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Brief Counsel

Court of Appeal upholds Crafar decision

08 August 2012

The Court of Appeal yesterday cleared the way for Milk NZ, in association with Landcorp, to bring the Crafar farms back to full production. 

The Court’s decision should close the door on a campaign by the rival New Zealand bidders to overturn the deal and restores some much needed certainty to New Zealand’s overseas investment regime. 

It should invigorate New Zealand’s Free Trade Agreement with China and reinforce the upcoming celebrations to mark 40 years of diplomatic relations between New Zealand and China.

The context

Crafar Farms Independent Purchaser Group (CFIPG) took the appeal.  CFIPG is a consortium which itself wanted to buy the farms and had earlier applied for a judicial review of the Ministers’ decision to approve purchase by Milk NZ, a Hong Kong registered subsidiary of Shanghai Pengxin Group Co Ltd.

The earlier challenge in the High Court argued that the Ministers were wrong to consent to the purchase because it did not comply with the Overseas Investment Act in two respects:

  • the overseas investors, although successful business people, did not have any direct experience in the dairying industry so did not meet the “good investor test”, and
  • the benefits to New Zealand from the investment had not been assessed correctly, because the Overseas Investment Office (and, therefore, the Ministers) had applied a "before and after" approach, instead of a "with and without" approach – which would have focussed on what would happen if the transaction did not proceed. 

The High Court rejected the first argument but agreed with the second.  The Judge ordered the Ministers to reconsider their decision.  This they did, and again granted consent.

CFIPG then appealed the High Court’s interpretation of the good investor test.  The High Court had ruled that the language was “broad and flexible” and that the Act required only that the people connected with the offer collectively possessed the skills and expertise necessary to realise the promised benefits to New Zealand from the investment.

Important to the High Court’s conclusion was the joint venture agreement that Milk NZ had made with Landcorp.  Under the agreement Milk NZ was to be the financier and Landcorp was to manage the farms. 

Milk NZ had also commissioned an experienced farm management consultancy (Perrin AG Consultants Ltd) to prepare a detailed business strategy in relation to the properties.

The Court of Appeal decision

The Court of Appeal upheld the High Court’s decision on the good investor test.

It said that the principal shareholder of Shanghai Pengxin, Mr Zhaobai Jiang, was a very successful entrepreneur who had built a substantial Chinese and international business group from small beginnings.  It was true that Shanghai Pengxin had no background in dairying but:

“Recognising this, they did what would be expected of sophisticated investors, namely they ensured that Milk NZ obtained professional advice and entered into appropriate arrangements with persons who had industry-specific experience, in particular Perrin and Landcorp. 
Against this background, we consider that the Ministers were entitled to conclude that the controlling individuals have relevant business experience and acumen within the meaning of s 161(1)(a)”.

Chapman Tripp comments

Chapman Tripp has been directly engaged in this matter as advisers to Shanghai Pengxin on its OIO application.  We welcome the emphatic nature of the Appeal Court’s judgment and the clarity and certainty that it offers investors wishing to invest in New Zealand.  We expect that it will bring this long process to a successful conclusion.

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