Oct 2007

New Zealand's overseas investment regime was overhauled in 2005 with the introduction of the Overseas Investment Act 2005 (Act). Since the introduction of the Act, we have sought Overseas Investment Office (OIO) consent for overseas buyers (and helped New Zealand clients sell to overseas buyers) in relation to a huge range of transactions from complex business acquisitions through to property purchases. In that time we have confronted almost all of the intricacies of the Act.

The key lesson to pass on to buyers and sellers of New Zealand businesses and assets is that obtaining OIO consent can be a time consuming and involved process that requires careful planning and management to ensure that consent is obtained on time, on budget and on acceptable terms.

This FYI is intended to highlight the key practical issues that any buyer or seller of qualifying New Zealand businesses or assets must consider when planning any sale or purchase transaction.

When is consent required?

Under the Act, consent is required before an "overseas person" invests in "sensitive land", or "significant business assets" (Qualifying Investment), or fishing quota.

An "overseas person" includes an individual who is not a New Zealand citizen or resident and overseas companies. An overseas person also includes a New Zealand company or other entity with 25% or more foreign ownership or control.

If an investment includes the acquisition of an interest in "sensitive land", it requires consent. Sensitive land includes non-urban land areas greater than 5 hectares, or other land classified as sensitive due to its inclusion of, or proximity to, waterways, parks, conservation areas, islands, or areas of historic significance.

Leaving aside acquisitions of fishing quota, OIO consent is also required to invest in "significant business assets" where the overseas person is acquiring more than 25% ownership or control in an entity and the price paid for the shares or assets exceeds $100 million, or the entity is worth more than $100 million. Often investments in significant business assets will also include sensitive land.

Key Issues for Buyers and Sellers to Consider

Set out below are the key practical issues that any buyer or seller involved in a Qualifying Investment must consider when planning any sale or purchase transaction.

Timing: OIO consent applications might take a few days or many weeks to prepare and file with the OIO, depending on the availability of information and the complexity of the transaction. On its website, the OIO states that applications for consent take approximately 8 to 12 weeks to process. However, this is a rough guide only and timing depends on the complexity of the relevant issues. We have been involved in complex applications that have taken six months to process and simple applications that have taken as little as 5 weeks to process. The key message is that the deal timeline for any Qualifying Investment will need to allow sufficient time to prepare and file an application and obtain OIO consent.

Reverse Due Diligence: If a seller considers that the New Zealand business or asset that they are selling might be purchased by an overseas person, they should do some basic due diligence to determine whether an overseas person might need OIO consent before completing the transaction. This would include, as a minimum, determining whether:

• the $100 million threshold is met (see above);
• there is any relevant land that might constitute "sensitive land" under the Act (see above);
• there is any relevant land that might  constitute "special land" under the Act (see below); and
• there is any relevant land that might constitute "farm land" under the Act (see below).

Special Land or Waterways: If the Qualifying Investment includes foreshore, seabed, or a bed of a river or lake (ie. "special land"), the seller must offer that special land to the Crown. In our experience, in order for the process to proceed efficiently, sellers have gifted the special land to the Crown without surveying the land. Typically, offering such land to the Crown is not material to the business being sold (eg. the bed of a river adjoining a factory where the bed of the river is not material to the factory operations), but in some cases the terms upon which this offer back occurs will be very important (eg. The bed of a river running through a property where key business activities occur on, over and around the river). This offer back process must be completed between the seller and the OIO/Crown, before the decision on OIO consent is made. Therefore, wherever there is special land, there will be delays in the OIO process.

Farm Land: If the Qualifying Investment includes "farm land" (ie. land used exclusively or principally for agricultural, horticultural, or pastoral purposes, or for the keeping of bees, poultry, or livestock), then the seller must market that land in accordance with specific regulations in New Zealand for a minimum of 20 working days. This is designed to allow the New Zealand public the opportunity to purchase that "farm land" prior to concluding a transaction with an overseas person. It is important to identify this issue early and decide how to deal with it. This might include: marketing the property in the prescribed manner; entering into a sale contract with an overseas person subject to a condition that allows the seller to market and sell to a New Zealander in certain circumstances; and/or seek an exemption from the marketing regulations.

International Transactions: The Act can apply to offshore transactions between offshore parties where the transaction involves the transfer of 25% or more control or ownership of "sensitive land" or "significant business assets". For example, OIO consent would be required if a US company acquired all of the shares in a Canadian company which, in turn, had a wholly owned subsidiary in New Zealand that leased sensitive land. In such cases, overseas businesses and advisers are sometimes surprised to discover that the timetable of their offshore transaction (sometimes set before seeking New Zealand legal advice) is dictated by the OIO consent process in New Zealand.

Net Benefit: The key criteria for obtaining OIO consent where sensitive land is involved is to demonstrate to the OIO that the acquisition will result in a net benefit to New Zealand . In order to demonstrate this net benefit, the buyer must submit a business plan to the OIO that explains what benefits will accrue, when they will accrue and what impact those benefits will have on the bottom line of the business. Where the target business records are comprehensive and the purchaser has a clear business plan in mind, this process is relatively straight forward, but this process can be difficult if the target business records are limited and there has been limited planning and due diligence done by the buyer.

Areas of Significance: As part of the OIO application process, where sensitive land is involved, a buyer must provide detailed descriptions of any significant indigenous vegetation, indigenous fauna, wildlife, historic heritage and walking access on the property and explain what mechanisms are in place/will be put in place in order to protect and enhance those areas. Set out below are examples of mechanisms that we have encountered.

• A buyer entered into a conservation covenant to protect an area of native forest.
• A habitat of skinks was identified on a property and the buyer was required to enter into a management agreement with the Department of Conservation to protect and enhance that habitat.
• Consultation with Fish and Game led to specific walkways being identified and formalised on a property to allow fishermen access to rivers for fishing.

In some instances, these issues are easy to identify, but in other instances, a specialist report from an environmental consultant may be required to identify relevant issues and relevant protection mechanisms. Obtaining such a report may have a significant impact on the time and cost of obtaining OIO consent.

How is this relevant to me?

In the context of any Qualifying Investment, there are a number of requirements under the Act that have the potential to prolong and complicate a transaction. Although any given transaction may not require consideration of all of these issues, as a buyer or seller, it is important to be aware of the types of issues that can arise and to plan the transaction process and timetable accordingly.

This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.