is also a subsidiary of the

corporation concerned. (Sub-clause 10(1).)

13. Value of assets is defined in terms of balance sheet

and book values.

PROHIBITABLE PROPOSALS

14. An examinable proposal may be prohibited by the

Treasurer if and only if the Treasurer is satisfied that

546"

(sub-clauses 9(2)f 18(2), 18(7), 19(2), 19(7), 20(2), 20(5),

21(2) and 21(5)):-

• the examinable proposal would result in a change in

control of the business concerned,

. the resultant control would be foreign, and

. the foreign control concerned would be against the

national interest.

NOTE (1): The Treasurer may prohibit an examinable

proposal that would result in a transfer of

control of a business from one foreign group to

another; from an Australian group to a foreign

group; or from a partnership between Australian

and foreign groups to a foreign group.

NOTE (2): The Treasurer may not prohibit a proposal by a

foreign person who already controls a

corporation to increase the extent of his

ownership of that corporation.

NOTE (3): In principle, where a corporation is owned as to

40% or more by a large number of foreign

persons, any very small proposed change in

foreign ownership of the corporation is

examinable. In practice, however, such a

proposal is not prohibitable because the

Treasurer cannot satisfy himself that control

would change as a result of the proposal*

The "40% benchmark" is essentially a support

for the "15% benchmark" (see paragraph 3).

The purpose of the "40% benchmark" is to

enable the Treasurer to intervene where there

is a fundamental change in the ownership

structure of a corporation without the 15%

benchmark being breached. For example, 4

"friendly" corporations may each acquire

14.9% of another corporation and thus clearly

bring about a change in the control of the

latter.

EXAMINATION AND PROHIBITION MACHINERY

15. The cornerstone of the examination machinery provided

for in the Bill is notification. Clause 26 requires 40

days’ notice by foreign persons of any proposal to acquire

or to increase an interest of 15% or more of the ownership

or voting power of an Australian corporation. Other

examinable acquisitions and examinable arrangements are not

subject to compulsory notification. However, as indicated

below, notification (whether compulsory or voluntary) will

set in train time limits upon the Treasurer's capacity to

make prohibition and other orders in respect of the matter

notified. It is expected that this effect of notification

11

O.

v

will in practice ensure that examinable proposals which are

likely to result in a change in control of a business will

generally be submitted for Government consideration before

they are consummated. This expectation is based on

experience in the administration of the Companies (Foreign

Take-overs) Act 1972-1974.

16. In principle, compulsory notification of all

examinable transactions is a desirable objective. In

practice, however, compulsory notification of all examinable

transactions is not feasible. A proposal by foreign persons

to acquire or increase an interest of 15% or more in the

ownership or voting power of a corporation raises a fairly

strong presumption that the acquisition could lead to a

change in control of the corporation concerned. However,

the great bulk of other examinable proposals will clearly

not lead to a change in control of a business - eg the great

bulk of asset acquisitions by foreign persons would clearly

not involve business takeovers. Compulsory notification of

all such proposals would impose unnecessarily heavy burdens

and costs on both the private sector and the Government

administration.

17. Where notification is given of a proposal,

examination of the proposal will normally be carried out in

up to 2 stages:-

. Preliminary examination, which must be completed

within 30 days of receipt of notification.

Preliminary examination may result in a quick

clearance of the proposal, normally either on

technical grounds (eg, the proposal would not in fact

result in a change in control of the business

concerned) or on the grounds that the proposal

involves a foreign takeover of an unexceptionable

small business. In the latter connection the

Government’s practice in administering the new

legislation will be not to intervene in takeovers of

businesses with total assets of $1 million or less

except in special circumstances. Otherwise, the

preliminary examination will result in an interim

order (clause 22) prohibiting implementation of the

proposal for a period of up to 90 days. Such an

order must be made by the Treasurer within 30 days of

the date of receipt of notification and it must be

published in the Gazette within 10 days of the date

on which it is made (sub-clause 25(3)).

Detailed investigation, which will follow an interim

order and must be completed within 90 days. Detailed

investigation will conclude either with a clearance

of the proposal or with its prohibition by order made

under sub-clause (2) of clause 18, 19, 20 or 21.

Such an order must be made by the Treasurer within 90

days of the date of publication of the interim order

(or within 30 days of the date of notification) and

it must be published in the Gazette within 10 days of

the date on which it is made (sub-clause 25(3)).

