FIRB’s enlarged mandate

30th April 2020

FIRB’s enlarged mandate is potentially detrimental

The Hon Josh Frydenberg MP recently announced that all proposed foreign investments into Australia will require approval by the Foreign Investment Review Board (FIRB).

The need and the community’s desire for a significant lowering of the monetary threshold is understandable. The change has merit, but it is imperative that FIRB is placed under tighter constraints. If not, Australia will suffer many lost foreign investment opportunities that would have been in the national interest.

The FIRB process must not become overly bureaucratic. It would be unreasonable for example to require that relatively small foreign investors provide the same level of detail on each of the ‘national interest factors’ as are required by large investors. FIRB’s requirements need to recognise that relatively small investments are generally much less likely to be contrary to the national interest than significantly larger investments.

The more comprehensive the application is required to be, the more it is likely to cost the applicant. Relatively small investments, sub-$100 million, do not justify spending hundreds of thousands of dollars on the data, analysis and other information generally expected of much larger companies in relation to addressing the ‘national interest’ factors.

A more comprehensive application is also likely to take longer to prepare. Add to this the recently announced increase in the timeframe for FIRM to review applications from 30 days to up to 6 months. The resulting expected time for a decision is far too long. The vendors of relatively small businesses are unlikely to accept an offer to purchase that is subject to a final decision that could take more than 6 months. The investors will also not be willing to spend significant time and money on the due diligence process until such time as the FIRB decision has been made, which then extends the expected date for settlement to way beyond 6-months.

Unless the total costs of the FIRB process are reasonable and the timeframe generally kept to within about 30 days, many offshore investors will not give serious consideration to investing. In which case, unlisted Australian companies will be deprived of the capital needed to achieve their potential and Australian business owners will be deprived of a fair and reasonable sale price for their businesses. It has been extraordinarily difficult for well-established, profitable, unlisted Australian companies to secure additional equity capital over the past couple of decades. This broadening of FIRB’s mandate could make it a lot more difficult.  Government needs to ensure it doesn’t.

With a view to ensuring that all foreign investments are in the national interest and that Australia does not suffer many lost opportunities, I propose that government ensure that FIRB:

  1. makes its decision within 30 days unless it has reasonable grounds for believing that the investment will not be in the ‘national interest’;
  2. develops a ‘short form’ application for smaller investments, one that does not require comprehensive arguments on each of the “national interest factors”, except in relation to the ‘character of the investor’ where comprehensive information should still be required; and
  3. is held to account by being required to justify to an independent body each decision that is not made within 30-days of the application being lodged.

Government not only needs to ensure the FIRB process is efficient and effective and its decisions are consistent, it also needs to satisfy the market that it will be the case.

I am currently considering the prospect of co-investing with offshore investors to purchase four different privately owned Australian companies, each within a value range of AUD 20 million to AUD 30 million value range. Unless government adopts my proposals or something similar, these investments are unlikely to be made.

Written by: Mark M.J. Morris of Rogers Morris Pty Limited, an investment business focused on unlisted securities