Overview: Overseas Investment Amendment Bill Series
Regulatory Alert Series
No: 1 | National Interest Test and Call-in Powers
The Overseas Investment Amendment Bill (No 2) ("Bill") was introduced on 20 March 2020 and sets out the proposed Phase II amendments to the Overseas Investment Act ("Act"). This is the first in a series of alerts discussing the changes introduced by the Bill, following on from our update late last year.
As indicated by Treasury in November last year, the Bill introduces a new national interest test and call-in power to better manage risks to New Zealand from overseas investment and bring our regime in line with comparable jurisdictions. These new powers are balanced by a range of liberalising amendments intended to attract overseas investment. In particular, the Bill simplifies the consenting requirements and excludes lower-risk investments from the regime (removing an estimated 14% of applications from screening). While the current drafting of the national interest test and call-in power may create some unnecessary uncertainty, overall, the Bill represents a significant improvement to the status quo.
The timeframe for passing this Bill before a September election was always tight. Given current circumstances, unless prioritised, there is a risk that it will not pass before Parliament rises on 6 August 2020. We understand that a decision on whether to prioritise the Bill is imminent. We note that the need for the national interest test could be viewed as more acute given the possible economic distress of current New Zealand owners in key sectors may lead to interest from well-capitalised offshore acquirers. A later election date is also a possibility, which would increase the likelihood of passage of the Bill in this Parliamentary term. In either event, the Bill should have a first reading soon after Parliament returns and be referred to the Select Committee with a reporting back date set. You can read more about the Parliamentary timetable in the wake of COVID-19 in our update here.
This first update in our series outlines the new national interest and call-in powers.
This alert will be followed by:
No 2: Reduction of the scope of the Act – this alert will consider the ways in which the Bill excludes from the scope of the Act what Treasury has referred to as "low-risk" investments. Changes proposed by the Bill include excluding majority New Zealand owned and widely held NZX listed companies from the definition of "overseas person" under the Act; further limiting the extent to which incremental securities transactions in NZX listed entities require consent under the Act; and removing from the definition of "sensitive land" certain categories of adjoining land and leasehold interests under 10 years.
No 3: Simplifying the existing tests – this alert will address the significant changes to the existing "benefits test" and "investor test" required to be met by applicants under the Act. Changes proposed by the Bill include simplifying the "benefit factors"; removing the differential requirement for benefits in relation to non-urban land over 5 hectares to be "substantive and identifiable" (although the current Ministerial direction for "farm land" applying a stricter test is embedded) and, importantly, introducing a new counterfactual test for "sensitive land" applications. The Bill also replaces the problematic "good character" aspect of the investor test with a clear bright line test that focuses only on serious proven matters and allegations of serious matters where proceedings have actually been commenced. Further, repeat investors will be able to rely on a previous assessment against the "investor test" where its acquisition and governance structure has not changed, and obtain pre-clearance from the OIO of an acquisition and governance structure prior to transacting.
No: 4: Application processing times, penalties, new enforcement tools and implementation issues – this alert will outline changes to enforcement provisions, including significantly increased penalties for breach and new enforcement tools, the introduction of processing times with which the OIO will be required to comply, new regulation making powers, transitional arrangements and the legislative timeframe.
National interest test
The new national interest allows the responsible Minister[1] to decline applications relating to certain categories of target businesses if the transaction is deemed contrary to New Zealand's national interest (a negative test). The test will operate as a "backstop" for specified transactions, and applies in addition to the existing investor and benefits tests under the Act. Importantly, the national interest test will only apply where an application for consent is already required under the Act, and essentially acts as an additional test that must be met. Treasury expects that the new test will automatically apply to around 20 transactions per year, but anticipates that most of those transactions would not be declined on this basis.
The test will automatically apply to the transactions set out below. The Minister must notify an applicant that the national interest test applies if the applicant has not already identified this (the onus is on the Minister). The Minister's failure to notify does not prevent him or her declining consent under the test, although as we read the Bill, the test cannot retrospectively be applied once consent is granted.
What transactions does it apply to?
The test will apply to investments where foreign governments will have a greater than 10% interest in the investor or where the investment is in "strategically important businesses" (SIBs) as defined in the Act. Our initial view is that the foreign government definition in the Bill ("non-NZ government investor") will not capture overseas superannuation funds or entities in which they invest (for example, private equity funds who have significant superannuation funds as investors). The national interest test can also apply to any other transaction notified by the Minister.
