Don’t Veto FIRB
There has been a recent rise in the granting of a board position or veto right to a foreign shareholder (even where the foreign shareholder has a less than 20% interest). While their shareholding alone will not deem the entity a foreign person for the purposes of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), it is important to consider the ramifications of any veto right afforded to a board nominee of a foreign shareholder.
The FATA includes provision whereby if a person is in a position to veto any resolution of the board, central management or general meeting of an entity or unincorporated limited partnership, then for the purposes of this FATA, the person is taken to be in a position to control 20% of the voting power in the entity or partnership (Veto Provision).
As set out below, the Veto Provision does not apply to the transaction that grants the Veto Provision.
The Veto Provision impacts how the entity calculates potential voting power.
Where the board nominee has a right to veto a decision, they are taken to be in a position to control 20% of the voting power of the entity or partnership. For the purposes of FATA, that entity would be a foreign person and would then be required to consider the application of the FATA of any acquisition moving forward.
The Veto Provision would be of significant impact where the granting of the veto right is to a foreign government investor, as the threshold for requiring Foreign Investment Review Board (FIRB) notification is $0 for all acquisitions.
Section 47(2)(b) of the FATA) is where the acquisition entity is the first condition to acquire a substantial interest in an Australian entity. This means that the Veto Provision right will not deem that transaction a notifiable action.
Section 54.4 of the FAATA relates to a meaning of control.
A person controls an entity or business if:
The granting of the Veto Provision does not result in that transaction being a change of control.
For more information, please contact our Corporate advisory and governance team.