As reported last week, urgent changes to the Overseas Investment Act (the Act) will accelerate some welcome changes to reduce the regulatory burden of the regime (while introducing urgent measures requiring screening of a broader range of transactions during the COVID-19 pandemic).
One key change, that we have advocated for some time, is a more sensible approach to when NZX listed companies are defined as “overseas persons". The Overseas Investment (Urgent Measures) Amendment Bill (the Urgent Bill) looks set to achieve this when it comes into force in mid-June 2020. However, disappointingly, the changes did not go as far as what we had previously suggested in our submission in response to the Treasury's earlier consultation paper.
Under the current regime, NZX listed entities that are 25% or more owned or controlled by one or more overseas persons are considered overseas persons. Because the shareholdings of all overseas persons are aggregated for this purpose, numerous listed companies are categorised as “overseas persons" under the current definition in the Act.
The Urgent Bill once passed will temporarily grant standing consent to NZX listed entities for any transactions that would otherwise have required consent under the Act unless:
The listed entity is more than 50% beneficially owned by overseas persons, or
Overseas persons each having a 10% or more beneficial interest in a class of the listed entity's voting securities cumulatively have a right to:
control the composition of 50% or more of the entity's governing body, or
exercise, or control the exercise, of more than 25% of the voting power at a meeting of the entity.
While this “standing consent" rule is temporary, it is expected to remain in force until a further amendment to the Act is enacted under the Overseas Investment Amendment Bill (No 3), likely within one year of the Urgent Bill coming into force. This further amendment will permanently change the definition of “overseas person" to exclude those NZX-listed companies that fall within the thresholds above.
Tipping point rules
The standing consent regime will also apply to so-called “tipping point" transactions. Currently, an overseas investor is required to obtain consent if, as a result of their investment, the target entity becomes an overseas person (for example, if the new investment tips the entity over the current 25% overseas ownership threshold) if the target entity has sensitive land.
Under the standing consent provisions of the Urgent Bill (to be replaced in due course with permanent legislation) such a transaction would only require screening if a new “tipping point" threshold is met. This would only apply if:
the overseas person making the investment already has a 10% or more beneficial interest in a class of the target's voting securities, or attains a 10% or more beneficial interest in a class of the target's voting securities as a result of the investment, and
the investor's interest in the target, combined with any other overseas persons who have a 10% or more beneficial interest in a class of the target's voting securities, cumulatively confer rights to control 50% or more of the target's board or more than 25% of shareholder votes.
This is a welcome change as it means that only investors holding or acquiring a material stake in a New Zealand listed company need to consider the application of the Act to their investment.
Status of KiwiSaver funds and other managed investment schemes
The other beneficial change to the definition of “overseas person" was expected to be a clarification that KiwiSaver funds and other managed investment schemes (MIS) were not defined as overseas persons where at least 75% of the investors in those schemes are New Zealanders. However, the draft legislation appears to retain an existing difficulty that defines MIS as overseas persons where they have an overseas person as the manager or trustee. It appears instead that changes to Overseas Investment Regulations will allow for certain exemptions for MIS. Some of these must be applied for, while others will apply automatically (specifically those relating to “qualifying retirement schemes").
In our view, the “fundamentally New Zealand" nature of MIS that are 75% or more beneficially owned by New Zealanders should be reflected in the primary legislation. Bell Gully will be submitting on the Urgent Bill requesting that it clarify that any MIS beneficially owned 75% or more by New Zealanders should not be treated as overseas persons, irrespective of whether the trustee or manager is an overseas person. This avoids unnecessary complexity in the regulations and the need for unnecessary exemption applications.
Exemption provisions for other fundamentally New Zealand persons
While the changes above are welcome, they do not cover a number of entities that are fundamentally New Zealand companies, but which do not meet these criteria (e.g., some New Zealand listed companies have a material Australian shareholder base and therefore do not meet the 50% New Zealand ownership threshold).
To this end, the Bill introduces a welcome clarification to the ability of the Ministers to grant exemptions for “fundamentally New Zealand entities". While the criteria for such an exemption is not set out (and will be subject to Ministerial discretion), we expect that there will be a number of strong candidates for such an exemption.
Importance of guidance
The proposed changes present various practical issues – in particular identifying the geographic location of beneficial owners and substantial product holders. Assuming that the changes are implemented as currently proposed, then it will be important that there is market guidance from the Overseas Investment Office addressing how to deal with these issues in practice.
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.
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.