Overseas Investment

17 Dec 2010

Download this as a pdf

New Directives for Overseas Investment in New Zealand Farms

The Government released draft regulations and a Ministerial directive letter in relation to overseas investment in New Zealand farms on 9 December 2010. The regulations and directive letter are expected to come into effect on 13 January 2011. 

The changes were signalled by the Minister of Finance the Hon Bill English in September this year. The changes are designed to strike an “appropriate balance” between providing clarity and certainty for potential investors while recognising the “genuine public concerns around overseas investment in our productive land”.

In this FYI, we consider the following questions.

• What concerns does the Government hope to address with the new regulations and directive letter?
• What is the new ‘economic interests’ factor in the regulations?
• What is the new ‘mitigating’ factor in the regulations?
• What specific directions has the Minister given in the directive letter in relation to these new factors?
• What does all this mean for overseas investors looking to invest in New Zealand farms?

What concerns does the Government hope to address with the new regulations and directIve letter?

The directive letter explains how to interpret and apply the new regulations and identifies the Government’s concerns relating to:

• overseas investment in vertically integrated firms which involve production, processing and distribution of products from the land-based primary sector on a large scale, which may reduce returns to New Zealand; and
• aggregation of farm land by overseas investors which may not be beneficial to New Zealand’s economic interests.

To address these concerns, the regulations introduce two new factors to be considered by Ministers when assessing applications by overseas investors for consent to invest in sensitive New Zealand land - the ‘economic interests factor’ and the ‘mitigating factor’. These factors will now form part of the wider consideration of the likely “benefit to New Zealand” which must usually be shown in order to obtain consent.

The directive letter explains the Government’s policy approach to overseas investment in particular sensitive New Zealand land and explains the relative importance of the ‘economic interests’  factor and ‘mitigating’ factor, particularly in relation to investments in large areas of farm land.

What is the new ‘economic interests’ factor in the regulations?

The ‘economic interests’ factor allows Ministers to consider whether New Zealand’s economic interests are adequately promoted and safeguarded.

An overseas investor in farm land will be more likely to obtain consent if it can be shown that, as a result of the investment:

• New Zealand will become a more reliable supplier of primary products in the future;
• New Zealand’s ability to supply the global economy with a product that forms an important part of New Zealand’s export earnings will be less likely to be controlled by a single overseas person or its associates;
• New Zealand’s strategic and security interests will be enhanced; and
• New Zealand’s key economic capacity will be improved.

What is the new ‘mitigating’ factor in the regulations?

The ‘mitigating’ factor enables Ministers to consider whether the new investment provides for New Zealand involvement or oversight in the investment.

This means that the level of involvement of New Zealanders will have in the running of the investment will be scrutinised. All or any of the following will be considered:

• Whether there is or will be a requirement that one or more New Zealanders be a part of the relevant overseas person’s governing body (the “relevant overseas person” will usually be the person making the investment);
• Whether the relevant overseas person will be incorporated in New Zealand;
• Whether the relevant overseas person will have their head office or principal place of business in New Zealand;
• Whether the relevant overseas person will be a party to a listing agreement with NZX Limited or any registered exchange that operates a securities market in New Zealand;
• The extent to which New Zealanders will have any partial ownership or controlling stake in the investment; and
• The extent to which ownership or control of the investment is dispersed amongst a number of non-associated overseas persons.

What specific directions has the Minister given in  the directive letter in relation to these new factors?

In the directive letter, the Government has directed the OIO to give the ‘economic interests’ factor and the ‘mitigating’ factor “high relative importance” when determining whether overseas investment in “large” areas of farmland is likely to benefit New Zealand. In the absence of such a specific direction, the OIO may determine the relative importance to be given to each relevant factor when determining whether an investment will, or is likely to, benefit New Zealand. There are 19 other factors specified in the Overseas Investment Act 2005 and the Overseas Investment Regulations 2005.

The directive letter gives “ten times the average farm size for the relevant farm type” as an indicative guide of what would be considered “large”. The OIO is expected to publish data on average farm sizes to assist investors. The Government’s recent press release on the new guidelines provides some useful current figures which state that:

• the average dairy farm is 172 ha, so the threshold will be 1,720ha; and
• the average sheep farm is 443ha, so the threshold will be 4,430ha.

What does all this mean for overseas investors looking to invest in New Zealand farms?

Investors are not required to put in place measures, or respond positively, in relation to all aspects of the new factors in order to guarantee consent - there are 19 other factors taken into account when considering an application for consent. However, given the direction from the Minister that these factors are of “high relative importance”, failing to adequately address these factors in an application for consent to invest in large farms could seriously jeopardise an investor’s chances of obtaining consent.

Only time will tell exactly what the impact of these new guidelines will be. However, we think the following impacts will likely arise in the short term.

• Overseas investors in large farms will need to consider the impact of their investment on New Zealand’s economic position.
• There will initially be uncertainty about exactly how these guidelines will be interpreted and applied.
• The mitigating factor adds a new consideration into the mix when determining the optimal investment structure for an overseas investment in farm land. For example, it creates a bias towards establishing a New Zealand subsidiary, as opposed to, say, a branch of an overseas company.
• All of the above is likely to lead to increased time and cost to obtain OIO consent to invest in large farms in New Zealand.

Authors

Shelley Cave

Partner - Corporate & Commercial

DDI: +64 9 977 5260

Mobile: +64 21 660 090

Email:

View Profile

Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

Mobile: +64 21 446 866

Email:

View Profile

Don Holborow

Partner - Corporate & Commercial

DDI: +64 4 924 3423

Mobile: +64 29 924 3423

Email:

View Profile

Michael Pollard

Partner - Corporate & Commercial

DDI: +64 9 977 5432

Mobile: +64 21 400 852

Email:

View Profile

Peter Stubbs

Partner - Corporate & Commercial

DDI: +64 9 977 5010

Mobile: +64 21 955 230

Email:

View Profile

Stephen Ward

Partner - Corporate & Commercial

DDI: +64 4 924 3418

Mobile: +64 21 987 056

Email:

View Profile

Greg Allen

Senior Associate - Property & Infrastructure

DDI: +64 9 977 5164

Mobile: +64 21 534 464

Email:

View Profile

Craig Nelson

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5185

Mobile: +64 21 918 309

Email:

View Profile