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					                                         Australian Regulation of Investments
                                by Sovereign Wealth Funds and State Owned Enterprises




                                                 Sovereign Wealth Funds in an
                                                Evolving Global Financial System



                                   Centre for Applied Macroeconomic Analysis in the
                                       ANU College of Business and Economics

                                                            and the

                                          Lowy Institute for International Policy




                                                Greg Golding and Rachael Bassil



                                                       25 September 2008




 Mallesons Stephen Jaques                                                              1
9614885_2                    26 February 2010
       Investments by SWFs are said to raise concerns for recipient countries because of their size, the lack of
       transparency, their potential to disrupt financial markets and the risk of them being used to progress
       political objectives.1

       The policy issues that arise for recipient countries include financial stability, political motives and
       national security. The debate on financial stability centres on the fact that sovereign wealth funds and
       their operations are largely unregulated and may lack transparency. Due to their size and financial
       capacity there are concerns that a lack of transparency of sovereign wealth funds will mean that certain
       investment decisions could have destabilising effects on the financial system. Some commentators
       suggest that Sovereign wealth funds in fact have a stabilising effect on the financial system by virtue
       of their long term investment horizon, mainly unleveraged positions and capacity to be able to enhance
       the depth and breadth of markets.2 The issue of transparency is one that is currently being considered
       and addressed by the international working group for sovereign wealth funds which was responsible
       for developing a draft voluntary code of conduct for SWFs in September 2008 known as the Santiago
       Principles3.

       Due to the influence the sovereign power may have over the operations and investment decisions of
       the sovereign wealth funds there is also a concern that SWFs may exercise their control over recipient
       companies for political rather than commercial purposes. There is also concern that foreign
       governments may get access to information or technology through the investments of the sovereign
       wealth funds that jeopardises the recipient country‟s national security.

       The public interest in investments by SWFs is also a significant issue for recipient governments to
       grapple with and is particularly the case where local “icons” are involved.

       Distinguishing between SWFs and SOEs

       Sovereign wealth funds and state owned enterprises are different in function as well as purpose. A
       sovereign wealth fund can take the form of a fund set up from foreign exchange reserves or
       commodity revenues that is designed to shield the economy from fluctuations in commodity prices
       (generally referred to as a stabilisation fund such as the Abu Dhabi Investment Authority and the
       Norway Government Pension Fund). The term sovereign wealth fund can also refer to a fund set up
       by a government from the proceeds of sales of public assets to meet the needs of future deficits of the
       social security system or to contribute to intergenerational savings (such as Australia‟s Future Fund) or
       funds set up out of employee contributions to fund pension plans (such as the Denmark Social Security
       Fund).4

       State owned entities on the other hand are commercial entities that are owned by the government.

       Sovereign Wealth Funds tend to make portfolio investments or indirect investments through private
       equity funds whereas state owned entities tend to make more commercially strategic investments so as
       to gain synergies, economies of scale or otherwise supplement or support their commercial operations.

       1. Overview of Australia’s foreign investment regime




       1
         Edwin M Truman (August 2007) “Sovereign Wealth Funds: The Need for Greater Transparency and Accountability”,
           Peterson Institute.
       2
         Monetary and Capital Markets and Policy Development and Review Departments (February 2008) “Sovereign Wealth
           Funds - A Work Agenda” International Monetary Fund
       3
         International Working Group of Sovereign Wealth Funds Press Release No. 08/04 dated 2 September 2008
       4
         Blundell-Wignall, A. Y. Hu and J. Yermo (2008), “Sovereign Wealth and Pension Fund Issues”, OECD Working
           Papers on Insurance and Private Pensions, No. 14. OECD Publishing


 Mallesons Stephen Jaques                                                                                              2
9614885_2                    26 February 2010
       Foreign investment in Australia is regulated principally under the Foreign Acquisitions and Takeovers
       Act 1975, and by the Australian Government‟s Foreign Investment Policy.5

       The Federal Treasurer is ultimately responsible for all decisions relating to foreign investment and for
       administration of the Policy. The Treasurer is advised and assisted by the Foreign Investment Review
       Board (“FIRB”), which administers the Act in accordance with the Policy. FIRB is an administrative
       body with no statutory existence, and the Act makes no reference to it. However, the Policy confirms
       its role. All decisions by the Treasurer relating to a foreign investment proposal are underpinned by
       analysis and recommendations made by FIRB.

