The Overseas Investment Act 2005 (the Act) was intended to provide greater protection to “iconic” sites while ensuring a liberal foreign investment regime and reducing compliance costs where feasible. Currently, however, technicalities in the Act are preventing it from achieving the second and third of these objectives. Land Information New Zealand (LINZ) noted in its briefing to the incoming government that since the Act’s introduction, the number of applications for consent had “increased rather than reduced as originally predicted” and that there had been “a substantial increase in turnaround times.” It advised that the effect of these in combination was “reducing the attractiveness of New Zealand as a place to invest”.
The Overseas Investment Office (OIO) has recently proposed increasing its application fees to generate the resources to speed up its processes. But in our view more is needed. The Act itself, and the regulations supporting it, need to be amended to remove some of the unnecessary “clutter” which is giving rise to these problems.
The case for change
The shallowness of New Zealand’s domestic capital markets has meant that we have always had to rely on overseas investment and this makes us particularly vulnerable to the global credit squeeze. This is not an argument for jettisoning the protections in the Overseas Investment Act 2005.
The New Zealand public wants to be assured that sensitive land and assets with cultural, historical or strategic significance will remain in New Zealand ownership. But the OIO is also charged with monitoring “the flow of overseas investment needed to support New Zealand’s sustainable economic growth” and we need to be certain, particularly in the current business environment, that there are no unnecessary barriers within our regulatory framework which would frustrate this objective.
We are far from being able to say that now. Trivial or minor transactions which can never have been intended to come within the Act’s purview are being caught due largely to technical drafting issues. The resulting ‘red tape’ is creating significant additional costs and delays as well as stretching the resources of the Overseas Investment Office (OIO) unnecessarily.
Clients proposing a transaction that requires consent are generally surprised at the level of detail and effort required to get an application over the line and can be excused for coming away from the whole exercise suspecting that New Zealand does not welcome foreign investment.
If the goal set down in the Confidence and Supply Agreement between National and ACT of closing the income gap with Australia by 2025 is to be achieved, New Zealand needs to be more internationally competitive, including as an attractive investment destination for foreign capital.
Refining the Act to ensure that it applies only to transactions where there is a true national interest to be protected will be an important and low-cost way of enhancing that international competitiveness.
The Prime Minister has said that a key focus of the planned Summit on Employment on 27 February will be to look at “streamlining legislation that could hold up growth”.6 We suggest that changes to the Overseas Investment Act could be considered within this context.
This Counsel discusses a suite of proposals which Chapman Tripp has developed to improve the Act.
Application of the Act
The Act applies to transactions undertaken by an overseas person involving either $100 million or more or involving sensitive land (including land that adjoins sensitive land). The application of the Act gives rise to four issues:
- The broad definition of ‘sensitive land’ often captures trivial and unexpected transactions; for example where there is a tidal creek or murky stream at the back of a factory site or a commercial property adjoins a small park or a small access reserve.
- The 2005 Act introduced a new category of ‘special land’ which must first be offered to the Crown by the vendor before sale to an overseas person can proceed. There is a lack of clarity over what constitutes ‘special land’ and there are a number of flaws in the offerback procedure.
- The threshold for determining an overseas person under the Act is set too low. It applies to entities which are 25 per cent or more under foreign ownership or control. A 25 per cent holding in an entity does not represent a controlling interest.
- No specific account can be taken of the fact that the relevant business, asset, land or securities are being transferred by one overseas person to another. In itself, this is an example of the Act’s rigidity. There is little explicit scope for the OIO to exercise discretion around the statutory criteria, other than through the ultimate yes or no decision.
The definition of sensitive land
Section 37 of the Act requires the OIO to “compile and keep a list of reserves and public parks … for which the adjoining land is sensitive”. To date,that list has not been compiled even though the Act imposes a statutory obligation to produce it and Parliament clearly intended that not all reserves would be in the regime. In the interim, the OIO has given a broad definition as to the type of land that will fall under this section. This broad definition is less than helpful as it results in an interpretation of ‘sensitive land’ which often includes land of very low or trivial national interest, including commercial or industrial sites that would otherwise not be worthy of protection and could never have been intended to be protected by the Act.
Reform recommendations in brief
- Refine the definition of ‘sensitive land’ to capture only land in which there is a significant national interest.
- Refine the ‘special land’ offer-back procedure.
- Raise the threshold for ‘overseas person’ status to a more meaningful level than the current 25 per cent foreign ownership or control or – if that is considered inappropriate – provide for more exemptions under the Act.
- Clarify what constitutes ‘strategically important infrastructure on sensitive land’.
- Provide a class exemption for limited partnerships where the general partner is a New Zealander.
Restricting this list to specific parks and reserves, or those meeting defined criteria, would restrict the scope ofthe Act to cover land or assets which are truly sensitive and worthy of protection, lowering the administrationrequirements for all involved. At the very least, pending the list’s completion, the minimum area for adjacent parks and reserves which was in place before the Act’s introduction should be reinstated.
Commercial or industrial land should only be caught if that land is itself sensitive and should not be subject tothe Act where there is no significant national interest to be protected. This is particularly the case where theexisting and proposed uses of the land are consistent. In these situations land should be left to the constraintsprovided by district plans and the Resource Management Act 1991.
Refining the offerback procedure
There are a number of problems with these provisions.
The requirement that the offer-back is made by the existing owner of the land, rather than the proposed overseas investor, seems designed to make the sale to an overseas person of any land that includes ‘special land’ a very unattractive prospect for the vendor.
The purchaser’s application for the remainder of the land may not be processed until the fate of the ‘special land’ has been decided. This can take some time as there are no time limits imposed on the Crown to decide whether or not it will waive its acquisition right, or accept or reject the offer-back, until a rather convoluted valuation procedure has been completed.
