The Government is pushing through urgent changes to the Overseas Investment Act, in the hopes of preventing ‘fire sales’ of distressed businesses to foreigners contrary to NZ’s national interest. But will the additional red tape achieve that aim, or instead discourage legitimate deals from being done?
The Overseas Investment (Urgent Measures) Amendment Bill (Bill) is currently being rushed through parliament and aims to fast-track measures which the government considers necessary to mitigate the effects of COVID-19 on foreign investment.
The Bill aims to address concerns of predatory behaviour from overseas investors on iconic or strategically important domestic enterprises whose value has been significantly reduced by COVID-19. The law changes are also intended to support access to productive overseas investment which may be needed by distressed businesses in light of the economic downturn caused by COVID-19.
This “urgent matters” Bill includes new tools to address the perceived new foreign investment risks from COVID-19, as well as grabbing some of the changes that were already included in proposed reforms of the Overseas Investment Act (pre COVID-19). The remainder of the previously introduced reform will work its way through Parliament following normal processes.
National Interest Test
One of the key changes is the proposed introduction of a “national interest test”, which will apply to investments already screened under the Act and provide significant powers to the responsible minister, including to deny consent to any investment that is considered to be contrary to New Zealand’s “national interest” (a troubling term with little definitive grounding, at present). It’s envisaged by Treasury that: “[t]he test will be available as a backstop tool, that will be rarely used, and only where it is necessary to ensure protection of New Zealand’s core national interests”.
This new test is designed to allow further scrutiny where:
- foreign governments/entities propose to acquire a strategic stake (10 per cent or more) in NZ assets; or
- any overseas person proposes to acquire a 25% or more interest in strategically important assets/businesses such as ports or airports, or those involved in supply of electricity, water, or telecommunications services.
We query whether the breadth and uncertain application of the national interest test may act as a deterrent to legitimate overseas investment in the long-term despite it being a measure of last resort.
Temporary Notification Regime
The introduction of a temporary notification regime will allow the government to review all overseas investments in New Zealand businesses/assets not ordinarily screened under the Act, regardless of the value of such investment, if that investment would result in:
- >25% control of an existing business;
- increases of an existing interest to or beyond certain levels (50%, 75%, or up to 100%); or
- the acquisition of >25% of a NZ business’ assets by value.
Where a proposed overseas investment meets this criteria, which will cover a broad range of transactions, parties will be required to notify the Overseas Investment Office, who will then screen the investment to determine if it poses risks contrary to national interest (i.e. the test referred to above). The transaction cannot be completed until notice is given and the OIO grants approval.
The proposed screening notification form is intended to be relatively simple (2 to 5 pages), there are no fees for the notification, and there is proposed to be a short (10 working day) timeframe for initial screening to take place. It is envisaged that the majority of notifications will be given the “all clear”.
However, given the vast number of transactions that will require notification (because of the absence of any value threshold), it remains to be seen whether these timeframes can be achieved.
If, as a result of this screening process, a transaction is found to be contrary to the national interest meriting intervention, there are powers for the Ministers to impose conditions or prohibit the investment altogether.
The temporary regime will be reviewed every 90 days, and will be lifted once the economic effects of COVID-19 have diminished.
Measures to improve support for investment
The Bill also includes provisions designed to stream-line assessment and relax some requirements in the Act. The intention is to eliminate unnecessary screening and compliance costs disproportionate to the level of risk posed by some investments, as well as to support to businesses in distress as a result of COVID-19. These are:
- Ownership/control threshold increased
Changes to thresholds for captured investments. For example, New Zealand listed issuers will no longer be considered overseas persons unless they are more than 50% beneficially owned by one or more overseas persons or if overseas persons who each own 10% or more either control 50% or more of governance or 25% or more voting power.
- Simplified investor test
Simplifying the investor test, including by amending “good character” requirements for the individuals involved in a transaction requiring OIA consent such that only serious proven matters or allegations before a court are taken into account and removing requirements for business experience and acumen and the requirement to demonstrate a “financial commitment” to the investment.
- Narrowing the sensitive land definition
Reducing the scope of what constitutes “sensitive land”, particularly where land is only sensitive because it adjoins certain other land (such as a local park or playground). The requirement for consent in these situations has been a bugbear for investors for several years, and these changes are welcomed.
- Exemptions to support financing
Exemptions have been introduced to mitigate against the potential issue of businesses affected by COVID-19 seeking to access debt or equity financing from overseas, but encountering difficulties as a result of restrictions under the existing provisions of the Act.
These changes to the law are expected to come into force sometime in June. While some of the changes are welcomed, we have concerns that the new notification and screening regime may stretch the resources of the Overseas Investment Office and add cost and time to transactions, thereby jeopardising their success.
If you have any questions about this Bill or would like to know more, please feel free to contact us.
- Slashing planning red tape to enable recoveryCommon to the post-earthquake recovery strategies in Christchurch and Kaikoura was the development of bespoke legislation substantially modifying the application of the Resource Management Act...
- 5 Key learnings from the Covid-19 lockdownThe aftermath of the COVID-19 lockdown will likely see a significant litigation spike, as there will inevitably be disputes about parties’ contractual obligations and who...
- Has Covid-19 created a new flexible working regime?For the better part of 2020, the outbreak of Covid-19 has challenged ordinary operations in the workplace. Globally, professionals have had to adapt, improvise and...