In our recent updates, we reported on:
The Government's announcement 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, and
The benefits of these changes for many New Zealand listed companies.
The government passed this legislation under urgency today, following submissions from interested parties and a short select committee process. The earliest that most of the key provisions will come into force is on 11 June 2020 (which would assume the legislation receives Royal Assent today). While most provisions of the Overseas Investment (Urgent Measures) Amendment Bill (the Original Bill) have not changed from what we reported on earlier, there have been some welcome clarifications in the final version of the legislation as passed. There have, however, also been some missed opportunities to clarify or minimise the burden of the regime.
New temporary notification requirement
As previously advised, the amendments introduce a temporary requirement that overseas investors notify the Overseas Investment Office (OIO) of acquisitions that are not already subject to screening under the Act in the following circumstances:
- NZ businesses: any transactions that result in an overseas person:
- acquiring an interest in a New Zealand business of more than 25%, or
- increasing an existing interest up to or beyond the thresholds of 50%, 75% or 100%.
irrespective of the value of the transaction, and
- Property: where an overseas person acquires more than 25% of the value of the seller's New Zealand business assets, also irrespective of the value of that transaction.
Where notification is required under this temporary regime, the relevant minister will assess whether the Proposed Transaction is “contrary to the national interest". If the minister determines it is, the minister may impose conditions on, prohibit, or order disposal of the investment. The key factors in the minister's assessment will be whether:
- the target is in financial distress, and
- the value attached to the target is fundamentally lower than would be the case absent the COVID-19 pandemic.
The scope of the temporary notification power has not changed substantially since the initial announcement was made and the Original Bill was released. However, we welcome the following changes and clarifications.
- Process for notification: the Original Bill would have established a burdensome regime for notifying transactions, including the requirement to provide a statutory declaration with all notifications. We are pleased to see that this requirement has been scrapped and we expect the notification process to be fairly streamlined: likely a short, online form.
- Conditions need not be imposed: the Original Bill would have required that conditions be imposed with any “direction order" (effectively the order that allows a transaction to proceed). The Act is now clear that a direction order need not have conditions. We expect few transactions will be subject to conditions.
- Publication: the Original Bill required ministers to publish all decisions on notifications. We are pleased to see that direction orders where no conditions are imposed (likely most of them) will not need to be published.
- 45-day review: the Act now includes a requirement for the minister to assess whether the temporary regime is capturing too many low risk transactions and consider an approach to address this issue. This is a sensible measure given the rush to impose the new legislation and its potential unintended consequences.
- Effect of “standing exemptions": we welcome the explicit direction in the Act that Regulations should be made to ensure that “standing exemptions" in the current Overseas Investment Regulations (which exempt very low risk transactions such as corporate restructures) will also exempt parties from the notification regime.
Regime for listed companies
As previously reported, the Act effectively (by way of a standing consent mechanism) treats New Zealand listed companies that fall within certain ownership thresholds as New Zealand persons. Bell Gully submitted that these ownership thresholds remained overly narrow and did not exclude a number of “fundamentally New Zealand" companies from being treated as overseas persons under the regime. Unfortunately, these submissions have not been taken on board and the thresholds as previously advised will apply. However, one welcome development in this regard is the inclusion of managed investment schemes within this standing consent regime (reflecting that not all New Zealand listed issuers are companies).
The Act includes some welcome clarity on the treatment of transactions entered into before the Act comes into force and those benefitting from the standing consent regime set out above:
- the temporary notification regime will not apply to transactions entered into before commencement (as above – expected to be 12 June) even if they have not completed,
- notifications can be given before a transaction is entered into and before the regime comes into force (to “get the clock running"), and
- the temporary notification regime will not apply to those New Zealand listed issuers that fall within the new ownership thresholds referred to above.
However, we are concerned that the transitional provisions relating to the broader “national interest" test have been left vague. In particular, these require that the national interest test will apply to “any other matters that relate to events or circumstances on or after commencement". It is not clear from this whether the amended Act (albeit not the notification regime) could apply to transactions that have already closed or how this could work in practice. We are seeking further clarity on this point from the government.
Changes to the “investor test"
The amendments to the Original Bill through the Select Committee process addressed many of the points that Bell Gully submitted on. However, in our view the government has missed the opportunity to clarify an important change to the Investor Test. From our perspective, while the simplification of the OIO's “good character" test is welcome, the list of matters that are said to reflect adversely on the character of an applicant remains unduly broad. In our view, matters such as civil pecuniary penalties issued against a company should have a minimum dollar threshold associated otherwise they risk capturing too broad a set of “misdemeanours". This has not been addressed through the Select Committee process.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
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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.