First published in The Property Lawyer, September 2016 edition.
New Zealand’s overseas investment regime has been in the media spotlight in recent times. While lobbying organisations and political parties closely scrutinise the decisions of the Overseas Investment Office (OIO), those in the investment community have raised concerns that the regime is overly burdensome and time consuming. Against this background, there have been a number of changes in process and regulation, with further changes in the pipeline, aimed at ensuring the regime is fit for purpose. This article provides a brief overview of the regime and then looks at some of the recent and impending developments.
Overview of the Act
The purpose of the Overseas Investment Act 2005 (the Act) is to acknowledge that it is a privilege for overseas persons to own or control sensitive New Zealand assets by requiring that they seek consent for certain investments. To achieve this purpose, the Act and Regulations contain restrictions on overseas persons acquiring interests in “significant business assets”, “sensitive land” and fishing quota.
The Act and Regulations confer a broad discretion on the Overseas Investment Office (OIO) or relevant minister to grant consent, with or without conditions, or to refuse consent to an application. The OIO operates under the Minister of Finance in all situations. In situations relating to land and fisheries the Minister of Land Information and the Minister of Fisheries respectively are also responsible. However many decisions are decided by the OIO itself under delegated authority.
Who is captured by the Overseas Investment Act
The Act captures “overseas persons” – those who are not New Zealand citizens or ordinarily resident in New Zealand, companies that are incorporated outside of New Zealand or companies or other entities that are 25% (or more) owned or controlled by an overseas person or persons.
The Act also captures
associates of overseas persons. The Act defines “associate” widely and the provisions are intended to regulate situations where investments are indirectly owned or controlled by an overseas person. The associate provisions therefore act as a way to identify those ultimately controlling investments (e.g. through agents, trust, business agreements, etc.) and as a general catch-all to prevent avoidance of the Act.
The application of the associate provisions has recently been in the spotlight with the High Court imposing a penalty on Australian-owned Carbon Conscious New Zealand Ltd (CCNZ) of $40,000 plus more than $6,000 in costs, for breaching the Act. CCNZ, an “overseas person” for the purposes of the Act, attempted to circumvent the need to obtain OIO consent by having a New Zealand associate buy the relevant land – and in doing so became a party to a transaction which resulted in an overseas investment in sensitive land without OIO consent.
The purchaser was an associate because of various contractual arrangements with CCNZ (including an option for CCNZ to acquire the land). According to the judgment “Katey LR Investments Limited was incorporated so as to avoid the need for CCNZ to obtain consent, and to disguise and distance CCNZ from the purchase of the property.”
Significant business assets transactions
Broadly speaking, if the proposed investment is expected to exceed NZ$100 million (whether by one transaction or through a series of related transactions) or the overseas person acquires 25% ownership/control of an entity with gross New Zealand assets exceeding NZ$100 million, then the investment will be considered an overseas investment in “significant business assets” and OIO consent will need to be obtained.
An exemption is available for certain Australian non-Government investors which increases the significant business assets threshold to $498 million.1 It is also expected that an exemption that would increase the threshold to $200 million for states that are a party to the Trans-Pacific Partnership Agreement will be introduced in the near future.2
To obtain consent for a significant business assets acquisition, the applicant must meet the “investor test”. This requires it to demonstrate financial commitment to the transaction and satisfy the OIO that the “individuals with control” of the “relevant overseas persons”:
- have business acumen and experience relevant to the transaction, and
- are of good character.
Recent developments in the good character test
The OIO’s good character test came under media scrutiny recently, following its decision to grant consent to an application by Rafael and Federico Grozovsky to acquire Onetai station in Taranaki which is sensitive land under the Act. The Grozovskys had previously been found criminally responsible for polluting a river in Argentina.
Following the media coverage, the OIO engaged Peter McKenzie QC to independently review the way the OIO assessed the “good character” requirement. Ultimately the report did not reveal any major flaws in the way the OIO is currently undertaking its assessment of “good character” and no major changes were recommended. Nevertheless, the OIO’s assessment of good character has already become, and will continue to be, subject to greater scrutiny and this has driven some changes in its approach to good character assessment that can have an impact on applications.
One significant development is the OIO’s approach to determining who are the “relevant overseas persons” and who are the “individuals with control” for the purposes of the good character requirements. Where previous practice may have been to stop at the level where the investment was made or one shareholding level above that, recent practice has been to reach right up to the ultimate controlling shareholder (either widely held companies or individuals are relevant). This can result in the OIO (and advisers) needing to undertake good character checks and obtain statutory declarations from a large number of “individuals with control” (e.g. the directors of many companies within the global group of companies).