This has led vendors and applicants to resort to arrangements where any compensation for special land is waived in advance of the Crown making its decision and artificial structures are put in place to allow the application to be processed and the offer-back procedure to be assumed by the applicant so that the vendor can remove itself from the process.
Chapman Tripp also questions whether the definition of ‘special land’ was meant to capture properties with a river boundary (as opposed to a river that runs through a property) because all that can be offered the Crown is a common law riparian ownership. As a number of properties do have river boundaries, the extra procedural compliance imposed on both applicants and vendors can delay the processing of otherwise straightforward sensitive land applications.
The 25 per cent ownership or control threshold for an ‘overseas person’ is very low and often has unintended consequences which frustrate policy objectives aimed at facilitating international investment in New Zealand. For example a New Zealand savings fund which receives 25 per cent of its funds from Australian investors (despite effective control remaining in New Zealand), is at a significant disadvantage:
- for investments in New Zealand it will be an overseas person and subject to the application of the Act, and
- for investments in Australia it is likely to be treated as a New Zealand entity for the purposes of the Australian Foreign Investment Review Board.
This truly represents the worst of both worlds.
If increasing this threshold is not considered appropriate, consideration should be given to simplifying and increasing the use of over-arching exemptions from the Act.
- Regulation 34 of the Overseas Investment Regulations (Regulations) enables amendments to Schedule 4 to exempt specific overseas persons from the application of the Act. An overseas person may be exempt if the entity is considered to be sufficiently “in New Zealand hands”.9 These types of exemptions should be more routinely contemplated to enable specific overseas persons (or classes of them) meeting particular criteria to be exempt from the general application of the Act.
- Discretion should be provided to the OIO to grant exemptions in specific circumstances without having to go through a formal regulation amendment process each time an exemption is granted.
These sorts of arrangements would free up resources for the OIO and would also benefit investors, who wouldneed to apply for consent only when absolutely necessary.
The newly introduced limited partnership regime would benefit from a class exemption in certain situations. A limited partnership is a separate legal entity (similar to a company) made up of passive investors (limited partners) and managers (general partners). One of the main purposes of the limited partnership regime is to encourage foreign investment in New Zealand.
However this purpose could be easily frustrated by the Act. Where more than 25 per cent of the limited partners are from overseas, even if the general partner (who has overall management responsibility) is a New Zealander, the overseas limited partners will effectively taint the whole entity, and the broad scope of the Act will mean it is likely to require OIO consent for many of its investments.
This would add significant time and cost to its operations and would cut against the purpose of the Limited Partnerships Act 2008 to facilitate international investment. Where the general partner is a New Zealander for the purposes of the Act, the limited partnership should be exempt from the Act.
In addition, one of the other main attractions of the limited partnership regime is that the limited partner (who is effectively a passive investor) can retain full confidentiality as to its identity. The Act however frustrates thisby requiring full disclosure of the details of all potential owners or beneficiaries of New Zealand assets. A limited partner would therefore be obliged to apply for full confidentiality of all of its details each time an application was required under the Act. Whether confidentiality can be maintained under the Official Information Act 1982 is always uncertain and is determined on a case by case basis as requests for information are made.
‘Strategically important infrastructure’
Against the backdrop of a contentious takeover proposal for Auckland International Airport, the previous government inserted Regulation 28(h) to provide that the OIO must consider “whether the overseas investment will, or is likely to, assist New Zealand to maintain New Zealand control of strategically important infrastructure on sensitive land”.
The amendment came into effect on 4 March 2008 and was immediately controversial because of the lack of clarity over which assets it was intended to protect. The provision of a clear definition regarding what constitutes “strategically important infrastructure on sensitive land” would boost confidence in New Zealand’s OIO regime.
Regulation 33, which outlines exemptions from the Act for particular transactions, may be producing some unintended outcomes, as set out below.
Regulation 33(1)(d) provides an exemption for an overseas person who acquires redeemable preference shares which are redeemable for cash only and do not entitle the holder to exercise any voting rights in the company except where a dividend payable is in arrears.
This exemption is arguably too narrow to be useful, particularly in light of section 117 of the Companies Act 1993 which protects shareholders by preventing a company from altering the rights attaching to shares without a special resolution of each affected interest group. The protection of these rights in the Companies Act makes it unlikely that redeemable preference shares would ever be issued with such limited voting rights as required for this exemption to be meaningful.
Regulation 33(1)(h) exempts the acquisition of property under a security arrangement from requiring consent under the Act. The intention of this is to exclude the need for consent in mortgage transactions. Recently, however, large banks taking part in securitisation transactions have had to apply for consent as the exemption did not clearly cover the transactions even though they were essentially secured funding transactions and, as such, fall outside the intended policy of the Act.
It has been Chapman Tripp’s experience that, when faced with these situations, the OIO has been generally understanding and sympathetic to the issues that arise. But the fact remains that technicalities in the Act require applicants to go through considerable time, cost and effort to obtain consent to a transaction which should never have been within the scope of the Act in the first place. Increasingly the New Zealand economy needs overseas entities to be able to deploy capital into New Zealand quickly. Although the Act provides some warranted patriotic protection, this has arguably been taken too far to the extent that it often hinders essentially New Zealand businesses from successfully growing and developing.
Chapman Tripp considers that there is a potential opportunity to achieve reform of the Overseas Investment Act as part of the government’s policy response to the economic recession and the international financial crisis. We will be raising these reform proposals with the government on behalf of our clients and urge businesses with an interest in the OIO regime to consider whether they wish to join this action or to make a separate submission. For further information, please contact any of our Corporate Partners or Principals.