Revamped overseas investment regime

On 7 June the COVID notification regime, always intended to be temporary, will be replaced with a permanent call-in power extending protection to strategically important businesses that would not otherwise require consent – e.g., involving the acquisition by overseas interests of military technology or critical national infrastructure.

Transactions entered into before 7 June will still be required to comply with the COVID notification regime.

Our comment

The Amendment Act concludes a broad reform exercise launched by Treasury in April 2019. That work was interrupted by COVID-19 last year, resulting in certain legislative amendments being accelerated and others being left to the Amendment Act.

We wrote at the start of the reform process that Treasury’s analysis of the flaws in the framework was spot on. While many of those have been resolved, there are in our view some missed opportunities which might have delivered some useful, and still outstanding, improvements.

We expect it will be several years before there is the political appetite to consider further significant reforms.

That said, many overseas investors will benefit from the recent changes. In particular, the Amendment Act will simplify the benefits test assessment and allow for investors to be approved ahead of an application for a specific transaction.

We outline the key changes from the Amendment Act below.

Benefits assessment

Currently investments into sensitive land are assessed against 21 “benefit to New Zealand” factors, a number of which are evaluated against a hypothetical scenario of what would occur without the overseas investment. In the majority of cases, this requires investors to demonstrate benefits over and above what a hypothetical, well-funded New Zealander would have done with the investment.   

The benefit factors will be refined down to seven broader factors. Benefits resulting from a proposed acquisition will be assessed against the existing state of affairs at the time the transaction was entered into, rather than against an hypothesis (as now). 

This is a welcome unwinding of the decision in the “Crafar farms case”¹. Benefits will also be assessed on a proportionate basis relative to the nature of the investment being made.

Changes to the benefits assessment will likely commence within six to 12 months.

Lease terms – now 10 years

The Amendment Act extends from three years to 10 years (including renewals) the threshold at which an overseas investor taking a lease over sensitive land, except for residential land, must obtain Overseas Investment Office (OIO) consent.  

However, as an anti-avoidance mechanism, calculation of that 10 year period must also take into account previous interests held by the overseas person, including any periodic tenancies between lease terms to calculate total lease term. 

Farm land

The Amendment Act introduces a new requirement that all investments in farm land be advertised in New Zealand before any agreement to sell to an overseas person is entered into (currently, advertising must only take place before ​such an acquisition is completed).

The rules apply to corporate transactions that may involve farm land and could prove to have a significant impact on the timing for entry into such transactions. 

But the Act provides for an exemption from the farm land advertising rules, which may be applied for independent of – or in advance of – a purchase application. Currently decisions on farm land advertising are only made when a proposed acquisition is being assessed for consent, creating a considerable risk to all parties. 

Changes to the farm land advertising rules will likely commence within six months. 

Incremental investments

Currently, overseas investors are required to obtain consent for any increase in ownership or control of sensitive assets (on an existing 25%+ stake), subject to a shareholder creep class exemption.

The Amendment Act removes the requirement to obtain consent unless the incremental increase results in a 50%, 75% or 100% ownership or control threshold being met or exceeded, or is an investment in a different class of securities.

Overseas investors will therefore have more freedom to execute minor increases in shareholdings without triggering a consent requirement.

Investor test

Currently, an overseas investor must meet the investor test (by reference to a set of statutory character and capability factors) each time they apply for consent. The Amendment Act provides that, once the test has been met, subsequent consent processes will only consider any changes that have occurred. This will be beneficial to repeat investors.

The Amendment Act also allows investors to be pre-screened against the investor test factors under a standalone application. The utility of this process (which could, in theory, benefit investors participating in bid processes who are new to the New Zealand market) will depend on the cost and timeframe that apply (both of which are currently unknown).

Other

Some other notable changes in the Amendment Act are:

• reducing the scope of the automatic application of the national interest test to consent processes (recognising that the existing framework has led to an over-capture of transactions that posed no national interest concerns)
• amending the permanent call-in regime (which will replace the temporary notification regime) to better target transactions that could pose a risk to New Zealand’s national security
• making permanent the changes to the treatment of listed issuers
• making permanent the removal of certain categories of sensitive land that is currently caught only because it adjoins low level reserves, and
• adding an ability to require by regulation that consent applications include prescribed information for tax purposes.

On the horizon

Although the Amendment Act brings the reform process to a formal conclusion, there remain several important developments on the horizon.

• A revised set of Regulations is being prepared which will introduce layers of detail underpinning some of the recent changes (for example, provisions relating to statutory timeframes, farm land advertising and tax information). We understand there is no intention to run any drafting or technical design workshops, or to release an exposure draft of the Regulations before introduction. This is unfortunate as these processes have proved effective in the past at reducing the risk of unintended consequences.
• The OIO’s fee review remains ongoing. The proposed fee structure released in February shows fees for some complex consent applications more than doubling or trebling from current levels.
• The streamlined forestry regime, introduced in 2018, is being reviewed by Treasury. This is not a “first principles” review interrogating the policy rationale for the regime. Rather it considers whether the regime is achieving its original policy intent. 

1 Tiroa E and Te Hape B Trusts v Chief Executive of Land Information New Zealand [2012] NZHC 147