The Select Committee report on the Overseas Investment Amendment Bill (No 3) ("No 3 Bill") was released today, together with the Treasury report to the Select Committee. The No 3 Bill is the final piece of legislation related to the Government’s ‘Phase Two’ review of the Overseas Investment Act 2005 (‘the Act’), which began in October 2018. It follows the passage of the Overseas Investment (Urgent Measures) Amendment Act (the Urgent Measures Act) in 2020 ("Urgent Measures Act"), which comprised those parts of the Phase Two reform most critical to the Government’s COVID-19 response.
Given that the Urgent Measures Act was passed under urgency with a truncated Select Committee process, the Government has allowed submissions on the changes introduced by the Urgent Measures Act in conjunction with submissions on the No 3 Bill. Russell McVeagh and others made a number of submissions on the Overseas Investment Amendment Bill (No 2), as it was then known, which was later split into the Urgent Measures Act and the No 3 Bill, as well as submissions on the Urgent Measures Act following its passage into law and on the new No 3 Bill itself.
Key changes to the Bill recommended by the Select Committee (reflecting the Treasury recommendations) include two important fixes that Russell McVeagh had submitted to Treasury on, both formally and informally:
Consent no longer required for incremental investments that do not breach control thresholds
The Government has now recognised that there is little utility in requiring overseas investors to obtain consent for incremental ownership increases that do not breach recognised control thresholds. The No 3 Bill has been amended so that under the new rules an increase in indirect ownership of an entity holding 'significant business assets' or 'sensitive land' through acquisitions of securities will now only require consent under the Act if they result in the overseas investor moving through the 50% or 75% ownership or control thresholds or attaining a 100% ownership or control interest.
The "shareholding creep exemptions" in Regulations 38 and 38A of the Overseas Investment Regulations, which were amended as recently as July 2020 to provide greater flexibility but remain too complicated and narrow, will no longer be required because the new rules will be incorporated in the Act itself.
One effect of this welcome change is that upstream overseas investors whose proportionate holdings may change from time to time as a result of fundraisings, buy-backs or other capital initiatives are significantly less likely to inadvertently contravene the regime. This is significant as it will allow investors the flexibility to introduce capital on a non-pro rata basis, or re-acquire shares from departing management (a key feature of private equity deals), without needing to seek consent.
Material narrowing of the application of the national interest test to "Non-New Zealand Government investors
The second important fix addresses what the Select Committee report on The No 3 Bill correctly refers to as "the over-application of the national interest test".
The Urgent Measures Act introduced a new 'national interest' test for overseas investments to give the Government an ability that didn't exist under the old regime to block a transaction where the Minister considers it would be contrary to New Zealand's national interest. The policy intention behind the test is that it should be used only where necessary to protect New Zealand’s core national interests
The national interest test was intended to apply to foreign government investors who could exercise control over sensitive assets in New Zealand as a result of an overseas investment requiring consent under the Act. However, the formulation of the test that was enacted under the Urgent Measures Act has a number of issues that mean the test mandatorily captures transactions and investors that have no bearing on New Zealand’s national security or national interest. In particular, the current definition both captures purely passive investors, such as pension funds, and also aggregates foreign government interests even where they are unrelated (i.e., governments from multiple countries). This has meant that, for example, widely held private equity funds that regularly invest in New Zealand have been caught by the test, even though no government exerts any control over the operations of the fund, the way it is invested, or the operations of the fund's portfolio investments. The implications of this are significant, given the 70 working day national interest review and Ministerial decision process and the additional $52,000 application fee that applies on top of the usual consent fee.
The Government has now recognised (quickly, to its credit, and to the credit also of the OIO which has itself raised the issue with Treasury) that these outcomes are contrary to Parliament’s original intent and are resulting in an unnecessary compliance burden on low risk high quality investors, the OIO itself and the Minister.
The No 3 Bill therefore amends the Act to provide that the national interest test will only mandatorily apply if a single foreign government holds a more than 25% (increased from 10% under the Urgent Measures Act, as originally enacted, to align with the usual consent threshold) ownership or control interest in an investor that is seeking consent to acquire significant business assets and/or sensitive land under the Act. In addition, Treasury has recommended introducing new regulations empowering the Minister to exempt passive foreign government investors from automatic application of the test on a case by case basis even where they meet the revised test (which we would hope would extend to superannuation and sovereign wealth funds, which are a key source of passive investment in New Zealand).
These changes are welcome, and will avert a major problem with the new national interest test as originally enacted.
The proposed amendments to the No 3 Bill also introduce the following noteworthy changes:
Easing the burden for investors in non-productive farmland
The No 3 Bill codifies the current Ministerial Directive letter as it applies to farmland by making the consent requirements under the "benefit to New Zealand" test for overseas investments in farmland more stringent. It does this by increasing the level of benefits to New Zealand such investments must achieve in order to obtain consent, and by requiring genuine public advertising of the sale of farmland to ensure that New Zealanders have a chance to acquire it.
Submitters argued that flexibility should be introduced to mitigate unintended consequences of the breadth of the more stringent test, such as acting as a barrier to potentially productive overseas investments in land that is technically farmland but which is not productive for farming.
In response, No 3 Bill expands the Minister’s discretion to not apply the more stringent benefit test to land that is unsuitable for farming yet nevertheless defined as farmland for technical rather than substantive reasons. No 3 Bill also clarifies that the Minister can take into account the nature of the land (for example, its productive capacity) when considering granting an exemption from the new more stringent requirements to advertise farmland.
Narrowing the scope of the new call-in power as it applies to direct acquisitions of property
The Urgent Measures Act added a "national security and public order call-in power" to the overseas investment regime. The call-in power enables the Government to screen overseas investments in "strategically important businesses", and to target investments that would not otherwise be screened under the Act (i.e., which do not otherwise require consent). The call-in power is due to come into effect once the current temporary emergency notification regime is repealed, which will occur when the effects of COVID-19 on the New Zealand economy are determined to have subsided.
The call-power as originally drafted applies to acquisitions of property used in a "strategically important business". This is clearly too broad, because such property could be acquired in the ordinary course of business trading and pose no security or public order risks.
Therefore, the No 3 Bill amends the call-in power so that it would only capture acquisitions of property that would make the buyer a strategically important business in their own right (for example, significant electricity generation capacity or large volumes of sensitive information).
Power to reinstate an emergency notification regime
Finally, the amendments to the No 3 Bill grant the Minister power to reinstate the current temporary emergency notification regime (after it has been replaced by the national security and public order call-in power) by regulation only and without following due parliamentary process. This power has been justified on the basis that a future emergency could mean that the Minister needed to quickly reinstate the regime, and that following normal parliamentary process would risk undue delays that could hamper the effectiveness of its timely reinstatement. Limited safeguards have been proposed, namely that the Minister must consult the Minister of Foreign Affairs when exercising the power, the Minister must be satisfied that the regulations used are no wider than is necessary to manage the risks to New Zealand’s national interest, and that any regulations that reinstate an emergency notification regime must be accompanied by a statement setting out the specific reasons for the reinstatement.
A number of other proposed changes are reflected in the amendments to the No 3 Bill. The Finance and Expenditure Committee's report and the proposed legislative amendments are available here.
The No 3 Bill must now go through the Second Reading, Committee of the Whole House and Third Reading. While it is not possible to accurately predict timeframes, the No 3 Bill should pass within the next few months. For the 2018 Overseas Investment Act reforms, the time between Select Committee report back and the passing of legislation was 2 months.