       The purpose of the regime is to empower the Treasurer to make orders in respect of proposals that
       ultimately are considered by the Treasurer to be “contrary to the national interest”. That is the test
       against which all proposals are assessed. There is no definition of the national interest and it is
       assessed on a case by case basis. In considering whether the national interest test is met, the Treasurer
       may impose conditions on the statement of no objection which the Treasurer considers necessary to
       protect the national interest. In the event that a condition is not complied with, this would be contrary
       to the national interest and would reactivate the Treasurer's powers.

       There are three key areas of Australia‟s foreign investment regime. These are acquisitions that require
       prior notification and “approval”6 under the Act, those that enliven the Treasurer‟s powers of
       divestiture under the Act and those that require prior approval under Policy.

       The requirements for prior approval for any investment by a SWF or state owned enterprise where the
       investor acquires less than 15% voting power or interests in shares is under the Policy, not the Act.
       The Policy has no legislative force, but adherence to its requirements is achieved in practice by a
       number of means, including by refusal to grant necessary ministerial or other approvals under other
       Australian legislation and by the prospect of on-going resistance from the Australian Government to
       the relevant investor, including the likelihood that future applications under Act might be refused.

       Prior approval under the Act

       Under the Act, foreign persons must seek prior approval to acquire control of 15% or more of voting
       rights, or to acquire interests in 15% or more of the issued shares in, an Australian company that has
       gross assets of A$100 million or more.7 Under section 26 of the Act it is a criminal offence to enter
       into such an acquisition without giving prior notification and obtaining a statement of no objections
       under the legislation. For the purposes of the requirement to seek prior approval an Australian
       corporation is one that is formed within the Commonwealth of Australia or an Australian Territory.

       Separately, the Act provides for a notification regime which is compulsory in respect to acquisitions of
       interests in Australian urban land for which there is no monetary threshold.8 However this paper is
       focused on the regulations applying to investments in corporations.

       Treasurer’s additional powers under the Act



       5
         The Foreign Acquisitions and Takeovers Act 1975 (Cth) will be referred to as the Act and the Australian Government’s
           Policy on foreign direct investment will be referred to as Policy.
       6
         Strictly speaking, what is obtained under the Act is a “statement of no objections”, however, I refer to it as an
           “approval” for the purposes of this paper.
       7
         Section 26 of the Act sets out the requirement to give prior notification and section 13A(4)(b)(ii) of the Act and
           regulation 5(2) of the Foreign Acquisitions and Takeovers Regulations 1989 (“Regulations”) provides an exemption
           where the corporation has gross assets of less than A$100m. For US investors a $913 million threshold applies
           (calender year 2008) except for prescribed sectors or an entity controlled by a US government - see Section 17E of
           the Act and Regulation 9 of the Regulations.
       8
         Section 26A of the Act.


 Mallesons Stephen Jaques                                                                                                  3
9614885_2                    26 February 2010
       The Act also gives the Treasurer power in certain circumstances to make an order prohibiting a
       proposed transaction, directing that a foreign person must not be in a position to control votes or hold
       interests in shares and, where the transaction has already completed, to direct a foreign person to
       dispose of shares.

       The Treasurer‟s powers apply to a broader range of acquisitions than is captured by the pre-approval
       requirement. However the powers will only be activated where the result of the acquisition is contrary
       to Australia‟s national interest.

       The Treasurer‟s powers extend to investments in prescribed corporations that carry on an Australian
       business9 and holding companies of such prescribed corporations10.

