AS Baosteel seeks to get the latest big decision across the line at the Foreign Investment Review Board, many share market investors may not realise what legally occurs with a transaction of this nature.
AS Baosteel seeks to get the latest big decision across the line at the Foreign Investment Review Board, many share market investors may not realise what legally occurs with a transaction of this nature.
When Aquila Resources agreed late last week to a strategic cooperation deal with the Chinese steel giant for an investment of $286 million, a magic ownership target was hit - 15 per cent.
As a result, if approved, Aquila is likely to be considered different from other listed companies - at least as far as the federal government is concerned. That is because the Shanghai-based Baosteel is state owned.
Treasury has confirmed to WA Business News that, once any foreign government has 15 per cent or more of an Australian company, it is deemed to be a foreign government entity.
According to these rules, numerous companies considered Australian ought to be seeking FIRB approval for a range of relatively mundane business activities.
The Aquila deal, if successful, would bring to well over $1 billion the total of Chinese acquisitions at or above this 15 per cent mark in the past 12 months, helping cement the Asian powerhouse's position as one of the major foreign investors in Australia.
The FIRB annual report for the year ending 2007-08, released about two weeks ago, shows China has been consistently among the elite group of multi-billion dollar investors in resources in Australia, with much of this likely to be in Western Australia.
The federal Department of Treasury says the current policy is that all direct investments by foreign governments or their agencies, irrespective of size, are required to be notified for prior approval under the government's foreign investment policy.
In addition, the policy states this applies whether the investment is made directly or through a company that is owned 15 per cent or more by a foreign government.
Applications must be submitted for: the establishment of any new business activity, regardless of value of investment; acquisitions of real estate of any value; and acquisitions of interests in companies or business assets of any amount or value.
This will come as extraordinary news for shareholders in numerous WA-based companies.
There are many big deals that fit this threshold, especially in the case of Chinese state-owned or controlled companies, which are viewed as representing their government in the case of many transactions.
Gindalbie Metals, Fortescue Metals Group and Perilya are examples of companies that have Chinese investors with more than 15 per cent of their equity.
AnSteel took its total shareholding from 12.6 per cent to 36.28 per cent of Gindalbie via a $162 million placement in early July, Hunan Valin Iron and Steel Group bought 17.33 per cent of FMG for $644 million in April, and Zhongjin Lingnan took 50.1 per cent of Perilya for $45.5 million in February.
Law firm Middletons director, Christian Owen, said he believed there was a lack of understanding in the market about the impact of having a state-controlled entity as a major shareholder.
"The upshot in those circumstances is that the Australian company's activities become subject to the more stringent regulatory requirements applying to direct investment by foreign governments and their agencies," Mr Owen said.
"This includes, for example, requiring that Australian company having to obtain the prior approval of the (federal) treasurer before acquiring shares in another listed Australian company. This point is not, I think, widely known."
Treasury confirms that once the threshold is reached, companies have to seek more approvals for new activity.
"FIRB approval is required for specific transactions," a Treasury spokesman said.
"Additional acquisitions of the same company will require further notifications unless they are within an existing approval."
By way of detail, the spokesman said off-take agreements would not normally need to be notified unless they were related in some way to an acquisition of equity.
