Overseas Investment Into NZ: Key Law Changes articles
11 Jun 2020
OVERSEAS INVESTMENT INTO NEW ZEALAND – WHAT FOREIGN INVESTORS NEED TO KNOW
The Overseas Investment (Urgent Measures) Amendment Act 2020 was passed on 27 May 2020 and will come into effect on 16 June 2020.
Most of the measures were already part of the planned reform of the Overseas Investment Regime but have now been accelerated to protect New Zealand assets from risks posed by foreign investments during the ongoing economic fallout from COVID-19. The Government is particularly concerned that declining business values of productive firms and strategically important assets create the potential for overseas investors to acquire these without government scrutiny.
WHAT ARE THE KEY CHANGES?
The key changes are the introduction of the:
• Temporary Emergency Notification Regime for a wide range of investments in New Zealand businesses;
• National Interest Test for strategically important businesses and investments of foreign governments;
• National Security and Call-in Power for certain investments in strategically important businesses.
TEMPORARY EMERGENCY NOTIFICATION REGIME
The temporary notification regime is specifically aimed at addressing perceived risks arising out of the COVID-19 pandemic. It will be reviewed every 90 days and will be removed once the effects of the pandemic no longer have a significant impact on New Zealand. There is no clear definition as to when this might be.
Before this legislation, in relation to business acquisitions, overseas persons were only required to obtain Overseas Investment Office (OIO) consent if the value of the business assets being acquired exceeded NZ$100 million. As a result of these changes, overseas persons are required to notify the OIO if they are intending to enter into a transaction, regardless of its dollar value, which:
• results in a more than a 25% ownership interest in a New Zealand business;
• increases an existing level of control in a New Zealand business (i.e an increase of more than 25% interest to either a more than 50% or 75% interest or a 100% interest); or
• results in the acquisition of more than 25% of a New Zealand’s business’ assets (by value).
The notification requirement does not apply to investment in land unless it is a business asset that makes up more than 25% of the business’ assets. In that case it applies to all types of land and not only to ‘sensitive land’.
Once notified, the OIO will then assess whether the investment is contrary to New Zealand’s national interest and make a determination whether the transaction can proceed with or without conditions or whether it will be prohibited. The OIO will notify the investor within 10 working days whether the transaction can proceed or whether it requires a more detailed review.
If an investor fails to notify the OIO of the proposed transaction the OIO may order the investor to sell the investment and other penalties may apply.
For the duration of the COVID-19 pandemic and while its effects continue, Treasury has indicated that the following factors are to be considered:
• Whether the target business is in financial distress; or
• Whether the value deviates from the business’ fundamental pre-COVID-19 valuation taking into account positive externalities such as intellectual property, supply-chain linkages or international connections.
NATIONAL INTEREST TEST
The new Overseas Investment Regime provides the Government with a new permanent power to assess investments that already require consent, to consider whether they are contrary to New Zealand’s national interest. This test will automatically apply to:
• transactions where a foreign Government would hold a 10% or greater interest in the asset; and
• transactions that involve Strategically Important Businesses or “SIBs”.
Any other overseas investment for which an application for consent has been made can still be considered by the Minister as contrary to the ‘national interest’ and notified to the applicant.
SIBs include ports, airports, electricity, water infrastructure, telecommunications and media. The details are either defined in the Overseas Investment Act or in the Regulations. Treasury has already specified the businesses that will be considered SIBs. While this provides some degree of certainty Treasury has not provided details for all SIBs. No Regulations for example are intended for businesses that are involved in a strategically important industry that own or control high-risk critical national infrastructure.
Further uncertainty arises around what the Government will consider as being contrary to New Zealand’s national interest as this is not defined in the Act. The new Act grants the Minister responsible for the Act (i.e. the Minister of Finance) broad discretion to decide on a case by case basis.
However, the Government has published the following factors as generally to be considered under the ‘national interest’ test:
• Extent to which the investment poses risks to NZ’s national security, public order and international relations;
• Competition: Whether the investment grant the investor market power either within New Zealand (for example, significant market share in one business segment or ownership of a vertical supply chain) or globally (for example, if an investment may allow an investor to control the global supply of a product or service). This assessment is separate to any investigations by the Commerce Commission (the NZ government department responsible for anti-competitive behaviour);
• Likely impact of the investment on the New Zealand economy and society, and the extent to which any benefits to New Zealand are commensurate with the sensitivity of the asset being acquired. The existing benefit to New Zealand test will serve as a guide for this assessment;
• The extent to which an investment supports broader Government priorities and policy settings and New Zealand’s values and interests, and broader policy settings. This includes whether it will support thriving and sustainable regions or New Zealand’s transition to a clean, green and carbon neutral environment;
• Character of the investor: Assessing whether the overseas person is suitable to invest in New Zealand applying the existing (but now streamlined) “investor test”.
The Government has stated that the ‘national interest’ test is a backstop tool that will be rarely used, and only where it is necessary to manage significant risk. Regardless, it adds another level of complexity and uncertainty to the application process. Considering the broad power to apply the ‘national interest’ test, it is also likely that the Minister will use this power alongside the temporary emergency notification regime to assess all current applications against the ‘national interest’ test.
PERMANENT CALL-IN POWERS
The new Overseas Investment Regime further provides the Government with the power to review certain investments in Strategically Important Businesses that do not require consent, to consider if these investments create a significant risk to national security and public order. This permanent ‘call-in’ power will replace the Temporary Emergency Notification Regime once removed (see above). This permanent call-in power is considerably narrower than the temporary regime as its focus is on national security and public order rather than the broader ‘national interest’ considerations applicable under the Temporary Emergency Regime.
Other changes which will benefit overseas investors include:
• the removal of consent for low risk investments including changing the threshold for the definition of ‘overseas person’ for New Zealand listed companies from 25% to 50% ownership or control, and reducing the scope of what constitutes ‘sensitive adjoining land’;
• the simplification of the investor test, including amending the ‘good character’ test so that only serious proven matters and matters before a Court are to be considered. New Zealanders will no longer have to pass the test and repeat investors will only have to pass the test once. This change will reduce cost and time of application;
• Introducing timeframes for different types of investment to provide investors with more certainty in relation to the application process.
WHICH TRANSACTIONS ARE AFFECTED BY THESE CHANGES?
The new Act will apply to applications made on or after 16 June 2020. This means that where consent is required the investment will be assessed under the new laws regardless of when the transaction was entered into. Any transaction entered into before 16 June 2020 which would have required consent but no longer requires consent under the new law, if it has not been completed, can after 16 June 2020 proceed without consent.
The changes are not intended to apply retrospectively. It especially does not affect transactions for which consent has already been granted (provided the information supplied was correct and not misleading).
GET IN TOUCH
The changes will increase the scrutiny of a wide range of investments and the Overseas Investment Regime is highly technical and complex in nature. We recommend that any overseas person or non-New Zealand resident seeking to acquire a land or business interest in New Zealand seek professional advice. If you have any questions about these measures and require advice about how they may affect your business or any planned transaction, please get in touch.