5465

18. Where the Treasurer makes and publishes in the

Gazette an order under sub-clause 18(2) in respect of a

proposed acquisition of shares, he may make a further order

prohibiting the foreign persons concerned, and such

associates or such class of associates of those foreign

persons as are specified in the order, from increasing their

percentage share of the ownership or voting power of the

corporation concerned (sub-clause 18(2)).

19. Where the Treasurer makes and publishes in the

Gazette an order under sub-clause 19(2) in respect of a

proposed acquisition of assets of a business, he may make a

further order prohibiting the foreign persons concerned, and

such associates or such class of associates of those foreign

persons as are specified in the order, from acquiring new

interests in the assets of the business concerned

(sub-clause 19 (3)).

COMPLETE

D ACQUISITIONS OR ARRANGEMENTS

20. Where an examinable acquisition or arrangement is

completed:-

• without notification having been given to the

Treasur

er;

. after notification has been given but within 40 days

of the date on which the Treasurer received the

notification (unless the Treasurer has authorised

a certificate under clause 29); or

. in defiance of an interim order or a prohibition

order made by the Treasurer and published in the

Gazette within due time

and where the Treasurer is satisfied thats-

• the acquisition or arrangement resulted in a change

in control of the business concerned;

. the resultant control is foreign; and

• the foreign control concerned is against the national

interest

the Treasurer may make an orders-

• requiring the foreign person concerned tto sell,

within such period of time as is specified in the

order, the shares or assets so acquired (subrclauses

18(4) and 19(4)); or

• requiring in effect the unwinding, within such period

of time as is specified in the order, of the

arrangement so entered into (sub-clauses 20(3) and

21(3)).

5467

21. By notice given in writing, the Treasurer may extend

the period of time specified in an order for the completion

of an act specified in that order (sub-clauses 18(5), 19(5),

20(4) and 21(4)).

22. The Treasurer may not withhold approval of a sale to

a person pursuant to an order made under sub-clause 18(4) or

19(4) unless he is satisfied that the person is a foreign

person and that it would be against the national interest

for that foreign person to control the business concerned

(sub-clauses 18(6) and 19(6)).

OTHER PROVISIONS RELATING TO ORDERS

23. The Treasurer may at any time make an order revoking

any order other than a revocation order (clause 23).

24. When the Treasurer is given due notification of an

acquisition or a proposed acquisition of an option to

acquire shares or assets and where he fails to make and

publish in the Gazette in due time an order prohibiting the

entering into of the option, the Treasurer may not

subsequently make orders in respect of acquisitions or

proposed acquisitions of shares or assets pursuant to

the option arrangement (sub-clause 25(4) and clause 28).

The Treasurer is prevented from making orders also in

respect of shares acquired after the date of commencement of

the new legislation pursuant to an option arrangement

entered into before the date of commencement where the

Government has indicated in writing that it has no objections to

the option arrangement being entered into (clause 15)•

25. The Treasurer is not permitted to make an order in

respect of a proposed or completed acquisition or

arrangement after he has authorised a certificate in writing

to be given to the effect that the proposed acquisition or

arrangement would not result in a change in control of the

business concerned that would be against the national

interest (clause 29).

26. Where an order has been contravened or not complied

with, State and Territory Supreme Courts may upon

application by the Treasurer make such orders as they see

fit to ensure effective enforcement of the Treasurer's order

(clause 35).

TRANSITIONAL PROVISIONS

27. Sub-clause 3(2) provides that the Companies (Foreign

Take-overs) Act 1972-1974 will continue in force in relation

to any foreign takeover (within the meaning of that Act)

effected by means of acquisitions of shares:-

. made before the date of commencement of the

legislation,

• made without notice having been given to the

Treasurer, and

5469

• determined by the Treasurer to be against the

national interest.

28. Sub-clause 3(3) provides in particular that sections

14 and 15 of the Companies (Foreign Take-overs) Act

1972-1974 continue in force in relation to foreign takeovers

of the kind referred to in paragraph 27. These provisions

empower the Treasurer to make divestiture orders and to

apply to the Courts for additional supportive orders in

respect of such takeovers.

29. Sub-clause 3(4) continues in force orders made and

certificates issued by the Treasurer under the provisions of

the Companies (Foreign Take-overs) Act 1972-1974 which are

in force immediately before the date of commencement of the

legislation.