       The Treasurer‟s powers are enlivened if the corporation becomes controlled by foreign persons or
       there is a change in foreign control. Control by a foreign person is control of 15% of the voting power
       or 15% of the issued shares by an individual foreign person or control of 40% of the voting power or
       40% of the issued shares by foreign persons in aggregate11. A change in foreign control occurs where
       a corporation is already at least 40% foreign controlled in aggregate and there is a change to the make-
       up of those foreign holders, unless the Treasurer is satisfied that, having regard to all the
       circumstances, those persons are not in a position to determine the policy of the corporation.12

       A “prescribed corporation” includes offshore companies with certain Australian assets where the gross
       Australian assets of the company are valued at A$100 million or more and make up more than 50% of
       the company‟s global assets13 or an offshore company with certain Australian assets where the gross
       Australian assets of the company are valued at A$200 million or more.

       The Treasurer‟s powers may therefore be activated in circumstances where prior approval was not
       required.

       The Treasurer‟s powers also extend to transactions that give a foreign person control of a corporation
       through an agreement or amendment to a constituent document that results in the directors of the
       corporation being under an obligation to act in accordance with the directions, instructions or wishes of
       a foreign person who has a substantial interest in the corporation and where the result of that
       arrangement would be contrary to the national interest.14

       Under the Act the Treasurer also has powers to unwind certain transactions and arrangements that put
       foreign persons in a position to control an Australian business where the value of the businesses‟ total
       assets is A$100 million or more and the result of the acquisition is contrary to the national interest.15
       These powers are activated if a foreign person acquires assets from a business carried on solely by a
       prescribed corporation with the result that, in the case of a business not controlled by foreign persons,
       that business would be controlled by foreign persons, and the result of that acquisition would be
       contrary to the national interest such that the Treasurer would have the power to direct the foreign
       person to dispose of those assets.16 The powers are also activated if a foreign person gains control of

       9
         Section 7(1) of the Act provides that a reference in the Act to an Australian business is a business carried on wholly or
           partly in Australia in anticipation of profit or gain either alone or together with another person.
       10
          Section 18(1) of the Act. The concept of a prescribed corporation is much broader in scope than “Australian
           corporations” which is relevant to the prior approval test in section 26.
       11
          Section 9(1) of the Act.
       12
          Section 9(1)(b) and 9(2) of the Act.
       13
          Section 13(1)(g) of the Act provides that a foreign corporations whose Australian assets make up not less than one
           half of its gross assets is a prescribed corporation. Section 13A(4)(b)(ii) of the Act and regulation 5(2) of the
           Regulations provide an exemption for companies where the total assets does not exceed $100m.
       14
          Section 20 of the Act
       15
          Sections 19, 21 and 13A(4) and Regulation 5(3) and 5(4).
       16
          Section 19 of the Act.


 Mallesons Stephen Jaques                                                                                                       4
9614885_2                    26 February 2010
       such a business by entering into an arrangement relating to the leasing or other rights to use assets of
       that business, or relating to the participation in the profits or management of that business and where
       the result is contrary to the national interest.17

       The Treasurer is also empowered to make divestment orders in relation to acquisitions of urban land
       by a foreign person where the acquisition is contrary to the national interest.18

       Applications under the Act

       If a foreign person is required to obtain prior approval under the Act or if they wish to make an
       application under the Act so that the Treasurer‟s powers are de-activated, then the applicant must
       provide the Foreign Investment Review Board with certain information about the company and the
       target.

       Once notification of the proposed transaction has been lodged, the Treasurer has 30 days to make a
       decision and then ten days to notify of that decision.19 If the applicant has not proceeded with the
       transaction and no notification is given in that time, the Treasurer ceases to have power in respect of
       that proposal. However the Treasurer may make an interim order if more time is required to enable
       due consideration of the application.20 An interim order prohibits the applicant from proceeding with
       the proposal for a period of up to 90 days, after which the Treasurer has a period of ten days in which
       to notify of his decision.

