By Pedro Morgan

Urgent changes to the Overseas Investment Act 2005 came into force on 16 June 2020 and impact overseas investors purchasing New Zealand businesses, land or other assets. These changes widen the range of business transactions that the Overseas Investment Office must screen under the Act.

These measures build on those introduced in October 2018 that brought residential land into the overseas investment regime and changed the rules for forestry land.

Further reforms to the overseas investment regime

After the reforms introduced in October 2018, a second targeted review of the Overseas Investment Act started. The second review aimed to improve the balance between effectively managing risks posed by overseas investment and simplifying the Overseas Investment Act to better support productive overseas investment.

Following public consultation on a range of proposals, the Government introduced the Overseas Investment Amendment Bill (No 2) (the Phase Two Reform Bill) on 19 March 2020.

However, the COVID-19 pandemic and related economic downturn has changed the overseas investment risk environment. While some businesses may need access to capital quickly to remain viable, the sale of others may undermine New Zealand’s national security. It could also result in a transfer of knowledge and jobs, or the loss of entry points into global value chains, or control of cornerstone businesses in sectors displaced by the COVID-19 pandemic.

Economic conditions have also caused a fall in value of some New Zealand businesses. This increases the risk that overseas investors may acquire ownership or control of New Zealand business assets – without government scrutiny or knowledge in situations where that investment is contrary to New Zealand’s national interest. Such transactions could undermine New Zealand’s economic or national security. It could also mean that productive businesses offering significant benefits to New Zealand – and that are important to New Zealand’s long-term productivity and economic recovery – are acquired at prices that don’t reflect their long-term value.

To date, the Government has announced multi-billion dollar financial support to businesses. By themselves, however, these measures are unlikely to guarantee ongoing business viability – businesses may still need overseas investment.

Parts of the Phase Two Reform Bill have now been combined with new amendments to mitigate the economic effects of COVID-19, as well as manage existing gaps in New Zealand’s overseas investment scheme. This resulted in two bills. The first was the Overseas Investment (Urgent Measures) Amendment Bill that came into force on 16 June 2020. The second is the Overseas Investment Amendment Bill (No 3) which contains the Phase Two Reform Bill provisions not included in the Urgent Measures Bill. The Amendment Bill (No 3) has been introduced and referred to select committee, and will follow the normal legislative process. The original Phase Two Reform Bill has been withdrawn.

The changes support the Government’s business response package, ensuring the right checks and balances are in place to protect those businesses important to our national security, economy, and communities. They also ensure we have the tools in place to manage risk and safeguard New Zealand’s sensitive assets.

New Zealand is not alone in taking steps to increase oversight of overseas investment. Australia, Canada and a range of European countries have all tightened their overseas investment schemes.

New Zealand continues to be open for business. Productive overseas investment will be central to our economic wellbeing, both in this time of recovery and beyond.

Summary of the changes

The key amendments in this first set of urgent changes are:

• A temporary emergency notification requirement and national interest assessment for business transactions of less than $100 million where a controlling interest is being acquired.
• Applying the new national interest assessment to transactions that already require consent under the Act (if that transaction gives rise to a national interest concern).
• Simplifying the regime for low-risk transactions.
• Stronger enforcement powers.

Temporary emergency notification requirement

Overseas investors must notify the Overseas Investment Office of all investments resulting in more than 25% overseas ownership of a New Zealand business or its assets, or an increase to an existing holding beyond 50, 75 or 100%. Notifications commenced on 16 June 2020 via www.linz.govt.nz./OIOnewrules. There is no cost to submit a notification.

The exemptions in the Overseas Investment Regulations 2005 have been extended to apply to notifications as well. This means that transactions like business restructures with no change in ownership, changes in trustees, and security arrangements will generally not need to be notified.

Overseas investors must otherwise notify the Overseas Investment Office before a transaction is given effect. If necessary, the transaction can be entered into before notifying us if it’s conditional on a direction order being made.

We’ll assess the notice within 10 working days to determine whether the transaction needs to have a national interest assessment. Most transactions will proceed after the initial assessment, without requiring further review. To begin with, the initial assessment decision will be made by Associate Minister of Finance, Hon David Parker.

There are a number of factors that are generally considered when determining whether an investment is contrary to New Zealand’s national interest:

• National security, public order and international relations.
• Competition (as well as any scrutiny applied by the Commerce Commission).
• The economic and social impact (the benefit to New Zealand test, which provides a formal framework for this kind of assessment in respect of sensitive land, serves as a guide for the types of matters the Government is likely to consider when considering the economic and social impact of investments in business assets).
• Alignment with New Zealand’s values and interests, and broader policy settings.
• The character of the investor.

The small number of notifications called-in by the Associate Minister will be assessed further against the national interest test, and could result in conditions being imposed or the investment being stopped. The national interest assessment may take up to a further 30 working days, and if an application is particularly complex or sensitive, then that could be extended for another 30 days. The Overseas Investment Office will be in contact throughout if this is the case.

