A move intended to protect local businesses has had the unintended consequence of making many day to day transactions by foreign owned franchise systems subject to approval by the Foreign Investment Review Board.
Failure to comply can have serious consequences including massive fines and significant jail terms!
On 29 March 2020 the Government announced temporary changes to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act) with the intention of better protecting local businesses struggling from the effects of COVID-19 from being bought out by foreign entities.
The primary change reduced the monetary screening threshold for all foreign investment governed by the Act to $0. Previously, the threshold was $275m, subject to exceptions.
Which franchises are liable?
Many franchisors are either foreign-owned companies, or Australian companies with shareholders that are not ordinarily resident in Australia. These franchisors meet the definition of a foreign person.
Actions such as entering a buy-back of a franchise, exercising an option under a franchise agreement, or entering into a lease, where the franchisor is a foreign person could all be caught under the definition of significant action or notifiable action under the Act.
The financial threshold requirement previously excluded such transactions from requiring FIRB approval, but the decrease in the threshold to $0 now means these actions can be caught.
How to get FIRB approval
Franchisors must submit an application to obtain FIRB approval, with the accompanying fee, currently a massive $10,400. Presumably the application would be approved, but the cost is prohibitive for many transactions.
Ordinarily, FIRB is required to respond to an application within 30 days. However, the announcement on 29 March 2020 also increased the amount of time FIRB has to respond to an application to six months.
The issue has been drawn to the attention of the Franchise Council of Australia, which is endeavouring to have the law amended. In the meantime the law stands, and the substantial penalties potentially apply.
Franchisors that are fit the foreign person definition and which seek to undertake any buy-backs, enter into leases, vary contract or exercise options will need to ensure they apply for approval by FIRB under the updated foreign investment review regime.
Given the extension of the timeframe for a response, and the applicable fee, this could be a lengthy and expensive process.
Authors: Stephen Giles and Nick Rimington, Norton Rose Fulbright.
