27/05/2021·5 mins to read
Overseas Investment: Notification Regime ends, Reform process complete
The final tranche of the Government’s overseas investment reform programme is now in place, with the passing of the Overseas Investment Amendment Act 2021 (Amendment Act). The Government has also just announced that the compulsory notification regime will end on 7 June 2021.
We set out a summary of key elements of the Amendment Act and our thoughts on what this means for the Overseas Investment Act 2005 (Act) regime overall.
What you need to know
- The emergency notification regime ends on 7 June 2021, but will be replaced by the new ‘call-in’ power relating to strategically important businesses.
- The Amendment Act streamlines the overseas investment regime by: (a) introducing ownership/control thresholds, so that incremental investments not affecting control will no longer be screened; and (b) removing certain categories of land from the definition of “sensitive land”.
- Key statutory tests have been clarified, including the “benefits to New Zealand” test and the “national interest” test.
- New requirements relating to how fees are set have been introduced (these requirements are proposed in parallel to the OIO’s current consultation on fee structure).
- Most of the changes implemented by the Amendment Act apply to applications received on or after 6 July 2021, although the substantive changes related to the benefits test and the counterfactual will not apply for another 6-12 months.
- We think that these changes are positive, and will make the consent process simpler and easier to manage. However, given this has been touted as the last major reform of this legislation for some time, we had hoped more would be done to promote foreign investment at a time when it is much needed to stimulate our economy.
Emergency Notification Regime ends
The Emergency Notification Regime introduced under the Overseas Investment (Urgent Measures) Amendment Act 2020 will terminate on 7 June (but continues to apply to transactions entered into before that date).
A narrower national security and public order call in power (also set out in the Urgent Measures Act) will replace it. This call in power will enable the Government to screen investments in “strategically important businesses” - such as businesses involved in certain key infrastructure and media businesses with significant impact - that would not normally require consent under the Act.
Final shape of key elements of reform
The Amendment Act received Royal Assent on 24 May 2021. Some changes implemented by the Amendment Act will apply to applications received on or after 6 July 2021, with changes to the benefits test, counterfactual, stewardship responsibilities (special land), farm land requirements and advertising coming into force after 6 months to 12 months.
The Amendment Act makes the following key changes to the Act:
1) Investments that do not affect control will no longer be screened
The Act currently requires overseas persons to obtain consent before they may increase their interest in a sensitive New Zealand asset beyond 25%, regardless of the size of the increase or whether the increase will change the degree of control the person has over the asset.
The Amendment Act permits additional incremental investments up to ownership or control limits of 25, 50, 75 and 100 percent. This means, for example, that an overseas person who has an existing 25.1% ownership interest in a sensitive New Zealand asset may increase their ownership to 49.9% without requiring OIO consent.
An investment in a “strategically important business” is still subject to consent requirements (even if a control limit is not reached) if an investment would grant “disproportionate access to or control of” such a business (such as the right to appoint director).
SG Comment: This is a positive change that will alleviate a common frustration: the need to invest significant time and money in making an application for consent where the transaction will have no impact on control, and therefore has minimal relevance to the protection of New Zealand interests.
This will have the benefit of (for example) reducing the likelihood that overseas investors inadvertently contravene the Act (or that flexibility is constrained by the need for further OIO consent) because their percentage ownership of a New Zealand asset would incrementally change as a result of share issues, buy-backs or other capital raising initiatives.
The change will allow the OIO to continue screening material changes in ownership or control, while reducing the regulatory burden of minor and inconsequential changes. We think this will make the regime more user friendly and allow the OIO to focus its resources on transactions that better justify scrutiny.
2) Some land no longer considered “sensitive”
a) Leases of less than 10 years: Leases of non-residential sensitive land of less than 10 years will no longer trigger consent requirements. For residential leases the consent threshold remains a term of 3 years or more.
SG Comment: While we welcome this change, we are disappointed that the numerous submissions to increase the length of lease term did not result in the non-residential lease term being further extended. We consider that leasehold interests are an ideal way to encourage investment (and income for New Zealanders) without any long-term impact on foreign land ownership. 10 years is too short to support any significant investment into the land.
b) Land that adjoins sensitive land: Certain adjoining land, in particular, the difficult-to-interpret s37 reserves list, has been removed. This change already has legal effect since being introduced under the Urgent Measures Act.
SG Comment: While welcome this change also, we hope that clear guidance is issued on what needs to be reviewed to determine certain sensitivities in the new adjoining land categories.
3) Limited Partnerships and Managed Investment Schemes are now specifically included as overseas persons
The Act does not currently capture limited partnerships in the definition of “overseas person”. The Amendment Act inserts a provision clarifying that they are (and the circumstances in which they are) an overseas person.
The Amendment Act also introduces a standing consent for managed investment schemes that are fundamentally New Zealand entities (reflecting the temporary standing consent introduced under the Urgent Measures Act).
4) Clarification of three key statutory tests
a) Benefit to NZ only about benefits, not a holistic cost-benefit analysis
The Amendment Act makes changes to more clearly focus the ‘benefit to New Zealand test’ on the benefits of a transaction, rather than a holistic cost-benefit analysis. The statutory test is intended to achieve the same position as was reached in Coromandel Watchdog of Hauraki v Minister of Finance & Others.
The revised test:
- requires a comparison of the existing state of affairs at the time the transaction is entered into against the likely result of the overseas investment;
- still requires decision-makers to consider a prescribed set of benefit factors, but that list is shorter;
- introduces a requirement that those benefit factors must be considered proportionately to the sensitivity of the land and the nature of the transaction; and
- requires decision makers to deduct from any benefit arising under a factor any directly comparable negative impact of the investment (deductions must stop at zero), but does not permit decision-makers to deduct any non-comparable negative impact of the investment.
