The long awaited third instalment in the wide-ranging reform of the Overseas Investment Act 2005 (the Act), and the end of the emergency notification regime, are now only weeks away from coming into force.
This follows the Overseas Investment Amendment Bill (No 3) (the Bill) receiving Royal Assent on 24 May 2021, with most changes applying to applications received after 5 July 2021. Implementation of some changes will be delayed by either 6 months or 12 months.
Minister David Parker also confirmed that, on 7 June 2021, the Emergency Notification Regime will be replaced with the national security and public order (NSPO) notification regime.
We summarise below the details of the new regime and some of the most important changes from the Bill which we expect will be particularly helpful for investors.
The changes in brief
The expiring Emergency Notification Regime required overseas persons to notify all transactions which involved acquisitions of a greater than a 25% shareholding or interest and regardless of the dollar value.
The NSPO is considerably narrower, applying only to transactions involving strategically important businesses (as defined in the Act and the Overseas Investment Regulations 2005 (Regulations)). However, the ownership and control thresholds that apply are then lower; being 10% for acquisitions of listed companies, 25% for acquisitions of media businesses with significant impact and, otherwise, any interest (a zero percent ownership threshold, unless the acquirer has an existing stake, in which case the acquisition has to result in a consent threshold (25%, 50%, 75%) being crossed). The zero dollar threshold continues to apply.
Changes introduced under the Overseas Investment (Urgent Measures) Amendment Act 2020 (the Urgent Measures Act) as standing consents are permanently applied. This includes the relaxing of the overseas ownership threshold for New Zealand listed companies and managed investment schemes (from more than 25% overseas ownership to 50% or greater) and reducing the scope of sensitive land (based on type of adjoining land).
Note that the ownership threshold changes are now less generous, capturing 50% or more overseas ownership for listed companies and managed investment schemes, rather than the 51% overseas ownership threshold that applied under the Urgent Measures Act.
Importantly, non-listed companies and managed investment schemes may be eligible for individual exemptions if they meet the same new ownership thresholds that apply to listed companies and managed investment schemes. This was also possible under the Urgent Measures Act with new changes to the exemption purposes to reflect this.
Changes that simplify the investor test were introduced a few months ago. A further welcome change is a new ability for repeat investors to rely on previous investor information and the ability to get a pre-clearance before an application is made.
Other new changes include increasing the time period of a leasehold interest from 3 years to 10 years, a simplified benefits test and new counterfactual for sensitive land applications (although implementation of this change is delayed for 12 months) and changes to the farm advertising requirements (for which implementation is delayed by six months) and tax disclosure rules.
Finally, the new changes also fix an issue with the National Interest Test introduced in the Urgent Measures Act which resulted in the over-capture of overseas persons with foreign government investors in their ownership structure. The National Interest Test will now only apply if foreign government investors from a single country hold a greater than 25% interest in the overseas person making the investment. There is also a new process for exempting foreign government investors caught by definition National Interest Test.
We discuss some of these changes in more detail below. Further discussion of changes in the Urgent Measure Act and No 3 Bill can be found in our previous articles.1
Permanent call-in regime
The Emergency Notification Regime required overseas persons to notify the OIO of all investments under which the overseas person:
acquired more than 25% of the securities or property of a New Zealand entity;
increased an existing more than 25% shareholding to a more than 50% or 75% interest; or
acquired 100% of the target's shares.
Crucially, the Emergency Notification Regime had a $0 threshold so applied regardless of deal value.
The Emergency Notification Regime will continue to apply to transactions entered into prior to 7 June 2021 and the NSPO regime will apply to transactions entered into on or after 7 June 2021 (regardless of when the transaction is notified to the OIO).
The NSPO regime applies to overseas investments in "strategically important businesses" that do not otherwise require consent. An overseas investment in a strategically important business is the acquisition, by an overseas person, of any interest (a zero percent ownership threshold, unless the acquirer has an existing interest, in which case the acquisition has to result in a consent threshold (25%, 50% or 75%) being crossed) in a target which is carrying on a strategically important business (although higher ownership or control thresholds apply where the target is a media business with significant impact (25%) or a listed issuer(10%)) or the acquisition of certain kinds of property used in carrying on a strategically important business.
Investors must notify the OIO of such a transaction if it relates to a strategically important business that researches, develops, produces or maintains military or dual-use technology or a critical direct supplier, and in all other cases notification is voluntary. Where notification is voluntary and the transaction is not notified by the investor, the transaction may still be called in for review by the Minister.