OTHER PROVISIONS

30. Clauses 30, 31 and 32 define offences. Clause 33

provides that the Treasurer must consent to proceedings for

an offence. Clause 34 invests State and Territory Supreme

Courts with jurisdiction in respect of offences.

31. Clause 36 empowers the Treasurer to requisition

information and documents relevant to his administration of

the legislation.

32. The legislation will not apply to the exclusion of

any State or Territory law to the extent that that law is

capable of operating concurrently with the legislation

(clause 37)• An offence under the legislation will not

invalidate any transaction (clause 38).

33. The Governor-General may make regulations not

inconsistent with the legislation (clause 39).

547;

FOREIG

N TAKEOVERS

STATEMENT BY THE HON, FRANK CRBAN, M.P.,

TREASURER

The Government has decided to introduce new

legislation for the control of foreign takeovers. The

drafting of the new legislation is in hand. Pending the

introduction of the new legislation, the policy to be

incorporated in the legislation will be put into effect on

an administrative basis. The policy will apply from

tomorrow.

The existing scheme for the control of foreign

takeovers was announced in a Ministerial Statement made in

the House on 26 September 1972, The scheme as a whole

comprises the Companies (Foreign Take-overs) Act and certain

policy measures for the control of foreign takeovers. The

existing Act applies only to foreign takeovers effected by

means of share acquisitions. The policy measures apply to

foreign takeovers of both incorporated and unincorporated

businesses effected by means of acquisitions of assets,

including mineral rights.

The legislation and the policy measures'for the

control of foreign takeovers have been administered in a

mutually consistent manner. The broad principles laid down

in the existing Act have been applied also to proposals to

which the policy measures apply.

The major provision of the existing Act is that

it empowers the Minister to make an order prohibiting a

proposed takeover of an Australian company where the

takeover is to be effected by means of an acquisition of a

substantial number of its shares and the Minister is

satisfied that:-

2.

(a) the company concerned is not already foreign

controlled but would be foreign controlled if

the share acquisition proceeded; and

(b) foreign control of the company would be against

the national interest.

The existing Act also enables the Minister to take certain

action in respect of a foreign share acquisition effected

without prior notice to the Government or in contravention

of a prohibition order.

The scope of the existing Act depends importantly

on two definitions. First, a substantial foreign

shareholding is defined as one which gives a single foreign

group at least 15% of the voting rights in a company or

which gives foreigners in the aggregate at least 40% of the

voting rights. Second, a foreign interest is defined as:-(i) a person not ordinarily resident of Australia;

(ii) a company incorporated overseas; and

(iii) a company incorporated in Australia in which

there is a substantial foreign shareholding,

provided that the Minister is satisfied that

the company is in fact foreign controlled.

The existing Act does not provide for

compulsory notification of proposed share acquisitions by

foreigners; it does not specify the criteria for judging

foreign takeovers; and it applies to all foreign takeovers

as defined, without exception. In practice, takeovers have

been judged on the basis of criteria spelt out in the

statement made in the House on 26 September 1972, Moreover,

the Governments general administrative practice is not to

intervene in takeovers of companies with total assets of $1

roillion or less, except where special considerations apply.

5473

The existi

ng Companies (Foreign Take-overs) Act

was introduced as an interim measure pending the preparation

of permanent legislation* It was due to expire on

31 December 1973 but the previous Parliament extended its

operation to 31 December 1974, Its operation has been

extended by Parliament today to 31 December 1975.

In drawing up proposals for new and permanent

foreign takeovers legislation, the Government has had the

benefit of two years experience of the operation of the

existing scheme. The Government's paramount objective is

comprehensive foreign takeovers legislation: the

arrangement under which the existing foreign takeovers sceme

operates with only partial statutory backing has worked with

a degree of success but it is not reallysatisfactory from

the viewpoint of either Government or industry. The

Government proposes that the new legislation will cover not

only transactions in shares, but also transactions in assets

(including mineral rights) covered by existing policy

measures. It will cover other classes of transactions which

are means of effecting takeovers and have been used to

circumvent the existing Act. Transactions between

foreigners will be treated in the same way as transactions

between Australians and foreigners. The Government also

proposes to tighten up certain machinery provisions of the

existing Act and to introduce new machinery.

