The government has announced today that it is making urgent changes to the Overseas Investment Act (the Act) to protect New Zealand business assets amidst the economic fallout of the COVID-19 pandemic. This reflects similar moves in other jurisdictions, including Australia.
The changes will introduce a temporary requirement to notify the Overseas Investment Office (OIO) of all acquisitions of New Zealand companies or businesses not already subject to screening under the Act, irrespective of the value of the transaction. It will also accelerate parts of the Phase II reforms first agreed by cabinet and announced to the public in late 2019.
The changes are expected to be in force by mid-June.
New temporary notification requirement
The urgent amendments to the Act will temporarily apply a “national interest test" to all foreign investments that are not already subject to screening under the Act, regardless of dollar value, where those transactions result in more than a 25% ownership interest in a New Zealand business or business assets, or that increase an existing interest up to or beyond the thresholds of 50%, 75%, or 100%.
The temporary power will operate as a simple notification requirement, and will be reviewed every 90 days to ensure it remains in place only for as long as necessary. It is difficult to say how long this might be.
The notification process will require the acquirer to lodge with the OIO a short (two to five page) document setting out key details of the proposed transaction. The OIO will inform an investor within 10 working days whether it can proceed with the transaction or whether it will be referred for more detailed assessment. The government will seek to undertake any detailed assessments within 30 working days, although this can be extended by another 30 working days. The government anticipates that most transactions will receive a quick “no action" notification allowing them to proceed.
National interest test
In addition to the temporary notification requirement, a new national interest test will also apply to transactions that are already screened under the Act.
The guidance as to what constitutes acquisitions that are against New Zealand's “national interest" is at this stage relatively limited, although it is clear that it will give decision-making ministers “broad discretion". Factors that look likely to play a part in the assessment of notifications under the temporary powers include:
whether the target business is in financial distress, and
whether the value attached to it is fundamentally lower than would be the case absent the COVID-19 pandemic.
If investments are aimed at ensuring financial stability of a target company, this will be taken into account, but the government may impose conditions on a transaction to ensure that these benefits manifest.
Today's announcement still leaves a number of unanswered questions. In particular, it is not clear whether transactions that have already been signed, but are not conditional on OIO approval must be screened. Such a retrospective application of the rules could result in a large number of notifications being made where it is clear that deal drivers did not relate to COVID-19. This could also create unnecessary deal uncertainty.
Acceleration of parts of Phase II reforms
A welcome part of today's announcement is that the government will fast track some aspects of the Phase II reforms aimed at cutting unnecessary red tape. This includes carve-outs for “sensitive adjoining land", changes to the process for assessing “good character" and removing some fundamentally New Zealand companies from the need to seek OIO consent. These changes are long overdue and their acceleration is welcome.
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This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.