       Prior approval under Policy

       Australian government Policy imposes additional restrictions on investments by foreign persons in
       sensitive sectors (such as banking, civil aviation, telecommunication, airports and airlines, shipping
       and media) as well as in relation to investments by foreign governments and their agencies.

       Prior to 17 February 2008, the government‟s published policy in respect of investments by foreign
       governments was that any direct investment by foreign governments and their agencies would require
       prior approval and that such applications would be dealt with on a case-by-case basis.

       Guidance on the issue was exceedingly brief:

                “All direct investments by foreign governments or their agencies irrespective of size are
                required to be notified for prior approval…This applies whether the investment is made
                directly or through a company that is owned 15 per cent or more by a foreign government.”

       The Australian Treasurer released a set of Guidelines for Foreign Government Investment Proposals
       on 17 February 200821 which purported to “enhance the transparency of Australia's foreign investment
       screening regime”.22

       In a speech to the Australia-China Business Council in Melbourne on 4 July 2008, the Treasurer made
       the following comments in relation to the Guidelines:

              “These guidelines were those used by the previous government; they are what we use too. They
              are not new..”

       17
          Section 21 of the Act.
       18
          Section 21A of the Act.
       19
          Sections 25(1B) and 25(2) of the Act.
       20
          Section 22(1) of the Act.
       21
          The Guidelines released on 17 February 2008 are attached in Annexure A.
       22
          Treasurer’s media release dated 17 February 2008.


 Mallesons Stephen Jaques                                                                                        5
9614885_2                    26 February 2010
       However many commentators consider that the release of these Guidelines indicates a shift in the
       government‟s approach.

       The Treasurer has refuted this by saying:

              “You will have heard, as I have, a couple of arguments about our approach to Chinese
              investment - broadly, that we have changed our policy to a more restrictive stance, and
              furthermore, are slowing down the processing of Chinese applications.

              I don't think either of these stand up when considered against the facts. I have approved a
              Chinese investment proposal on average once every nine days since coming into office. This is
              certainly not a slowing pace.”23

       In the Guidelines of 17 February 2008 the Treasurer said that proposed investments by foreign
       governments and their agencies are assessed on the same basis as private sector proposals and that
       national interest implications are determined on a case-by-case basis. The Guidelines then set out a list
       of six issues to which the government will have regard when considering whether a proposal by a state
       owned entity or SWF is contrary to the national interest.

       In understanding the potential reach of the pre-approval requirement for investments by sovereign
       wealth funds and state owned entities it is necessary to consider what is meant by “direct investment”
       and what investors would be considered a “foreign government agency”.

       What is a direct investment?

       There is very little guidance as to what constitutes a “direct” investment.24 It is clear that the size of
       the investment does not affect the requirement to seek prior approval25 however it is not clear whether
       the government would consider the term “direct” to extend to offshore investments in companies or
       funds that have assets or operations or other economic links to Australia. Debt structures that are
       considered “quasi-equity” are also likely to be treated by the government as a direct investment. 26

       What are foreign government agencies?

       For the purposes of the Act, a “foreign government investor” is an entity that is owned or controlled by
       a foreign government where the foreign government has an interest of 15% or more. However, the
       requirement that all investments by “foreign governments and their agencies” seek prior approval is
       under Policy, not the Act.

       The Guidelines of 17 February 2008 make it clear that foreign government agencies include sovereign
       wealth funds and state-owned enterprises27 and indicates that the policy would apply to investors
       owned or controlled by a foreign government.28




       23
          Speech by the Treasurer to the Australia-China Business Council in Melbourne on 4 July 2008
       24
          The FIRB website states that a “Direct Investment” is a “non-portfolio investment” however that is not reflective of the
           government’s approach in relation to investments by foreign government agencies. This definition is however
           relevant to investments in the sensitive sector of media where different tests apply to direct (being non-portfolio)
           investments and portfolio investments.
       25
          The Summary of Australia’s Foreign Investment Policy April 2008 lists as a category of investments that require prior
           approval “direct investments by foreign governments and their agencies irrespective of size”.
       26
          The Summary of Australia’s Foreign Investment Policy April 2008 notes that funding arrangements that include debt
           instruments having quasi-equity characteristics will be treated as direct foreign investment
       27
          The Guidelines state “Proposed investments by foreign governments and their agencies (e.g. state-owned
           enterprises and sovereign wealth funds (SWF)) are assessed on the same basis as private sector proposals”


