Fast track for Overseas Investment Bill?

Associate Finance Minister David Parker told the Epidemic Response Committee last week that the Government was considering following other countries and expanding our screening regime to protect vulnerable industries from aggressive foreign takeover.

He did not say definitively how this would be done but an obvious mechanism would be to bring forward the new national interest test and call in powers in the Bill or to add additional criteria to the Overseas Investment Regulations.

Options to increase screening

Australia now requires approval for all foreign acquisitions, having reduced its monetary consent threshold to zero, and has increased its review timeframes from 30 days to six months.

And a number of European jurisdictions – including France, Spain, Italy and Germany – have moved to strengthen their screening regimes against the predatory purchase by foreign interests of distressed sensitive assets.

The New Zealand Government could go for a stop-gap solution, including:

• COVID-19 specific measures, likely similar in concept to the national interest test and call in power
• temporarily lowering the point at which the acquisition of “significant business assets” would require approval (currently $100m, higher for certain trade partners). This would increase screening, but not change the test for consent (which focuses only on financial capability and good character)
• regulate to insert additional factors for consideration when deciding whether to grant consent, although this would only apply to consents involving sensitive land and would not change the scope of transactions screened.

Other alternatives, engaging the Bill, are to fast-track:

• the national interest test and call-in power (which, on current timelines might not come into force until six months and 12 months respectively after the Bill obtains assent), or
• the entire Bill.

Option two would restrict the opportunity for Parliamentary scrutiny and could remove the opportunity for public submissions.

However, the Bill has already been widely consulted on preparatory to drafting and has presumably been subject to detailed negotiation with coalition partners – meaning that further substantial change will be very hard to achieve. And it contains much, particularly in the listed company sphere, that will assist New Zealand’s economic resuscitation.

Our pick

We think the Government will see the Bill as an instrument in the post-COVID remodelling of the economy that Finance Minister Grant Robertson is talking of, involving a new self-sufficiency with a bigger role for the State, and for domestic capital. This would suggest that:

• the Bill will be progressed under urgency, perhaps with special arrangements to allow further public input, and
• with fewer constraints around the exercise of Ministerial discretion in decision making. (We note that Treasury’s recommendation that the Bill specify the considerations Ministers take into account when evaluating the “national interest” has been ignored).

The Government is well aware that this will be a hard piece of legislation to revisit and that politics will reduce what future liberalising governments may be able to achieve so the strong preference will be to ensure the key changes are legislative rather than regulatory.

Listed company relief

The Bill would exempt NZX-listed entities from the definition of overseas person where:

• they are majority New Zealand owned (the ownership limb), and
• significant overseas shareholders, each 10% or more, (the control limb) together:
• hold less than 25% of the voting rights, and
• can appoint fewer than half of the Board.

KiwiSaver retirement funds will also be exempted.

Chapman Tripp comment

We think the control limb by itself is enough to address the anomaly that many fundamentally New Zealand entities are treated as overseas persons merely because of widespread foreign portfolio investment.

Retention of the ownership limb will likely preclude some iconic widely held New Zealand issuers such as Fletcher Building, despite it having no portfolio investor holding more than 10% of its voting rights.

It will also mean that the problems identified with monitoring levels of foreign portfolio investment in a listed company with tradeable shares will continue - compared to the simplicity of the “substantial product holder” approach in the Financial Markets Conduct Act 2013.

That said, the Bill is still a significant improvement over the current law and is long overdue.

We urge the Government to introduce the listed issuer exemptions as a priority, alongside any move to restrict predatory acquisitions. The current restrictions may constrain the ability of some New Zealand listed companies to raise the capital they need to weather the COVID-19 storm – which would be compounded if the thresholds were to be reduced, as in Australia and elsewhere.

NZX and the Takeovers Panel have already recognised this through the granting of class waivers and exemptions to facilitate capital raising until 31 October 2020.

Other moves toward liberalisation in the Bill

The Bill will increase the term of leasehold interests requiring consent and limit the categories of adjoining land that can trigger an approval requirement. These changes could facilitate beneficial investment, at the time it’s most needed, paired with the overall protection offered by the national interest test.

The new powers

The national interest test will apply to all transactions involving sensitive land, significant acquisitions of rural land, and any acquisition of a strategically important business (SIB), defined as businesses that:

• present national security risks (e.g., military or dual use technology), or
• are engaged in critical infrastructure (ports, airports, electricity generators and distributors, water networks, financial institutions/financial infrastructure), and
• media companies that impact on New Zealand’s media plurality.

More detail is to come in regulations.

The Government can also invoke the call-in power to scrutinise, block or impose conditions on transactions that do not otherwise require consent, including the acquisition of:

• SIBs or property (including goodwill and intangible property) of a SIB;
• 25% or more of the ownership or control of a strategically important media business, and
• 10% or more of the ownership or control of a non-media listed company or disproportionate control of a listed company (as defined in the Bill).

It can also be used to make a disposal order and/or recommend statutory management where a transaction has already occurred.

All national interest and call-in decisions are to be made by the Minister of Finance alone, rather than (as now) being delegated to the Overseas Investment Office or more junior Ministers.

Our thanks to Roger Wallis and Sebastian Templeton for writing this Brief Counsel. Chapman Tripp partner Tessa Baker is a leading expert on New Zealand Overseas Investment law and a member of the Overseas Investment Office’s Legal Reference Group. Because of this role, Tessa has not been involved preparing this Brief Counsel.