On 16 April the Government launched its public consultation document on the 'second phase' of its Overseas Investment Act 2005 (the Act) reforms (as foreshadowed in our announcement late last year).
This second round of reform is focused on ensuring New Zealand remains an attractive destination for high-quality productive overseas investment and ensuring such investments are in the national interest by:
- reducing unnecessary complexity and ensuring compliance costs are proportionate to the risks associated with the investment; and
- examining ways to better ensure that overseas investment is consistent with New Zealand's national interest.
Bell Gully is pleased to see the Government undertaking such a comprehensive review, having previously advocated for a number of the proposals that the Government is considering. The consultation includes issues relating to land that adjoins sensitive land, the treatment of NZX-listed companies and fundamentally New Zealand entities, and exemptions for small ownership interest changes.
The second phase of reform follows the changes made to the Act in late 2018 which simplified forestry investments and banned the purchase of residential property by overseas persons.
Below we take a brief look at the key areas and issues that the Government is considering as part of its public consultation. Details about the proposed changes being considered can be found in the full consultation document here.
Bell Gully is in the process of preparing to submit a written submission responding to the public consultation document and welcomes input from its clients and interested persons in the business community prior to 24 May 2019.
Area 1: What assets require consent?
Treasury is reviewing whether it is appropriate to:
a) continue to classify land that adjoins land with sensitive characteristics as "sensitive"; and
b) whether the three-year lease threshold for a relevant "interest" in sensitive land is too low.
Bell Gully would welcome changes to both of these matters as they currently result in a number of transactions requiring OIO consent that, on their face, do not impact the ownership or control of "sensitive" New Zealand assets.
Area 2: Who needs consent?
To improve the Act's efficiency, Treasury is reviewing whether it remains appropriate for certain body corporates to fall within the definition of "overseas person", as well as other quality of life changes relating to technical consent triggers. Specifically, it is considering the Act's treatment of:
a) companies with strong connections to New Zealand (such as NZX-listed companies or New Zealand incorporated companies that are majority owned and controlled by New Zealanders) that currently qualify as overseas persons for technical reasons;
b) passive portfolio investors who do not obtain majority ownership or meaningful control of sensitive New Zealand assets;
c) an overseas person acquiring a small ownership interest in an entity that holds sensitive land or fishing quota, whereby the acquisition makes the target entity an overseas person, requiring the acquirer to obtain consent under the Act; and
d) small incremental investments that increase an existing 25% ownership interest in an overseas person.
Area 3: Changes to how the Act screens investments in sensitive assets
Treasury is considering amending the "investor test" (which all applicants must satisfy) by potentially narrowing the scope of the good character assessment (e.g. by removing the "whether convicted or not" disclosure requirement, or introducing a bright-line checklist style assessment) and potentially removing the requirement for New Zealanders to satisfy the investor test.
We are very pleased to see the OIO reviewing the investor test as it currently results in significant compliance costs for applicants and can lead to unintended outcomes (e.g. where an overseas company fails to satisfy the 'good character test' because of good character issues with one of its New Zealand JV partners).
Treasury has also proposed a number of options around the current "benefit to New Zealand" test. These include:
a) retaining the existing benefit to New Zealand test with some tweaks to allow the decision makers to consider other factors such as national security or any negative impacts of the investment;
b) streamlining the benefit to New Zealand test, but giving the deciding Ministers one of two potential powers:
- a narrow power that allows Ministers to deny consent for investments that pose a risk of substantial harm to things like public health and safety; or
- a broader power to allow Ministers to only provide consent in more sensitive transactions if they are in the national interest, and to allow Ministers to consider both the positive and negative impacts of an investment. Sensitive transactions could include investments in a strategically important industry or activity, critical infrastructure and any asset where the applicant is a “foreign government” or associate; or
c) completely removing the benefit to New Zealand test, and replacing it with a new “national interest” which would apply to all sensitive assets (not just sensitive land) with full discretion for the deciding Ministers to decide whether or not the transaction is in New Zealand’s national interest. The issues that would form part of the national interest would be left open to be determined by the Ministers on a case by case basis, and could include:
- economic or other benefits;
- any risks to national security, public safety, international relations or other national interests;
- the extent to which risks can be mitigated by consent conditions or other legislation; and
- any other matters that they consider relevant, such as the investment’s environmental or cultural implications.
We are pleased to see consideration being given to simplifying the benefit to New Zealand test which is complex and in some cases onerous for investors to satisfy. However, we are concerned about the impact of completely removing that test and replacing it with a national interest test where the Ministers have a broad discretion without any guidance or parameters around the exercise of that discretion. This has the potential to create even more uncertainty for investors than the current benefit to New Zealand process. We can see merit in having some additional power for the Ministers to take into account national security and public health and safety concerns, in line with the trend happening offshore.