 Mallesons Stephen Jaques                                                                                                           6
9614885_2                    26 February 2010
       Our recent experience suggests that in the current political environment the Australian government
       would take a broad view of what constitutes a foreign government agency and would look at decision
       making processes and other indicia of control rather than focusing only on the ownership of a
       particular entity.

       National interest considerations in relation to state owned entities and SWFs

       The interpretation of Policy is obviously fluid and is likely to be influenced by the sensitivity attaching
       to the sector in which the target company operates. As noted in the Summary of Australia‟s Foreign
       Investment Policy “The Government determines what is „contrary to the national interest‟ by having
       regard to the widely held community concerns of Australians.”29

       The Guidelines of 17 February 2008 set out the six issues to which the government will typically have
       regard when assessing whether a proposal by a state owned entity or SWF is contrary to the national
       interest. The six issues are the extent to which:

               an investor‟s operations are independent from the relevant foreign government;

               an investor is subject to and adheres to the law and observes common standards of business
                behaviour;

               an investment may hinder competition or lead to undue concentration or control in the industry
                or sectors concerned;

               an investment may impact on Australian Government revenue or other policies;

               an investment may impact on Australia‟s national security; and

               an investment may impact on the operations and directions of an Australian business, as well
                as its contribution to the Australian economy and broader community.

       The key point to note in relation to these Guidelines is that no guidance has been given by the
       government as to how their consideration of the national interest would be impacted by each of these
       factors and the extent to which each factor is or is not satisfied or to what level the government will
       need to be satisfied of each factor.

       While the International debate on the policy issues surrounding investments by SWFs tends to focus
       on economic risks raised by the participation of SWF‟s and in particular the lack of transparency in
       their operations, the issues raised by the Australian government are more focused on non-economic
       issues.

       2. Case Studies

       Chinalco and Rio Tinto

       On 1 February 2008, Shining Prospect Pte Ltd, a company incorporated in Singapore and a wholly
       owned subsidiary of Aluminum Corporation of China, known as Chinalco, acquired a 12% interest
       through market purchases in Rio Tinto Plc.


       28
          The Guidelines state “National interest implications are determined on a case-by-case basis. However, the fact that
           these investors are owned or controlled by a foreign government raises additional factors that must also be
           examined.”
       29
          Summary of Australia’s Foreign Investment Policy published by the Australian Government Treasury dated April
           2008 and available at http://www.firb.gov.au/content/_downloads/General_Policy_Summary_April_2008.pdf


 Mallesons Stephen Jaques                                                                                                      7
9614885_2                    26 February 2010
       Chinalco is a Chinese state owned entity.

       Rio Tinto Plc is a company incorporated in England and listed on the London Stock Exchange and is
       the English arm of the dual listed Rio Tinto Group.

       The Australian arm of the Rio Tinto Group is Rio Tinto Limited, a company incorporated in Australia
       with its primary listing on the ASX.

       The two listed Rio Tinto entities are separate legal entities with separate assets, share listings and share
       registers. The dual nature of the Rio Tinto Group is effected through a series of contracts and
       constitutional provisions which prescribe, among other things, joint voting arrangements, common
       board appointments and restrictions on control transactions unless the transaction relates to both the
       UK and Australian listed entities.

       By virtue of the dual listing arrangements, the two Rio Tinto listed entities are intended to operate and
       be managed as a single economic unit. In practice this is primarily effected through the voting
       arrangements of the two companies. Decisions that affect both companies are put to a joint decision
       such that the public shareholders of each of Rio Tinto Plc and Rio Tinto Limited effectively vote in
       aggregate.

