New Zealand’s overseas investment regime has become significantly more difficult and uncertain as a result of a High Court ruling the effect of which is to require the government to apply a counterfactual test to applications by foreigners to buy sensitive land.
At issue was an application from a rival New Zealand-based bidder to quash the consent given by Ministers under the Overseas Investment Act to an offer by Chinese company Shanghai Pengxin to buy 16 dairy farms put on the market by the receivers to the Crafar liquidation.
The Court directed both the Ministers and the Overseas Investment Office (OIO) as their adviser to reconsider their decision. The Judge indicated that the reconsideration need not take long and that, on the face of it, the OIO might simply recalibrate its existing recommendation.
In the event, the Ministers, after a reconsideration of the revised recommendation, reaffirmed the sale but the new interpretation of the Act applied by the Court in this case will affect future applications to the OIO.
The Act insists that sensitive land – a definition which includes any parcel of non-urban land greater than five ha - be offered first for sale to New Zealanders (in the case of farm land), that overseas owners have relevant business experience and acumen and that the acquisition will or is likely to provide a positive benefit to New Zealand as stipulated under section 17 of the Act, and regulation 28 of the OIA Regulations. The “sensitive land” definition is wide enough to capture urban commercial land situated adjacent to a public reserve, a factor which captures many commercial transactions on the OIO consent process.
It was on the ground of public benefit that the plaintiffs (the Crafar Farms Independent Purchaser Group) succeeded, arguing:
that the benefits attributed to the sale had been exaggerated as any buyer, including a domestic buyer such as themselves, would make the investment required to bring the land back into full production, and
that Ministers should measure the Chinese bid against a specific counterfactual – what would happen if the bid did not proceed.
This is a significant departure from previous practice.
The OIO has hitherto, and under successive governments, applied a “before and after” assessment which has required Ministers simply to establish that the proposed purchase meets the public benefit criteria in the Act.
What we have now is a “with or without” test which, in the Court’s words, will require assessing “for each claimed benefit, whether it is likely to happen absent the overseas investment”. Comparison against the status quo is not enough.
The Judge was persuaded to this view by the causal connection implied in the wording of the Act between the investment and the benefits. He noted that the legislation referred to “increased” processing, to “added” competition, to “additional” investment and to “the creation of new job opportunities”. And he drew particular attention to the reference in the Act to the retention of existing jobs “that would or might otherwise be lost”.
“The work assigned to the phrase that would or might otherwise be lost is that of insisting that the status quo will not serve as the counterfactual. Other factors do not specify that the benefit must be something that would not otherwise happen, but the drafter appears to have considered such language redundant, for each benefit speaks of something new, something that the investment will introduce or add. If the status quo might serve as the counterfactual for economic benefits, I can see no reason why the drafter singled out the retention of jobs for different treatment”.
The effect of this new approach to the requirements of the Act will be to create greater uncertainty and to add to the time and expense of the screening process. It will draw the OIO and Ministers into analysing alternative scenarios and to evaluating a bid against competing bids, or even hypothetical bids. It will also make it more difficult, and perhaps even impossible, to satisfy the benefits test for mature assets where there is limited scope to lift productivity, deploy new technology or create new jobs.
It could have been worse. Counsel for the Group argued that the OIO should apply the guidelines applied by the Commerce Commission to the consideration of business acquisition or merger applications, with benefits and detriments quantified as much as possible. Fortunately, the Court did not accept that “so disciplined an analysis” was demanded under the Overseas Investment Act.
But there is little other cause for satisfaction in terms of the implications for New Zealand’s regulatory framework from this litigation.