Overseas Investment: New investor test to come into effect on 22 March 2021

18 February 2021

Cabinet has announced today that the new “investor test”, introduced as part of a rang​e of measures in the Overseas Investment (Urgent Measures) Amendment Act 2020 (the Amendment Act), will come into effect 22 March 2021. 

The changes are designed to create clarity for overseas investors who require Overseas Investment Office (OIO) consent and minimise their compliance costs.

The OIO will now assess investors against 12 prescribed character and capability factors, rather than a broad, and somewhat ill-defined, set of criteria under current processes. This is a welcome move given the burdensome and unwieldy ap​​proach that investors currently experience. However, there are a few aspects of the new regime that could still cause investors some unnecessary difficulties.

Current investor test – a​ssessing “good character”

The current investor test is comprised of four key investor criteria: business experience and acumen; demonstrated financial commitment; good character; and absence of ineligibility under the Immigration Act. The OIO cannot grant consent unless the applicant has met each of these four criteria.

The OIO applies its good character criteria to the key individual investor or key personnel within the acquirer’s corporate group or fund structure who may have control or decision-making roles in relation to the investment. Together with any offences and contraventions of the law, the current test requires these individuals to disclose “any other matter that reflects adversely” on the individual’s fitness to have the particular overseas investment. This can include wholly unfounded allegations disclosed through internet searches (using OIO-specified search strings) and the need to explain any “hits” on the ICIJ “Wikileaks” database.

The current open ended regime often results in the OIO and investors spending a significant amount of time identifying and considering irrelevant matters and unsubstantiated allegations. This results in disproportionate compliance costs, particularly in large, corporate transactions.

The new regime aims to address these issues through limiting how character is judged to 12 prescribed criteria, rather than requiring explanation of spurious allegations or law suits disclosed through internet searches. It also removes the ‘business experience and acumen’ and financial commitment criteria, which were of little practical benefit to the consent process.

New investor ​​test – “character and capability”

The purpose of the new investor test is to determine whether investors are “unsuitable” to own or control any sensitive New Zealand assets, by assessing whether they are likely to pose risks to New Zealand, based on 12 factors relating to their character and capability.

  • The new character factors include convictions resulting in imprisonment, corporate fines both in New Zealand and overseas, and being ineligible to come to New Zealand.
  • The new capability factors include prohibitions on being a director, promotor, or manager of a company, penalties for tax avoidance or evasion, and unpaid tax of NZ$5 million or more.

Investors “pass” the new test when none of the 12 factors are established or, if a factor is met, the decision-maker is satisfied that this does not make an investor “unsuitable” to own or control a sensitive New Zealand asset.

When will the new test​​ take effect​?

The new investor test will apply where the overseas investor:

  1. has submitted a consent application before the test comes into force and has not entered a transaction to buy the asset concerned, or
  2. submits a consent application after the test comes into force.

The new investor test will apply to the same consent pathways as the current test (i.e., all consent pathways, with some exceptions for residential land). However, individuals who are not overseas persons do not need to meet the new investor test (a welcome change from the current situation where New Zealand directors of overseas entities must still go through the good character test).

A welcome development with ​​some outstanding issues

We welcome these developments which we expect will make the OIO consent process faster and easier for investors. However, there are some outstanding issues with the new investor test, which we have previously highlighted in our submissions on the Overseas Investment (Urgent Measures) Amendment Bill:

  • The new investor test still retains a degree of subjectivity, because the test does not define what “unsuitable” means or how it will be assessed if an investor “fails” one of the 12 factors.
  • There is no monetary threshold for fines or civil pecuniary penalties causing an investor to “fail” those factors. Fines and civil pecuniary penalties can vary greatly in quantum and can occur as a result of strict liability offences (i.e., without intention).
  • The developments have clarified how the new investor test will apply to historical breaches by a New Zealand company that subsequently becomes an overseas person (we argue that these should be ignored).

However, despite these issues, the new investor test provides much needed clarity for overseas investors about the types of behaviour the New Zealand Government considers to indicate potential risks to New Zealand from overseas investments. To that end, we expect investors will find the OIO process to be less of a “pinch point” when undertaking acquisitions in New Zealand.

If you have any questions about the matters raised in this article, p​lease get in touch with the contacts listed, or your usual Bell Gully adviser.​

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.