News & Thinking

Will the new reforms to the Overseas Investment Act affect you?

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Tim Barclay

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Tim Barclay

On 19 November 2019, Associate Minister of Finance David Parker announced a raft of broad changes to the Overseas Investment Act as part of a Phase 2 reform of the Act.

This followed the announcement, on 16 October 2018, that the Government would be undertaking a further review of the Act following the initial wide-ranging changes that came into force on 22 October 2018.

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A Bill implementing these new changes will be introduced in early 2020 and public submissions will be sought after the Bill is introduced.  The Act is already complex, and understanding what the changes will mean for you, or your business, can be difficult. We can assist you with making sense of the changes and in developing any submissions you may wish to make on the Bill.

The Phase 2 reforms in more detail

The Phase 2 review had the stated goal of better ensuring that investments by overseas persons are consistent with New Zealand’s “national interest”.

The Treasury has released a Q&A document detailing the changes being made as part of the Phase 2 reform.  The key changes are summarised below:

  • A “national interest” test, similar to the Australian model, to ensure that New Zealand’s core national interests are protected. This will operate as a backstop mechanism to manage significant risks associated with investments already screened under the Act.  The test will apply to investments that the Government considers warrant greater scrutiny, for example investments in strategically important industries and high-risk critical infrastructure, or where a foreign government or its associates (presumably this includes the likes of sovereign wealth funds) would hold a 10% or greater interest in the asset).
  • A power to “call in” investments that are not currently subject to screening. This will involve a new notifications regime (mandatory in the case of some investments, and voluntary in the case of other investments). Investments that pose risks to national security or public order can be blocked, have conditions imposed, or can be required to be unwound.
  • Under a Ministerial Directive letter that is issued under the Act, the Government directs that high levels of benefits need to be shown for foreign purchases of farmland. These requirements will now be embedded in the Act, meaning that Parliament’s consent will be needed to change these requirements.
  • The enforcement powers of the OIO will be further strengthened. The OIO will be able to accept undertakings from investors who have breached the Act, and these will able to be Court-enforced. Civil penalties will be increased and split – individual penalties will be increased to $500,000 and corporate penalties increased to $10 million. The OIO will also be able to seek urgent orders from the Court compelling investors to take (or not take) certain steps.
  • The investor test will be simplified, with key changes including the replacement of the “good character” test with a set of factors the decision-maker may take into account. Unless there has been a significant change in circumstances, repeat investors will only have to satisfy the test once. There will be changes to the assessment of corporate character, allowing the decision makers to consider offences or contraventions by, and allegations against, corporate entities with “substantive control” over the investment.
  • The “benefits test” will also be simplified, replacing the current 21 factors with fewer, broader, powers. Only positive impacts may be considered under each factor (it is currently not clear whether negative impacts can be taken into account), other than for extraction of water for water bottling, where positive and negative impacts (e.g. on water quality, sustainability) may be considered.
  • Doing away with the “substantial and identifiable” test for non-urban land over 5 hectares, and replacing it with a proportionate approach where the benefits must be proportionate to the land’s sensitivity and the interest being acquired in it, noting that acquiring farmland will still be subject to stricter requirements.
  • Removing the requirement for benefits to be measured relative to the current state of the sensitive land (the counterfactual).
  • Māori cultural values (e.g. that support access over land for the purposes of stewardship of natural heritage or a natural resource) can be favourably taken into account when making decisions on consent.
  • Timeframes will be introduced and will be set out in regulations. Timeframes will run from the point in time that the OIO accepts an application for assessment. The OIO is able to extend a timeframe once, either for a prescribed period, or an alternate period that is agreed with the applicant.
  • The following transactions will no longer be screened under the Act:
    • leases (and other less than freehold interests) on sensitive land that is not residential land if they are for a term of less than 10 years (in calculating this term, options and rights of renewal will no doubt still be included);
    • small increases in existing shareholdings (there is no detail about what “small” means);
    • the list of “adjoining” sensitive land will be trimmed down considerably. Land adjoining the foreshore, lakebed, conservation land, certain regional parks, some land significant to Maori, will still continue to be screened.
  • The following investors will no longer be screened:
    • listed entities that are majority owned and wholly controlled by New Zealanders will be “removed from the Act”. (Presumably, these listed entities will be exempted from the definition of “overseas person”).  It is not clear how the “wholly controlled by New Zealanders” test might be met;
    • Kiwisaver funds will also “be removed from the Act”;
    • non-listed entities and managed investment schemes that are majority owned and wholly controlled by New Zealanders, do not have significant foreign government backing, and have a record of compliance with New Zealand and foreign laws will be allowed to apply for an exemption from the consent requirements of the Act. Again, much will turn on the “wholly controlled by New Zealanders” test.
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