In mid-2021, a national security and public order regime was introduced, applying to certain investments in strategically important businesses
Joshua Jones1 and Luke Bowers authored this publication.
The Overseas Investment Office (OIO) is the regulator responsible for the administration of the Overseas Investment Act 2005 (OIA), the statute that regulates investments in New Zealand assets by overseas investors.
The OIA sets out a consent regime in relation to investments that meet a value threshold or are in respect of certain types of land. In mid-2021, a national security and public order (NSPO) regime was introduced, applying to certain investments in strategically important businesses that don't otherwise require consent.
The OIO has delegated authority to determine most consent applications, based on an assessment of whether the investor meets an investor test and (for land acquisitions) the benefit to New Zealand test. For certain land acquisitions, or where a national interest assessment is required—including as part of the NSPO regime—ministerial approval is required.
In response to the pandemic, the New Zealand government introduced a separate notification pathway that applied to a broad range of transactions that did not already trigger a consent requirement. That regime subsequently has been discontinued, but still applies to transactions entered into before June 7, 2021.
An overseas person making an acquisition that requires consent under the OIA's consent regime, or clearance under the NSPO regime, must apply to the OIO for consent or clearance (as applicable) before completion of the acquisition. Any agreement to make the acquisition must be subject to receiving consent or clearance.
A consent application includes a filing fee that varies according to the type of transaction and transaction value, and whether a national interest assessment is required. A notification under the NSPO regime does not require any filing fee.
TYPES OF DEALS REVIEWED
Consent under the OIA is required for a range of acquisitions by overseas persons, including an acquisition of a more than 25 percent ownership or control interest in a target entity (or an increase in an existing interest to or through 50 percent, 75 percent or 100 percent) where:
- The value of the applicable New Zealand assets, or consideration attributable to those assets, exceeds NZD 100 million
- The target owns or controls (directly or indirectly) an interest in sensitive land. The definition of sensitive land is very detailed and requires careful checking and analysis from qualified advisers. In particular, land may be "sensitive" if it adjoins certain types of land, or is "associated" with other land already controlled by an overseas person. It also includes all residential land
- The target owns or controls (directly or indirectly) an interest in fishing quotas
Consent requirements can be triggered for transactions occurring upstream of the New Zealand assets, as well as for direct acquisitions in New Zealand.
Certain types of investors receive differing treatment for their transactions:
- Australian investors: A higher monetary threshold applies to acquisitions by certain Australian investors. Currently, that higher threshold is NZD 552 million for Australian non-government investors and NZD 116 million for Australian government investors
- Free trade agreement investors: Consistent with New Zealand's free trade agreement (FTA) commitments, a higher monetary threshold of NZD 200 million applies to acquisitions made by certain non-government investors from South Korea, Taiwan, Hong Kong, China, Brunei, Chile and countries for which the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is in force
- Residential land: Consistent with New Zealand's treaty obligations, certain Australian and Singaporean investors are exempt from consent requirements for investments in residential land
- Foreign government investors: Further scrutiny is applied to investments by foreign government investors, in respect of which a national interest assessment is undertaken as part of the consent process
Under the NSPO regime, certain investments in strategically important businesses (where a consent requirement is not already triggered) can, and in some cases must, be notified to the OIO for clearance by the relevant minister. Notification is mandatory for investments in critical direct suppliers to New Zealand's intelligence or security agencies and businesses involved in military or dual-use technology, but is otherwise optional. Non-notified transactions can be called in for review by the minister before or after completion of the transaction.
In response to the pandemic, the New Zealand government introduced a separate notification pathway that applied to a broad range of transactions
SCOPE OF THE REVIEW
Under the consent regime, each overseas investor and the individuals who control that investor are required to meet a bright-line investor test comprising a closed list of character and capability factors. Those factors include:
- Convictions resulting in imprisonment
- Corporate fines
- Prohibitions on being a director, promotor or manager of a company
- Penalties for tax avoidance or evasion
- Unpaid tax of NZD 5 million or more
For investments in land, the overseas investor must also satisfy the "benefit to New Zealand" test or, where the land is residential or forest land, an alternative set of criteria. The benefit test requires the investor to demonstrate the benefits that will be delivered by the transaction (compared to the position if the transaction did not occur) against a list of economic, environmental and other factors. This area of the law is currently in flux, with changes made in recent legislative amendments due to come into force some time before mid-May 2022.
In addition, a national interest assessment is applied to transactions involving strategically important businesses or being undertaken by foreign government investors. National interest assessments are supported by a cross-government standing committee that looks across the New Zealand government system to obtain and use a wide range of information. The minister has broad discretion to determine whether to block a transaction on the basis that it is contrary to New Zealand's national interests.
Under the NSPO regime, the minister will consider whether there are any national security or public order risks associated with the transaction. If there are such risks, the minister can impose conditions on the transaction, prohibit the transaction (if not yet completed) or require a disposal (if completion has occurred).
REVIEW PROCESS TIMELINE
Currently, there are no statutory timeframes that apply to the OIO or ministers' consideration of a consent application under the OIA, making it difficult to specify with certainty how long a consent process will take.
For a non-land application, a decision typically takes at least two to three months from the date the application is accepted for processing and payment of the fee is made. Depending on its complexity, a land application can take five to seven months, or even longer. From November 2021, statutory timeframes for consent applications will be phased in. The OIO has not yet published details of the applicable timeframes.
Under the NSPO regime, an initial review period of 15 working days applies, after which the OIO will inform the applicant whether the transaction has been cleared or is being subjected to a more detailed assessment. If a more detailed assessment is required, a further 40 working-day review period applies, which can be extended once by the minister for a further 30 working-day period up to a maximum overall period of 85 working days.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
In most circumstances, it is difficult to obtain consent under the OIA in advance of agreeing a transaction, as the consent regime operates to screen specific transactions rather than simply acting on the identity of the investor. An investor may apply on a standalone basis to be screened against the investor test, but this does not negate the need to seek consent for a relevant transaction (though in theory it would make that consent application easier and quicker).
Where consent under the OIA is required, or the investor is required or wishes to make a notification under the NSPO regime, the transaction should be conditional on receiving the relevant consent or clearance, and must not proceed to completion until such consent or clearance is received.
Given the relatively long review timeframes, investors should assess early in a transaction process whether consent or notification under the OIA will be required. In some (but not most) circumstances, a discussion with the OIO ahead of filing can be helpful to gauge the OIO's reaction to aspects of the transaction.
TRENDS IN THE REVIEW PROCESS
The New Zealand government had already commenced a reform program in relation to the OIA when the pandemic occurred. As a result of the pandemic, aspects of that reform process—particularly in relation to national interest considerations—were accelerated and an additional temporary screening regime was put in place to guard against potentially harmful or opportunistic foreign investments.
In mid-2021, that temporary screening regime was suspended (with the NSPO regime coming into force) around the same time as the reform process was completed. The commencement of a number of the legislative amendments resulting from the reform process was delayed, to allow the OIO time to prepare for those changes.
While the recent reforms have resulted in a number of welcome changes to exclude lower-risk transactions from consent requirements, the New Zealand government has now given itself broader powers to intervene in transactions on national interest grounds. As those changes have only recently been implemented, there is not yet a meaningful track record of how the relevant ministers intend to wield those powers.
Historically, there have been few formal rejections by the OIO or ministers of consent applications. In part, that results from investors withdrawing applications before a decision was made.
1 Joshua Jones is a Special Counsel with Chapman Tripp (T +64 9 357 9084, [email protected]) and Luke Bowers is a Senior Associate with Chapman Tripp. White & Case LLP has no affiliation with Chapman Tripp.
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