In relation to the “good character” statutory declarations, the OIO has been going through an on-going process of determining acceptable wording for its good character statutory declarations. The OIO currently requires that a person declare that neither they, nor a company that they had a 25% or more ownership or control interest at the time, have ever committed an offence or contravened the law or otherwise disclose such instances. A strict interpretation would require that the person signing a declaration disclose every time they have ever breached any law (e.g. driving 51kph in a 50kph speed limit zone). While the argument may seem trivial, it is worth noting that signing an incorrect statutory declaration is a criminal offence in itself. The OIO has previously accepted a carve out from the declaration for such trifling offences, but has changed its practice in recent times.
The OIO’s most recent guidance suggests that parking, speeding or other traffic offences that did not result in a conviction being entered by a court do not need to be disclosed unless the person was disqualified from driving as a result of the offending. However, this raises a practical issue since, without a positive carve out for such offences, failing to disclose such matters would technically mean that the declaration would be false.
A practical issue for applicants is that if a person has anything to disclose, they must sign a personal statutory declaration, rather than have a fellow director sign on their behalf as part of a group statutory declaration. This can substantially increase the administrative burden on applicants. This issue becomes especially acute where the OIO requires good character declarations from the directors of overseas parent companies (who may be numerous and located in different places around the globe).
However, it is understood that work on this issue is on-going at the OIO and that further guidance could be released clarifying the OIO’s approach to these matters.
Sensitive land transactions
Broadly speaking, consent will be required for an overseas person to purchase or acquire an interest (for greater than three years) in land which is “sensitive”, either directly or through the purchase of securities in a company that owns land (with the overseas person owning or controlling more than 25% of the company) which, together with any associated land meets any of the thresholds set out in the Act.
Assessing sensitive land holdings is often a complex process. A number of consultancies and specialist lawyers are available to undertake sensitive land reviews. One of the frequent criticisms of the regime is that the requirement to obtain consent is often triggered by seemingly innocuous “sensitive land”. For example, a warehouse in an industrial estate could be considered “sensitive land” as a result of adjoining a small reserve or a mangrove area which is part of the “foreshore”.
If a sensitive land application is required, the applicant will need to meet the same criteria as for a significant business assets acquisition (see above) and prove “benefits to New Zealand” when compared to the counterfactual (i.e. the situation absent the Transaction).
As a result of the introduction of the “counterfactual test” and the recent Lochinvar decision, demonstrating benefits to New Zealand has been an increasingly complicated process in recent times. Combined with the greater rigour in relation to good character analysis, the OIO’s process has become much more involved.
Recent developments in the benefit to New Zealand test
When considering an application for an overseas investment in “sensitive land”, the OIO must be satisfied that the overseas investment will, or is likely to, benefit New Zealand (or any part of it or group of New Zealanders). If the relevant land includes non-urban land that either alone or together with any associated land exceeds five hectares, the benefit must be likely to be, “substantial and identifiable”. The OIO must make this assessment by reference to specified economic and environmental factors set out in section 17 of the Act and certain ‘other’ factors set out in regulation 28 of the Regulations.
The 2012 High Court decision of
Tiroa E and Te Hape B Trusts v Chief Executive of Land Information New Zealand3 substantially altered how benefits to New Zealand must be assessed. It determined that the OIO must use a ‘counterfactual test’ (also known as the “with or without test”) when determining whether the “benefit to New Zealand” criteria are satisfied. The formulation and application of the correct counterfactual has become a core element to any application for consent to acquire an interest in sensitive land.
The counterfactual test requires a comparison of what is likely to happen with the overseas investment, and what is likely to happen
without the overseas investment. It is only the additional benefits from the overseas investment that are relevant when applying the benefit criteria.
Accordingly, an applicant will need to undertake an analysis of what could reasonably be expected to occur if the transaction did not proceed. Matters that will be relevant to this analysis include:
- details of who might also be interested in purchasing the asset (and if they include a New Zealand purchaser, their intentions if they were to purchase the asset),
- if there is not an alternative New Zealand purchaser, what would a reasonably funded alternative New Zealand purchaser likely do with the asset, and
- the vendor’s intentions in relation to the assets in the event the transaction does not proceed.
The High Court in
Tiroa indicated that the status quo should only be used as the counterfactual if it is likely that the asset will remain in its current state in the hands of another owner.4 The
Lochinver decision also suggests that the OIO is unlikely to accept a “status quo” counterfactual without strong evidence. In that case the OIO did not accept the vendor’s argument that if the transaction did not proceed it would retain ownership of the property and continue to farm it in the current manner until an appropriate buyer could be found. It considered, including by reference to the vendor’s business strategy, that the vendor would instead sell to an alternative New Zealand purchaser.
