Politics and pragmatism in new overseas investment regime

The Government had two objectives in the Overseas Investment Act (OIA) review – to clearly assert New Zealand’s right to maintain domestic control and ownership of sensitive and strategic assets, and to reduce the barriers to overseas acquisitions which will confer an unambiguous national benefit.

The reforms will deliver on the first objective and make significant progress toward the second – limiting the number of transactions captured by the screening regime, simplifying the application process and setting specific timelines for consent.

The new exemption for KiwiSaver funds and listed entities from being treated as an “overseas person” should take most NZX-listed issuers with only overseas portfolio ownership completely outside the Act, and will be particularly welcomed by the listed retirement village owners that were caught by the expansion of the Act in last year’s residential land reforms. We strongly support this exemption, and otherwise, generally welcome the changes but identify some areas for further consideration.

A phased release

Unusually, the Government has chosen to drip-feed its reform package rather than make a single, comprehensive announcement. The information has been released in three tranches: the Minister’s statement on 19 November, a Q&A document posted on the Treasury website, and presentations run by Treasury.

The relevant Cabinet paper, copies of submissions on the April consultation document, and copies of the Treasury presentations are expected to be published by Treasury before Christmas.

Although the national interest test and call in power have dominated the media attention, we consider that some of the most growth-positive effects will come from the new exclusion for listed entities that are majority owned and controlled by New Zealanders. This was identified as a priority in the Capital Markets 2029 road map, published in September.

Other changes have the potential to significantly reduce the number of transactions that will require consent – in particular, the large reduction in the types of land deemed sensitive because of what they adjoin.

​New rules​Simplifications​ Exclusions​Process/OIO

​National interest test for key assets and industries

Call in power (national security and media)

Additions to benefit test:

  • water bottling and environmental impact
  • stronger consideration of Māori cultural values
  • higher bar for farmland

Tax data provided to Inland Revenue

​Simplified investor test:

  • New Zealanders and repeat investors out
  • simplified good character test
  • corporate character test in

Modified benefits test:

  • proportionate approach
  • simplification of benefits
  • clarification of technicalities

​Fundamentally NZ entities:

  • listed entities and KiwiSaver funds
  • certain others on application

Tipping point investors

More flexible shareholder creep exemptions

Significant reduction in adjoining land

Leases under ten years (except residential)

​New Overseas Investment Office (OIO) powers:

  • can accept enforceable undertakings
  • can appoint a statutory manager in some cases
  • explicit injunction power

Fixed timeframes for different types of consent

Penalties up to $10m for corporates

Rationalised special land Crown offer process

Changes to farmland advertising requirements

National interest test

A national interest test will automatically apply, and will allow the Minister to block or impose conditions on transactions that require consent, where:

  • a foreign government or its associates would hold a 10% or greater interest in the relevant asset(s)
  • acquisition by a foreign investor would present national security risks, or
  • the proposed investment is in “specified strategically important industries and high-risk critical national infrastructure”. This includes: ports and airports, electricity generation and distribution, utilities (e.g. water and telecommunications), financial systems, media entities, and intelligence and defence.

The Minister of Finance will also be able to invoke the test, after notification to the prospective overseas investor/s, for “any other investments….that pose material risks”. How this discretion is framed with largely determine how arbitrary and obtrusive the national interest test becomes.

The onus will be on the Government to show that the transaction is not in the national interest, rather than on the applicant to demonstrate that it is.

Call in power

The call in power will allow the Government to scrutinise, block or impose conditions on transactions that do not otherwise require consent. It will be limited to investments by overseas persons and will be able to be invoked only in defence of national security or “public order”, which will relate primarily to the media and importance of media plurality.

The policy seems to be targeted at investments which fall below the $100m significant business asset threshold. It will apply equally whether assets are transferred between overseas persons or from New Zealanders to overseas persons. This broad application is limited by several factors:

  • it will be available to the Government only:
    • for media entities, above a 25% threshold
    • for other investments, above a 10% threshold, and
  • the Government must be able to demonstrate that the transaction is not in the national interest.

These limitations notwithstanding, the call in power is very broad and, in applying to any transactions by overseas persons that do not require consent, could introduce significant uncertainty and complexity. The legislative design of the call in power will be important as, if implemented poorly, it could discourage passive investments and capital raising.