       Chinalco‟s 12% shareholding in Rio Tinto Plc equates to an approximate 9% economic interest in the
       group.

       As has been widely reported Chinalco had legal advice that it did not require prior approval for an
       investment in Rio Tinto Plc up to 14.9% because it was acquiring shares in a company incorporated in
       England and listed on the London Stock Exchange. As reported by Jennifer Hewitt:30

                “Chinalco insisted at the time that the company did not need approval from the Foreign
                Investment Review Board because the shares it had acquired were those of a London-listed
                company. Chinalco's chief executive, Xiao Yaqing, told The Australian it submitted the proposal
                to the FIRB as ”an expression of goodwill”.

                The Government has never accepted this interpretation of law or politics..”31

       On 24 August 2008, the Australian Treasurer announced that he had decided not to raise any
       objections to Chinalco acquiring up to 14.99% of Rio Tinto Plc on the basis of two undertakings. In
       the words of the Treasurer:

                “First, Chinalco has undertaken to me that it would not raise its shareholding above this level
                without notifying and receiving fresh approval from the Government under Australia's foreign
                investment review arrangements. Second, Chinalco has also undertaken that it will not seek to
                appoint a director to Rio Tinto Plc or Rio Tinto Limited for as long as it holds a shareholding of
                below 15 per cent.”32

       Jennifer Hewitt commented that:




       30
            “Just one move in bigger game” The Australian, 25 August 2008.
       31

       32
            Treasurer’s media release dated 24 August 2008


 Mallesons Stephen Jaques                                                                                            8
9614885_2                     26 February 2010
              “..the practical impact of getting Chinalco to formally agree not to repeat a raid is limited,
              because Chinalco has already said it would not do so -- just as it has already said it would not
              seek board representation.”33

       Sinosteel and Murchison Metals

       Sinosteel launched a hostile takeover bid for Midwest Corporation Limited, a western Australian iron-
       ore mining company on 14 March 2008. This came following Sinosteel‟s acquisition of a strategic
       stake of 19.89% through on-market purchases beginning on 24 January 2008. It is understood that
       Sinosteel obtained FIRB approval to make the takeover bid at the time of seeking clearance for its
       initial investment in January 2008.34

       On 26 May 2008, Midwest announced that it had received a merger proposal from Murchison Metals
       Limited (a 9.2% shareholder in Midwest) to combine the two companies with Midwest being retained
       as the listed entity. Under the merger proposal Midwest shareholders would own 47.8% of the merged
       entity such that if Sinosteel was successful in gaining 100% of Midwest it would own less than 50% of
       the merged entity. Sinosteel expressed concerns with the merger proposal35. However as the
       transaction was to be structured as a reverse merger with Midwest retaining its ASX listing, only a
       50.1% approval by Midwest shareholders was required.

       A few days later Sinosteel increased its offer for Midwest and waived the defeating conditions36 and
       by 12 June 2008 Sinosteel‟s shareholding in Midwest had increased to 44%. On 7 July Murchison and
       Midwest announced that they were unable to get the support of Sinosteel and consequently the merger
       proposal was terminated.37 The Sinosteel offer closed on 15 September by which stage it had a
       relevant interest in 98.52% of Midwest shares and therefore moved to compulsorily acquire the
       remaining shares.38

       Sinosteel also lodged an application with FIRB39 to acquire a substantial shareholding in Murchison
       Metals. An interim stop was issued on 25 June40 prohibiting that transaction for 90 days while the
       government considered the application further. This occurred at the same time as speculation was
       growing that the government was considering imposing a 49.9% limit on investments by sovereign
       corporations and sovereign wealth funds.41

       Shortly after the close of Sinosteel‟s takeover of Midwest, the Australian Treasurer approved
       Sinosteel‟s application to acquire up to 49.9% of Murchison Metals.42 The Treasurer‟s comments