Examples are included to assist with the interpretation of that fourth point. For example, “if the overseas investment will result in an increase in jobs, but a decrease in export receipts, as compared with the counterfactual, the decrease in export receipts cannot be deducted from the benefit associated with the increase in jobs”.
SG Comment: We welcome the proposed changes to the benefit to New Zealand test, as they should simplify and clarify its application, while the national interest test ensures that the Government is still able to undertake a broader risk assessment in certain circumstances (see our further comments on this below).
However, we expect to see continued pressure for further reform. For example:
- The Green Party recorded its opposition to this change in the Select Committee report, stating that it prefers a broader holistic approach which would focus on net benefits to New Zealand (ie an overall judgement that weighs benefits, such as increased export receipts, against negative impacts, such as a loss of local jobs).
- Treasury’s March 2020 consultation paper on the reform considered a supplemental “no detriments” test, requiring only that the purchaser retain current benefits associated with sensitive land. This would reduce the risk of large, well-managed assets being stranded because a potential purchaser cannot demonstrate incremental benefit. This option was popular with submitters but ultimately not adopted.
- A level of uncertainty still exists through, for example, the new “proportionality” element of the test and the ability for Ministers to determine the relative importance of different benefit factors.
b) National Interest test - foreign governments / SIBs
The national interest test (in section 20A of the Act) is amended: (a) so that it applies automatically if a non-NZ government investor takes a more than 25% ownership or control interest in the relevant entity (up from 10%); (b) to clarify that the 25% ownership threshold that makes an entity a “non-NZ government investor” applies to the government of each country (not an aggregate of interests held by different governments); and (c) to provide for exemptions where there are appropriate limitations on the extent to which government control or influence could affect the pursuit of non-commercial objectives.
SG Comment: The changes have not addressed a drafting issue in section 20A of the Act. As drafted, section 20A(1)(d) provides that a transaction of national interest is one in which interests in “A” are acquired where A is “carrying on” the SIB. This suggests upstream SIB business acquisitions do not trigger national interest powers, which surely cannot be intended. In contrast, section 82 (call in transactions, as amended by the Amendment Act) applies where A is “directly or indirectly” carrying on a SIB, which more clearly applies to upstream acquisitions.
c) Overseas persons - narrowed application to NZ listed entities
The Amendment Act addresses a long-standing technical issue, where the Act captures fundamentally New Zealand listed issuers because they have a large proportion of overseas shareholders. These companies will no longer be “overseas persons” if they are more than 50% NZ owned with a diverse overseas ownership. A NZ-incorporated company listed on NZX will only be an overseas person if overseas shareholders cumulatively have a beneficial interest in 50% or more of the company’s securities, or where overseas shareholders who each hold a beneficial interest in 10% or more of the company’s securities can collectively (a) control the composition of 50% or more of the company’s governing body or (b) control the exercise of more than 25% of voting power.
d) Call in power - narrowed application and fix for offshore listed entities
The call in power referred to above, and established under section 53 of the Urgent Measures Act, will enable the Government to review overseas investments in “strategically important businesses”. The Amendment Act reduces the scope of that power by excluding from the definition of “overseas investment in SIB assets” transactions that result in only a low level of change in ownership or control (including by applying 25, 50, 75 and 100 percent thresholds).
In addition, under the replacement s82(2) provided for in the Urgent Measures Act, any change of ownership in an issuer listed on an overseas market carrying on (directly or indirectly) a SIB triggered the call-in powers. This is because new s82(2)(a)(ii) (which set a minimum 10% ownership or control threshold) previously only applied to issuers listed in NZ. Overseas listed issuers were subject to the “any ownership or control interest” threshold in s82(2)(a)(iii). Changes introduced by the Amendment Act extend the benefit of the 10% threshold in s82(2)(a)(ii) to overseas listed issuers.
5) Fee reviews
The Amendment Act seeks to ensure that overseas persons bear the true cost of the work involved in assessing their applications. This is achieved by: (a) requiring the Minister to conduct regular fee reviews; and (b) providing that fees may be set to meet any under-recovery in the preceding four financial years (to allow for a level of ‘fee smoothing’ over the fee review cycle).
This change is proposed in parallel to the OIO’s current consultation on fee structure. See our recent FYI on this here.
SG Comment: As noted in our earlier FYI, we think that changes to the way fees are charged will need to carefully balance the desire for a financially sustainable overseas investment regime with investors’ perceptions of ‘value for money’. Significantly increasing fees will also increase investor expectations that the regime will operate efficiently and provide certainty - including through practical consent pathways and criteria, clear fees and, importantly, improved timeframes for application processing.
Have the wider reform goals been met?
The stated goals for the reform programme were to ensure that:
- the risks posed by foreign investment can be managed effectively (including the heightened risks during the ongoing economic fallout from Covid-19); and
- high quality, productive investment could more easily proceed.
We think the changes introduced by the Amendment Act achieve an improved position on risk management. In particular, the introduction of tiered ownership/control thresholds to permit incremental investment, and relief for New Zealand listed issuers, means that the OIO can continue screening material changes in ownership or control while the regulatory burden on minor and inconsequential changes is reduced.
The changes to the investor test and simplification of the benefits analysis will certainly make the application process simpler and easier to manage. Removing certain land sensitivities is also a positive move.
However, given this has been touted as the last major reform of this legislation for some time, we had hoped more would be done to promote foreign investment at a time when it is much needed to stimulate our economy.