What are SIBs?:
SIBs cover the following:
- critical infrastructure - being ports, airports, electricity (generation, distribution, metering and aggregation), telecommunications, water networks; financial institutions/businesses involved in financial infrastructure and irrigations schemes – of a class to be set out in regulations (for example, regulations will likely provide that only critical ports or airports are captured by the national interest test);
- media entities that have a significant impact (as defined in the Bill),[2] and financial institutions;
- businesses that present national security risks (military or dual use technology and "critical direct suppliers"); and
- other classes of businesses that may be set out in regulations which are involved in a "strategically important industry" or that owns or controls "high-risk critical national infrastructure" (these terms are not defined).
What is the national interest?
The Bill grants the Minister a very broad discretion to decline an application that is "contrary to the national interest" without any legislative criteria to underpin this decision. While it is expected transactions will rarely be declined (only where the transaction poses material risks), without legislative criteria there will be uncertainty and speculation about its intended application – a risk recognised in the Regulatory Impact Statement (RIS). Notably, Cabinet rejected Treasury's recommendation for clear legislative criteria of this nature.
It is proposed that guidance on the national interest test will mitigate this risk, as will the precedent value of decisions over time and market practice in Australia where a similar test is applied under the Foreign Acquisitions and Takeovers Act. In addition, the Minister otherwise not usually responsible for overseas investment decisions will apply the national interest.[3] Nevertheless, without clear legislative criteria, the Bill risks having an unnecessarily chilling effect on beneficial overseas investment in critical infrastructure and overseas investment in New Zealand more broadly (particularly at a time when such investment may be crucially required). While guidance may assist, it can be readily changed and so is limited in its ability to provide certainty for investors.
Finally, at this stage, it is unclear what additional information or submissions will be required to be made by applicants where the new test applies. Reassuringly, the test is expressed in the Bill in the negative as a "not contrary to the national interest" test, so there will be no requirement on applicants to positively demonstrate the transaction is in the national interest. Guidance on any additional information and submissions required to be included in applications will no doubt be provided.
Call in power
The call-in power enables the Minister to "call-in" a transaction that would not otherwise be subject to the consent regime. It is intended to allow the Government to manage "significant national security and public order risks". The Minister has the power to issue directions, prohibit a transaction and, for transactions that have already occurred, make a disposal order and/or recommend statutory management. While the power is intended to be very rarely used, it will place a new regulatory burden on transactions not currently subject to the Act.
What transactions does it apply to?
The call-in power applies to:
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The acquisition of rights, interests or securities in a SIB where consent under the Act in not required (with the exception of irrigation schemes and the addition of transactions that grant access to sensitive data) where:
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the acquisition of more than 10% shares in listed companies or where there is disproportionate control of a listed company (disproportionate control is defined in the Bill);
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but if the SIB is a media businesses with significant impact, to acquisitions of more than 25%;
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in any other case, where the acquisition results in ownership in control;
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Any acquisition of property used in carrying on an SIB.
How does it work?
Because the power may be applied retrospectively, there is a notification system whereby, if the transaction is notified to the Minister and allowed to proceed, it cannot subsequently be unwound. For military or dual-use technology and critical direct suppliers SIBs, notification by the prospective investor is mandatory. For all other transactions, notification is discretionary. So it will be up to investors to weigh the risk of not notifying with the risk the transaction could be unwound in the future. Where an investor concludes that there is a very low risk the transaction would be considered to pose a national security or public order risk, the investor might decide that the compliance and delay associated with notification (in order to have certainty) is not justified. Guidance will be necessary to assist with these decisions. We would expect guidance to confirm that notification is not required unless the particular listed issuer has an obvious strategic or security element to its business.
Once the Minister receives a notification, he or she is required to take one of the actions set out in the Bill, that is, there is no scope to do nothing. The least restrictive available action is a "direction order", which will always include an automatic condition that the investor not act with a purpose of adversely affecting national security or the public interest. Other conditions can be added.
Unlike the national interest test, the Minister can only exercise the call-in power where legislative criteria are met. These criteria set a high bar, being satisfaction on reasonable grounds that the transaction will give rise, or is likely give rise to, a significant risk to national security or public order. Further, to issue disposal, prohibition or statutory management orders, the Minister must be satisfied that the issues cannot be managed by a direction or other enforcement action. However, any certainty provided by these criteria may be undermined by the potentially wide scope of the call-in power combined with the potential for retrospective action. At the very least, and as mentioned above, clear guidance will be required.
If you would like to discuss the implications of the above for your organisation, please get in touch with one of our team listed below.
We will be hosting an upcoming CPD seminar in April to discuss the OIA changes - to register your interest in attending, please email [email protected].
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