       33
          Chinalco’s Chairman, Xiao Yaqing said at a media conference in Sydney on 4 February 2008, that Chinalco did not
           have any plans to increase its stake in Rio Tinto and did not intend to make a bid for Rio Tinto or seek board
           representation.
       34
          Sinosteel’s Bidder’s Statement dated 14 March 2008 “The Australian Treasurer has already confirmed through FIRB
           that there is no objection to the Offer and accordingly the Offer is not conditional on FIRB approval.”
       35
          Sinosteel announcement dated 28 May 2008.
       36
          Sinosteel announcement dated 30 May 2008.
       37
          Murchison announcement dated 7 July 2008.
       38
          Announcement by Sinosteel dated 18 September 2008. Murchison announced on 11 September that it had
           accepted its 9.2% holding into the Sinosteel bid.
       39
          Malcolm Maiden suggested in the article “Swan and co tread a fine line in the China shop of progress” in the Sydney
           Morning Herald on 27 June 2008 that Sinosteel lodged the FIRB application for Murchison Metals in January 2008.
           Stephen Bartholomeusz suggested in his article “Swan's iron will” in Business Spectator on 27 July 2008 that
           Sinosteel had withdrawn and resubmitted the application.
       40
          On 25 June 2008, a section 22 interim order dated 16 June 2008 was published in the Commonwealth Gazette
           prohibiting Sinosteel from acquiring a substantial shareholding in or assets of Murchison Metals Limited.
       41
          Mid West ore merger hangs on Canberra” The Australian, 27June 2008 and “Swan and co tread a fine line in the
           China shop of progress” The Sydney Morning Herald, 27 June 2008.
       42
          The Treasurer’s media release dated 21 September notes that Sinosteel’s application to acquire up to 100% of
           Murchison had been withdrawn and that a revised application for up to 49.9% of Murchison was approved.


 Mallesons Stephen Jaques                                                                                                      9
9614885_2                    26 February 2010
       indicate that an application for more than 49.9% was originally submitted but would not have been
       approved and that in determining the effect on Australia‟s national interest the government as
       concerned to ensure “diversity of ownership” or iron ore in the Midwest region:

                “In approving Sinosteel’s application, I have determined that a shareholding of up to 49.9 per
                cent in Murchison will maintain diversity of ownership within the Mid ‑ West region. The
                Government considers the development of such potentially significant new resource areas
                should occur through arrangements that are open to multiple investors. This approach is
                consistent with the national interest principles we released in February and with the approach I
                have outlined previously, including in discussions with my Chinese counterparts.” 43

       Sinosteel‟s applications were both made pursuant to the Act (rather than Policy) as they both involved
       acquisitions of more than 15% of Australian companies however the national interest test is equally
       applicable to applications under Policy.

       3. Closing comments

       Applications under policy are not governed by the statutory process set out in the Act and therefore no
       time limits apply in respect of the government‟s response to such applications. Applications by
       foreign government entities are currently taking months to be considered.

       This leads us to consider the question of whether the Australian government is being protectionist or
       cautious. Where a recipient country imposes restrictions on foreign investment for national security
       reasons the OECD have determined guidelines that should guide governments in the design and
       implementation of such measures. These guidelines suggest that a recipient government‟s policy
       towards foreign investment should be transparent, predictable, proportionate, non-discriminatory and
       accountable.44




       43
            Treasurer’s press release dated 21 September 2008.
       44
            Minutes of Meeting of the Council at Ministerial Level, 4-5 June 2008, OECD Declaration on Sovereign Wealth Funds
             and Recipient Country Policies.


 Mallesons Stephen Jaques                                                                                                 10
9614885_2                     26 February 2010
       Annexure A

                            PRINCIPLES GUIDING CONSIDERATION OF
                    FOREIGN GOVERNMENT RELATED INVESTMENT IN AUSTRALIA

       Australia maintains a welcoming stance towards foreign investment in recognition of the substantial
       benefits that it provides to our community.

       The purpose of Australia's foreign investment screening regime is to ensure that foreign investment
       into Australia is consistent with our national interest. The Treasurer can reject proposals that are
       deemed contrary to the national interest or impose conditions on them to address national interest
       concerns.