Other known design features are:

  • investors in military or dual-use technology, or “critical” direct suppliers to defence or security services, will need explicit clearance prior to the transaction, and
  • investors can elect to notify the government of other investments within the scope of the call in power. Where the transaction is found to pose no risk, it will be shielded from future government intervention.

Simplifications and exclusions

Much of the package is directed to simplifying and expediting the consents process. We expand on the key simplifications and exclusions below.

The Government will also make minor changes to recent reforms relating to residential land, forestry and regulated profits à prendre.

Simplifications

Investor test

The investor test will be modified with the effect that:

  • New Zealanders will be exempt (now New Zealanders are caught when they are “individuals with control”)
  • repeat investors need only pass the test once, assuming no significant change in circumstances
  • the “good character” component will be replaced by a bright line test with a closed list of specific considerations (serious defaults, convictions and breaches of tax law, civil contraventions and allegations). The current open-ended “any other matters” discretion will be removed, and
  • a new “corporate character” requirement will apply, but only in limited circumstances. Decision makers will be empowered to consider offences and contraventions by, and allegations against, corporate entities.

Our view, as expressed in our submission, is that the corporate character test may be too subjective. However, the balance of these changes should streamline the investor test assessment.

Benefits test

A significant shift (not highlighted by the documentation available to date) is the introduction of a proportionality approach under which Ministers and the OIO will be directed to apply the benefits test in a manner proportionate to the sensitivity of the land and the interest being acquired.

This should assist investors at the bottom end of the screening spectrum but opens the door to high levels of scrutiny for applications for large parcels of particularly sensitive land.

The benefits test will be simplified by:

  • replacing the 21 factors for consideration with a smaller and broader set of factors
  • clarifying that only positive impacts may be considered under each factor (except in the case of water bottling)
  • replacing the counterfactual test with a requirement that benefits be measured against the status quo rather than against a (hypothetical) alternative buyer – a move away from the test set out in the Crafar farms decision.

Three additions have also been made to the benefits test, discussed further below.

Special land Crown offer requirements

The requirement to offer special land (foreshore, seabed, riverbed and lakebed) to the Crown will become mandatory across all consent pathways, and the process will be substantially improved.

Currently a vendor must offer special land to the Crown before selling to an overseas person. As the Crown rarely accepts such offers, this is something of a technicality but it can be time consuming due to Crown delays or difficulties in determining exactly which parts of the overall parcel constitute special land.

In future, the applicant/investor must only agree to register a right for the Crown to acquire the special land (for up to 10 years). There is no engagement by the vendor, and the exact boundaries of the special land need not be determined unless and until the Crown exercises its right after the investment.

New exclusions for “fundamentally New Zealand entities”

KiwiSaver funds and listed entities will be exempt from the definition of overseas person where:

  • they are majority New Zealand owned, and
  • significant overseas shareholders together:
    • hold less than 25% of the voting rights in the entity, and
    • can appoint fewer than half of the Board.

“Significant” for these purposes means those shareholders who individually hold 10% or more. This exception looks to have been made with mixed ownership model (MOM) companies in mind. The Public Finance Act requires that MOMs are at least 51% Crown owned and controlled, and prohibits other shareholdings of greater than 10%.

The fact of exemption from the definition of overseas person (rather than from the consent requirements in the Act) is important. It means a “fundamentally New Zealand” entity can invest in other entities without increasing those entities’ levels of overseas ownership.

Non-listed entities and managed investment schemes can apply for an exemption if they meet the criteria above, do not have significant foreign government backing, and have a record of compliance with New Zealand and foreign laws – i.e. checking that they have not broken any laws.

These changes effectively replace Schedule 4 of the Overseas Investment Regulations (exemption for New Zealand controlled persons), the use of which was arguably limited by the earlier amendments to the Act and Regulations in 2018.