The objective of the new legislation will be to

enable the Government to examine all takeovers of Australian

businesses by foreigners and to prohibit such takeovers

found to be against the national interest. A “takeover"

will be a transaction which results in a change in the

identity of the person in a position to determine the major

policy decisions of an Australian business. An "Australian

business" will be any private sector activity carried on in

Australia for the purpose of making a profit. "Foreigner"

will be defined as in the existing Act, except that a

foreign corporation will be defined in terms of ownership of

either shares or voting shares.

Particular atte

ntion is drawn to the

implications of the definition of "Australian business".

The definition covers unincorporated as well as incorporated

businesses; activities carried on in Australia by

foreigners as well as Australians, whether through a local

subsidiary or a branch office; and activities carried on as

part of a larger operation as well as activities carried on

as the sole business of the vendor.

The existing Act provides for the examination

of foreign acquisitions of voting shares in a company

incorporated in Australia. The existing policy measures

provide for the examination of foreign acquisitions of the

assets (including mineral rights) of incorporated and

unincorporated businesses. The new legislation will provide

for the examination of:

(a) an acquisition by a single foreigner or

associated overseas group of an interest of 15%

or more, or by any number of foreigners of an

aggregate interest of 40% or more, of the

shares or assets (including mineral rights) of

a business;

5475

(b) splitting by an overseas interest of a

substantial shareholding in a business where

this involves an increase in voting rights#

(c) acquisition by an overseas interest of a lease

or licence over the assets of a business#

(d) an execution by Australian and/or overseas

interests of an agreement which would give an

overseas interest which owns 15% or more of a

business the right to increase its

proportionate representation on the board or

management committee of the business concerned#

or a change by a business in its articles of

association or the terms of any memorandum,

agreement or trust deed to provide for, permit

or facilitate increased proportionate

representation by a substantial foreign

shareholder in the business on its board or

management committee of a business# and

(e) acquisitions of shares or assets of a business

incorporated in an overseas country where such

transactions would result in a change in the

control of the business concerned and where

either 50% or more of the assets of the latter

business are held in Australia or where the

Australian assets of the latter business amount

to more than $3 million*

All examinable transactions will be subject to

the provisions of the new legislation* However, the

Government will continue the existing administrative

practice of intervening in takeovers of businesses with

total assets of $1 million or less only in special

circumstances•

Except for essentially drafting modifications,

the new legislation will incorporate the interim,

prohibition and divestiture order provisions and the other

machinery provisions of the existing Act. However, the new

legislation will require a foreigner to give at least 40

days notice of a proposal to acquire or to increase a

substantial holding of shares or voting shares in a company*

The new legislation will also provide that, where the

Minister is satisfied that divestiture would not be

practicable or would not involve an effective penalty, he

may apply to the courts for an imposition of a fine which

may not exceed the amount of the takeover consideration#

The Treasurer will remain the responsible

Minister# The Committee on Foreign Takeovers will continue

in operation as a purely advisory body# It will examine

foreign takeovers for report to and decision by the

Treasurer# A foreign takeover proposal will be judged to

be against the national interest if it is found to be

inconsistent with the following criteria#

The first criterion for judging a proposed

foreign takeover will be: whether, against the background

of existing circumstances in the industry concerned, the

takeover would lead, either directly or indirectly, to net

economic benefits in relation to such matters as

competition, productive capacity, technological change,

development of new markets, production, quality and range of

products and services, level of prices and efficiency which

would be sufficient to justify the change in foreign control

of the particular industry that would result from the

takeover#

5477

If the proposed takeover is judged not to be

against the national interest on this basis, the following

additional criteria will also be taken into accounts-

(i) Whether, after the takeover, the business

concerned could be expected to follow practices

consistent with Australia's interest in matters

such as exports, imports, local processing of

materials produced, research and development

and industrial relations ? and

(ii) Whether the takeover would be consistent with

the Government's objectives for defence, the

environment and conservation, urban and

regional development or the preservation of

Aboriginal land rights.

In making judgements as to whether particular

foreign takeovers would be against the national interest on

any of the foregoing grounds, due weight will be given toz-

(i) The extent of Australian participation in

ownership, control and management that would

remain after the takeover? and

(ii) The interests of employees or shareholders of

the business subject to the takeover.

CANBERRA A.C.T., 10 December 1974