My research list

Loading My Research List ...

Save my research

Don't lose any of your research. Fill out the form below and have your research list emailed to you.

Register to receive our latest publications

Overseas Investment - what is “good character” and what happens if things change?

April 02, 2019


Partners Greg Allen, Robert McLean, Michael Pollard, Nick Wilson
Senior Associates Victoria Anderson, Tom Heard

Overseas investment

The High Court has recently given clear guidance on some of the key aspects of the Overseas Investment regime: what it means to be of “good character”, and what you can expect if you breach an overseas investment consent condition. 

High Court decisions in the context of the overseas investment regime are rare, and this was the first to deal with penalties, and so it’s worth exploring further.

What happened?

Agria Singapore received consents from the Overseas Investment Office (OIO) in 2009 and 2011, to acquire 50.22% of the shares in PGG Wrightson. Agria’s application for OIO consent required it to show that it was of “good character”, and both the consents were granted subject to the condition that Agria, and the individuals that control it, “remain of good character”. There is an obligation to notify the OIO if there is any change to the good character.

In 2016, the Securities and Exchange Commission (SEC) investigated Agria’s parent company - NYSE-listed Agria Corporation and its chairman, Mr Lai, in relation to alleged breaches of the Securities Exchange Act (US). The allegations included that Agria Corporation had concealed losses from investors through fraudulent accounting, that Agria Corporation had filed annual reports that materially misstated its financial position, and that Mr Lai engaged in a scheme to manipulate the price of Agria Corporation on the NYSE, including by making materially misleading statements. The NYSE initiated proceedings to delist Agria Corporation, which occurred in January 2017.

In December 2018 Agria Corporation and Mr Lai entered into a settlement agreement with the SEC, without making any admission of liability. It was agreed that Agria Corporation and Mr Lai, between them, would pay civil penalties to the SEC of US$3,400,000.  

In light of the SEC investigation, the OIO investigated the good character of Agria Singapore and Mr Lai. In December 2018, Agria, Mr Lai and the OIO entered into a settlement agreement, in which it was accepted that the alleged conduct was a breach of the good character conditions. Agria agreed to reduce its interest in PGG Wrightson to below 50% (from 50.22%), and the parties agreed on recommended penalties. The High Court was required to confirm and enforce the penalties (detailed below).

Clarification of “good character”

The Act does not state what “good character” means. The OIO provides the following guidance: a breach of the good character condition may occur where it is clear that someone has acted or done something which raises significant concerns about their character. Examples given by the OIO include that they: (a) could be unfit to hold the asset they have consent for, or (b) are likely to bring the country into disrepute, but there is little else. 

It was helpful therefore that the Judge set out some matters that she considered to be relevant to the assessment of character. In particular, she noted that:

  • good character should be assessed in light of the overarching purpose of the Act, that it is a privilege for overseas persons to own or control sensitive New Zealand assets; and
  • the OIO and Ministers are entitled to adopt a high standard in terms of their level of satisfaction that the good character requirement is met.  

The inference from the second point above is that the decision maker does not have to adopt the same standard in every case, provided that the standard is one which can be reasonably adopted in the circumstances. 

The Judge also reiterated the wording from the Overseas Investment Act that an assessment of good character must take into account all relevant matters, which includes any offences or contraventions (whether convicted or not), along with any other matter that reflects adversely on a person’s fitness to have a particular overseas investment. Provided that the criteria for consent are met, there is no residual discretion to decline a consent, and it must be granted.

What happens if you breach an OIO condition?

The OIO has a range of enforcement actions available to it depending on the type of breach, including formal warnings, compulsory divestment of sensitive assets or revoking consent. In taking enforcement action, the OIO will have regard to its strategic priorities and enforcement criteria.

In the Agria case, pecuniary penalties were the only enforcement action available to the OIO. The amount of penalties sought will be fact specific, but some general comments include the following:

  • Penalties must be determined by the High Court, noting that enforcement proceedings must be brought by the OIO.
  • The maximum pecuniary penalties available are the higher of: $300,000; three times any quantifiable gain; the cost of remedying the breach or the loss suffered by a person in relation to the breach.
  • The Judge made very clear that the purpose of penalties is deterrence. 
  • The size of the penalty will reflect the seriousness of the conduct in question.  
  • Also relevant will be whether the defendant admits liability, cooperates with the OIO and took steps to promote compliance.

Taking all of the factors into account, the Judge considered that the agreed penalties under the settlement agreement were appropriate, and ordered penalties of $100,000 for Agria and $120,000 for Mr Lai, plus additional costs of $30,000 to the OIO for monitoring and enforcement costs.

What to do?

The Judge regarded the nature and extent of the breaches by Agria and Mr Lai to be serious, and the penalties reflected this. However, breaches of OIO conditions can, and do, inadvertently occur. We suggest that you follow these steps to ensure that you don’t find yourself on the wrong side of the Overseas Investment Act:

  • Make sure you understand the conditions of consent, and have internal processes in place to ensure that you continue to comply with the conditions. 
  • If you become aware of a breach, notify the OIO as soon as possible, and cooperate with any investigation or line of enquiry. 
  • Demonstrate what you are doing, and have been doing, to promote compliance.

If you have any questions about the good character requirements, or the overseas investment regime generally, please get in touch.