"Strategically important business" includes businesses that are involved in:
- military or dual-use technology;
- supplying integral goods or services to the New Zealand Defence Force, the GCSB or the Security Intelligence Service;
- ports or airports;
- electricity generation, distribution, metering or aggregation;
- drinking water, wastewater or storm water infrastructure;
- telecommunications infrastructure or services;
- financial markets infrastructure;
- in relation to transactions that require consent, irrigation, or is involved in a strategically important industry or that owns or controls high-risk critical national infrastructure;
- the development, production, maintenance of, or which otherwise have access to:
- sensitive information in connection with the supply of services to the New Zealand Defence Force, the GCSB, the Security Intelligence Service, the Department of the Prime Minister and Cabinet, or the Ministry of Foreign Affairs and Trade; or
- data sets of sensitive information relating to 30,000 or more individuals.
If a transaction is notified or called-in under the NSPO regime, it will be reviewed for risks to New Zealand's national security and public order. If the Minister determines that the transaction gives rise, or is likely to give rise, to a significant risk to national security or public order, it may impose conditions on, prohibit or unwind the transaction.
The majority of the below changes passed into law by the Bill will apply to applications received by the OIO on or after 5 July 2021 (regardless of when the transaction is entered into).
Incremental investments: more flexibility for investors to manage their capital structure
Previously, investors required consent from the OIO to increase an existing more than 25% shareholding of an entity constituting 'significant business assets' or holding 'sensitive land'. Under the new rules, an increase in ownership through acquisitions of securities will now only require consent under the Act if it results in the overseas investor moving through the 50% or 75% ownership or control thresholds or acquiring a 100% ownership or control interest in the New Zealand entity.
This means that upstream overseas investors are significantly less likely to inadvertently contravene the Act if their proportionate holdings change from time to time as a result of, for example, non-pro rata capital initiatives (e.g. capital raisings or share buy-backs). This provides investors with flexibility to manage their capital structure (within the thresholds) without needing to seek consent (for example, to introduce capital on a non-pro rata basis, or to re-acquire shares from minority shareholders).
National interest test for non-NZ government investors
The Urgent Measures Act introduced a new 'national interest' test for overseas investments which gave the Minister of Finance an ability to block, or impose conditions on, a transaction where the Minister considers it would be contrary to New Zealand's national interest. Due to the drafting of the operative provisions, a wider range of investors and transactions were caught by the national interest test that was intended. This did not align with the underlying policy intention (being the protection of New Zealand’s core national interests).
The Bill will narrow the scope of the national interest test, such that it will only mandatorily apply if a single foreign government holds a more than 25% (increased from 10% under the Urgent Measures Act) ownership or control interest in an investor that is seeking consent to acquire significant business assets and/or sensitive land under the Act. Previously, this test aggregated all interests of all foreign governments, regardless of the number and size of the individual interest each government held. In addition, the Minister may exempt passive foreign government investors from automatic application of the test if they meet certain criteria relating to control or influence (which will be set out in the Regulations). While the details are yet to be confirmed, this exemption power may apply to, for example, a private equity fund which has superannuation funds as investors/limited partners, and such funds are only passive investors with no involvement in investment decisions or other material decision-making.
Investor test – repeat investors and pre-clearance
For all consent applications, the key individuals in an acquisition structure are required to meet the 'investor test'. The Bill introduces a process whereby investors can notify and clear their acquisition structure with the OIO in advance, even if a transaction is not being considered at that time. When the investor subsequently seeks consent for a transaction, the investor will only need to confirm that nothing has changed since the time that acquisition structure was cleared (and meet the investor test in respect of new entities/individuals within that structure, if any).
Additionally, repeat investors who have previously met the investor test in respect of a past transaction can simply confirm that nothing has changed since the time that the test was last satisfied. This should significantly improve OIO processing times for transactions and gives investors' confidence that their proposed acquisition structure is approved prior to a transaction being considered. We expect this will be very useful for repeat investors, such as private equity funds.
The Bill introduces a number of other changes and makes certain changes temporarily enacted in the Urgent Measures Act through standing consents a permanent feature of the regime (including the more liberal definition of overseas person as it applies to New Zealand listed issuers and managed investment schemes, and the change to the sensitive adjoining land criteria). Further detail on these are available in our series on the reform of the Act. 2
Additional changes include:
- simplifying the framing of the benefits test, and applying differing tests depending on the specific investment being made. This includes legislating for the heightened test that applies to farmland (which was previously only contained in a Ministerial Directive Letter);
- permanent changes to the definition of "overseas person" (including as it relates to listed issuers and managed investment schemes) and the types of adjoining land that are sensitive land for the purposes of the Act;
- changing the time period for a leasehold interest to be a qualifying interest in sensitive land (from three years to 10, other than for residential land);
- changing the farmland advertising rules; and
- enhanced tax disclosures.
The OIO is also preparing regulations to create statutory timeframes, and vary the fees payable, for consent applications. Submissions on the changes to the fee structure closed on 19 March 2021, and the necessary amendments to the Regulations are expected to be passed in 2021.
Please get in touch with one of our team if you would like to discuss how the changes may impact you and your organisation.