       Significant foreign investment proposals must be notified to the Australian Government and examined
       by the Foreign Investment Review Board (FIRB). This includes all proposed investments by foreign
       governments and their agencies. This requirement is a longstanding feature of Australia's foreign
       investment policy that has been maintained in place by successive governments.

       While the FIRB plays an important advisory role, determining whether a proposal is consistent with
       the national interest is ultimately a matter for the Treasurer.

       To ensure they are consistent with Australia's national interest, the FIRB examines whether proposed
       foreign investments may have any adverse implications for Australia's national security or economic
       development and ensures they are consistent with any specific foreign investment legislation in areas
       such as transport and telecommunications. It also examines whether proposals have implications for
       other Government policies, competition and the operations of Australian businesses.

       If the Treasurer forms a view that a foreign investment would be inconsistent with Australia's national
       interest, it may be blocked or made subject to conditions to address any problems that have been
       identified.
       Guidelines for foreign government investment proposals
       Proposed investments by foreign governments and their agencies (e.g. state-owned enterprises and
       sovereign wealth funds (SWF)) are assessed on the same basis as private sector proposals. National
       interest implications are determined on a case-by-case basis.

       However, the fact that these investors are owned or controlled by a foreign government raises
       additional factors that must also be examined.

       This reflects the fact that investors with links to foreign governments may not operate solely in
       accordance with normal commercial considerations and may instead pursue broader political or
       strategic objectives that could be contrary to Australia's national interest.

       The Government is obliged under the Foreign Acquisitions and Takeovers Act 1975 to determine
       whether proposed foreign acquisitions are consistent with Australia's national interest. In examining
       proposed investments by foreign governments and their agencies, the Australian Government will
       typically have regard to the following six issues.

       1. An investor's operations are independent from the relevant foreign government.
           In considering issues relating to independence, the Government will focus on the extent to which
           the prospective foreign investor operates at arm's length from the relevant government.

           It also considers whether the prospective investor's governance arrangements could facilitate actual
           or potential control by a foreign government (including through the investor's funding
           arrangements).



 Mallesons Stephen Jaques                                                                                     11
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           Where the investor has been partly privatised, the Government would consider the size and
           composition of any non-government interests, including any restrictions on governance rights.

       2. An investor is subject to and adheres to the law and observes common standards of business
          behaviour.
           To this end, the Government considers the extent to which the investor has clear commercial
           objectives and has been subject to adequate and transparent regulation and supervision in other
           jurisdictions.

           The Government will examine the corporate governance practices of foreign government investors.
           In the case of an SWF, the Government would also consider the fund's investment policy and how
           it proposes to exercise voting power in relation to Australian companies.

           Proposals by foreign government owned or controlled investors that operate on a transparent and
           commercial basis are less likely to raise additional national interest concerns than proposals from
           those that do not.

       3. An investment may hinder competition or lead to undue concentration or control in the
          industry or sectors concerned.

           These issues are also examined by the Australian Competition and Consumer Commission in
           accordance with Australia's competition policy regime.

       4. An investment may impact on Australian Government revenue or other policies.

           For example, investments by foreign government entities must be taxed on the same basis as
           operations by other commercial entities. They must also be consistent with the Government's
           objectives in relation to matters such as the environment.

       5. An investment may impact on Australia's national security.
           The Government would consider the extent to which investments might affect Australia's ability to
           protect its strategic and security interests.

       6. An investment may impact on the operations and directions of an Australian business, as well
          as its contribution to the Australian economy and broader community.
           The Government would consider any plans by an acquiring entity to restructure an Australian
           business following its acquisition. Key interests would include impacts on imports, exports, local
           processing of materials, research and development and industrial relations.

           The Government would also consider the extent of Australian participation in ownership, control
           and management of an enterprise that would remain after a foreign investment, including the
           interests of employees, creditors and other stakeholders.




 Mallesons Stephen Jaques                                                                                       12
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