The Minister of Finance, Hon Grant Robertson, will then determine whether the investment is contrary to the national interest and take a risk management action, such as allowing the transaction to proceed with conditions (if any) appropriate to manage any risks to national interest. In very rare circumstances, the Minister may prohibit the transaction from going ahead or require it to be unwound.

To ensure transparency, the Overseas Investment Office will publish decisions to allow a transaction to proceed with conditions, block a transaction, or force an investor to sell an investment. Decisions to unconditionally allow transactions to proceed will not generally be published.

The notification requirement will be reviewed by the Government every 90 days and will only remain in place while the effects of the COVID-19 emergency justify the requirement continuing.

Applying the new national interest assessment to applications under the consent pathways

The new national interest assessment can also be applied to transactions that already need consent. The assessment will be in addition to the existing consent criteria.

The national interest assessment will apply in all cases where the investor is a non-New Zealand government investor or is 10% or more owned by a non-New Zealand government investor, or where the investment is in a strategically important business. Strategically important businesses include certain airport and port companies, business involved in electricity generation and distribution, water, telecommunications, some media companies, and critical direct suppliers to the intelligence and security agencies.

The national interest assessment can also be applied in other cases if the Minister considers that a transaction could be contrary to New Zealand’s national interest. Investors will be notified if the national interest test will be applied on this discretionary basis.

Transactions that were entered into and for which consent was sought before 16 June 2020 will not be subject to a national interest assessment. Transactions that have already received consent will not be reopened.

Additional information about the national interest assessment can also be found in a Guidance Note published by Treasury: https://treasury.govt.nz/publications/guide/foreign-investment-policy-and-national-interest-guidance.

Simplifying the regime for low-risk transactions

The regime has been simplified so that some low risk transactions no longer need consent. These changes will mainly help listed companies with overseas ownership between 25% and 50%, and investments that adjoin certain types of sensitive land. These changes are made through an automatic and unconditional ‘standing consent’. No application will be required.

The changes also resolve an ambiguity about whether the origination and transfer of debt and debt securities requires consent. The clarification in respect of origination is a permanent change to the regime while clarification in respect of transfer is another automatic standing consent.

The standing consents will be reviewed when the Overseas Investment Amendment Bill (No 3) is considered and will likely become permanent then.

A small number of applications currently being processed by the Overseas Investment Office will also benefit from these changes. Applicants would have had contact from the Overseas Investment Office if these changes affect their application. However, applicants should contact us if they consider the changes apply to them, but we have not contacted them.

The changes also simplify the ‘investor test’. Currently, the investor test requires investors to provide a large amount of information. It also tests investors we are not concerned about (such as New Zealanders, and those who have previously passed the test). At the same time, the test does not directly apply to corporate entities.

The investor test will be simplified to better target material risks that may be posed by investors. This should reduce the amount of information that investors need to provide, without compromising the government’s ability to protect New Zealanders. It will also allow the Overseas Investment Office to take into account the character of corporate investors as part of the new highly specific changes to this test.

This change will come into force later in 2020, with the existing test applying in the meantime.

Stronger enforcement powers

Stronger enforcement powers support the Overseas Investment Office’s ability to act against investors who do not comply. Changes include:

• Allowing the regulator to seek injunctions and accept enforceable undertakings, increasing the regulator’s ability to act against those that break the rules.
• Increasing maximum fixed civil pecuniary penalties from $300,000 to $500,000 for individuals and $10 million for others.
• Introducing new tools to manage investors who pose significant national security and public order risk, including (in extreme cases) placing a business into statutory management.

The Act also includes provisions to ensure that natural justice rights and classified security information can both be adequately protected during any court proceedings.

How you can help your clients

While the Overseas Investment Office is providing a range of material to support businesses, investors and their advisors, we are also encouraging overseas investors to get independent advice.

There are many things you can do to help your clients.

• Ensure that you and those you work with know about the new rules.
• Encourage others in your professional networks (especially accountants, business brokers, and others involved in commercial transactions) to learn about the new rules.
• Update your transaction checklists and procedures to account for the new rules.
• Encourage your overseas clients to make agreements conditional upon a direction order being given (this will help them to avoid inadvertently breaching the rules).
• Be prepared to give a complete and accurate notification on behalf of your clients, and to give the notification as early as possible in the transaction process.

It is important that New Zealand businesses are getting the advice they need to ensure they comply with these changes and can do the right thing. Please get in touch with the Office if we can assist by emailing OIO@linz.govt.nz. More information about the changes – including the online notification form – is available from www.linz.govt.nz/OIOnewrules.

We also encourage you to subscribe to and read our newsletter Pānui and that you encourage colleagues and professional networks to sign up too. This is available in the About Overseas Invesment Office/Contact OIO section of the LINZ website.

Pedro Morgan is a Principal Advisor in the Overseas Investment Office.