The OIO may well undertake a very detailed analysis of the counterfactual. For example, in the
Lochinver decision the OIO engaged an economist who undertook an analysis to determine the likely counterfactual. This was based on a range of data, including previous farm sales, previous investment made into the conversion of farms to dairy and comparative land prices for beef and sheep farms compared to dairy farms. This also took into account factors such as climate and soil conditions, amongst others.
Where it is unclear what the relevant counterfactual is, the applicant’s lawyer may need to proceed to consider the benefits against both a status quo and a hypothetical well-funded purchaser counterfactual to avoid delays with the process.
Applications for consent to invest in non-urban land that is greater than 5ha must meet an additional requirement by showing that the benefit to New Zealand will be, or is likely to be, “substantial and identifiable”. The Ministers’ decision in relation to the Lochinver application has provided some recent guidance on how the “substantial and identifiable” test may be applied in the future. In particular:
- in the case of investment in the land itself, the Ministers were quick to dismiss benefits as not substantial due to the small size of the land to be developed in the factual compared to the counterfactual, relative to the total size of land (379ha out of a total 13,843 ha), and
- in the case of benefits to the New Zealand economy via increased export receipts and greater productivity, the Ministers’ view was that that due to the small size of the land and the relatively large size of the dairy and meat sectors as a whole, the benefits are unlikely to be substantial.
The second point above could have significant ramifications for all future applications involving non-urban land exceeding 5 ha (as the “substantial and identifiable” test applies to acquisitions of such land). It is difficult to see how any investment in non-urban land exceeding 5 ha could result in a “substantial and identifiable” benefit in the context of the dairy and red meat sectors. It is highly unlikely that one farm or even a portfolio of farms would have a material impact on the level of exports from New Zealand or the productivity of the industry as a whole.
The OIO has recently engaged consultants to assist it to produce guidelines dealing with these issues. Given the complexities that have developed in applying the benefits to New Zealand test, such guidelines will be most welcome.
Fee increase and processing timeframes
There is no statutory timeframe in which the OIO must complete its assessment. Instead, the OIO aims to complete its assessment based on target timeframes which vary according to the complexity of the application. There has been concern in the investor community that the timeframes have been long and unpredictable in recent times, which can have a major impact on transactions.
In July the OIO application fees were increased by between 8.7% and 166%. The fee for an application to invest in significant business assets increased to NZ$32,000 (a 143% increase), while the fee for certain sensitive land applications increased to NZ$43,500 (a 93% increase).
The Minister of Land Information, Louise Upston, has said that the increases to fees will enable the OIO to increase their staff by up to 25%, which will mean reduced assessment times and improved monitoring and reporting. No indication has been made of the magnitude of the decrease in assessment times that can be expected following the changes. However, the OIO has already begun recruiting additional staff, which should soon translate into shorter timeframes.
Opportunity to improve the regime
The Minister of Land Information, Hon Louise Upston has recently led a series of workshops aimed at improving New Zealand’s Overseas Investment regime. At the workshops, stakeholders were asked to provide feedback on ways in which the Overseas Investment Office (OIO) consent process could be improved and how regulations could be amended to better focus resources on investments that are truly “sensitive”.
Hon Bill English and Minister Upston have announced they are looking at targeted exemptions that include, in broad terms, exempting:
- acquisitions of leasehold farmland (where the cumulative duration of the lease is for a term of not more than 20 years) from the requirement to first advertise land on the open market,
- lease renewals from screening where a previously consented lease is being renewed or re-granted on the same terms and conditions, and the substantive ownership and size of the property in question is unchanged,
- transactions from one overseas person to another for specified land that is of a small scale, incidental to a larger global transaction and that has previously been screened,
- certain transactions where consent is required as a result of certain Public Works Act 1981 actions and consent has previously have been obtained to acquire the adjoining land, and
- overseas owned custodians who hold shares on behalf of New Zealand investors from the requirement for consent for those shareholdings only.
While the scope of the proposed exemptions is not yet entirely clear, an exposure draft of the amendment regulations is expected to be released shortly. These are certainly welcome developments, but also leave room for further improvement. To that end, it is expected that when consulting on these amendments, officials will also seek comment from interested parties on areas for further improvement. Some practitioners have already begun working with Treasury and LINZ officials to explore further amendments, but input from all of those involved with the overseas investment regime will be beneficial.
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.