Other exclusions will narrow the scope of transactions requiring consent
  • Tipping point transactions: overseas persons must currently seek consent where they acquire shares that, known to them or not, push overseas ownership in the entity beyond 25%. People who tip firms over the 25% threshold will no longer require consent so long as their overall shareholding remains below 10%.
  • Restructuring and small increases in shareholding: current exemptions allowing small increases in shareholding (“creep”) will become more flexible, including allowing users of the exemption to increase their shareholding any time (currently a five year limit following consent) and beyond the 90% control threshold currently in place. Changes will also clarify that certain exemptions are usable by upstream entities (e.g. during restructurings).
  • Adjoining land: only land adjoining the foreshore, lakebeds, the conservation estate, certain regional parks and some land significant to Māori will be deemed sensitive and require consent. This is a significant change not to be understated, and one Chapman Tripp has consistently advocated for. It will markedly reduce the number of transactions technically requiring consent.
  • Leases: leases of less than 10 years over sensitive land will be excluded (noting that back to back leases that cumulatively run for longer than 10 years are still caught). This is a change in the right direction but we consider 10 years is still too short and will capture investments which should not be subject to OIA screening. The three year limit for leases over residential land will continue.

Timeframes

Explicit timeframes for consent tailored to each type of application will be set out in regulations. Although the national interest test applies as part of the benefits test, a longer timeframe will be allowed when this extra test applies. Having explicit timeframes will provide welcome certainty to investors and help demystify the New Zealand regime.

The OIO will be allowed an initial period to review an application and determine whether more information is required before accepting it. Once the clock has started, the OIO will not be able to stop it and will be able to extend the timeframe only once, either for a prescribed period or as agreed with the applicant.

We note that the OIO is already working on methods to reduce processing times and to improve the process. That said, the dynamics of the relationship are such that we expect that, in practice:

  • the OIO will simply decline consent where timeframes expire and it is not yet convinced of the reasons to grant approval, and
  • applicants will want to agree to any extension the OIO requests, within reason.

Enforcement

The OIO will be given explicit powers to accept enforceable undertakings from investors who have breached the Act and to seek injunctive relief (e.g. urgent court orders to prevent a transaction). The OIO will also be able to appoint a statutory manager to ensure that firms meet their obligations. This power will only apply for matters of national security, where:

  • a mandatory notification should have been made, or
  • to avoid or remedy breaches of undertakings made or conditions imposed under the national interest test (including when it’s applied via the call in power).

Maximum civil penalties will be increased from:

  • $300,000 to $500,000 for individuals, and
  • $300,000 to $10m for corporates.
Tax information requirement

Investors will be required to provide information with their application on the structure of their investments and the proposed tax treatment. This will be shared with Inland Revenue to monitor New Zealand tax compliance.

Additions to the benefits test

Water bottling

Applications to extract water for bottling will be subject to the benefits test, including the impacts of the investment on water quality and sustainability, where (and only where) the acquisition involves sensitive land. This is an issue dear to the Green Party so may have been the price for their support for the reform package.

Farmland

The Ministerial Directive Letter to the OIO currently sets a higher bar for overseas persons seeking consent to acquire non-urban land over five hectares. This higher bar will move to be codified in the Act, but only for farmland, not the wider non-urban land category. The effect of the directive has been to virtually shut the door on overseas investment in farmland and this change will cement that position.

The higher bar benefits test will apply even where overseas investors seek to acquire farmland for conversion, such as for new residential developments. However Treasury is investigating further options for flexibility in scenarios like these. The Government will also make tweaks to the requirements to advertise farmland before selling to an overseas person.

Māori cultural values

The Government plans to make explicit that decision-makers can take into account an investor’s plans to protect certain areas culturally important to Māori, and support access to land for the stewardship of historic heritage or a natural resource.

Next steps

The Government intends to introduce an Overseas Investment Amendment Bill implementing the changes in “early 2020” and to pass the Bill into law before the election.

Unlike with some previous amendments to the OIA, there is no intention to run any drafting or technical design workshops, or to release an exposure draft of the Bill before introduction. This is unfortunate as these processes have proved effective in the past at reducing the risk of error.

We’d be happy to assist if you have any questions about how the changes may impact you, or require assistance engaging with Treasury and the Government during this drafting and the coming legislative phases of the review.

Our thanks to Sebastian Templeton for writing this Brief Counsel.

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Related topics: Foreign investment; Overseas investment; Property & real estate; Corporate & commercial

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