The Overseas Investment Office (OIO) has recently advised that its interpretation of the definition of “overseas person” under the Overseas Investment Act 2005 (the ‘Act’) is markedly different from what this firm and, to our knowledge, the market generally has previously adopted.
Broadly, a company is an overseas person under the Act if 25% or more of any class of its securities are held by an overseas person.
Acquisitions by an overseas person of “significant business assets” or “sensitive land” (as defined in the Act) require OIO consent. In addition, if an overseas person purchases shares in a company which holds sensitive land and that purchase results in the company becoming an overseas person, the purchaser needs OIO approval for the purchase. For example, if a company which holds sensitive land has 24.6% overseas ownership, a purchase by an overseas person of say 1% from a non-overseas shareholder will require OIO approval.
The message we have received from the OIO is that shares in a listed company registered in the name of a custodian or nominee which is an overseas person (which includes custodian companies of the registered banks and custodians of many of the brokers) will be counted as shares held by an overseas person under the Act, even where the custodian or nominee holds the majority of those shares on bare trust for New Zealanders.
In our view, this interpretation is inconsistent with established market practice since the commencement of the Act, which has been to look through custodians and nominees to the beneficial owner of the shares, thereby excluding shares held by the custodians on behalf of New Zealanders from the percentage overseas ownership of a listed company. We also view this as an incorrect interpretation of the wording of the Act.
As discussed in further detail below, we believe that the position adopted by the OIO will be problematic for a number of listed issuers, for investors in listed issuers and for custodian and nominee companies.
Overseas persons under the Overseas Investment Act
Many listed companies, and overseas investors in listed companies, will be aware of the difficulty in assessing the level of overseas ownership of a listed company for the purposes of the Act.
Given the dispersed and layered ownership of listed company securities, determining the level of overseas ownership of a particular listed company is an imperfect science. Best practice has been to commission a register analysis by the likes of Computershare, Orient Capital or Merlin, which, to the extent possible, looks through bare trusts (such as custodians or nominees) to determine the true level of overseas ownership of the company's shares.
This approach is consistent with the purpose of the Act - to regulate overseas ownership and control of sensitive New Zealand assets - given that a custodian or nominee neither beneficially owns nor controls a share it holds on bare trust for an investor, the investor does. In our view, this approach is also consistent with the Act's definition of "overseas person".
The relevant provisions in further detail
Under the Act, a company will be an "overseas person" if overseas persons have:
- 25% or more of any class of the company's securities;
- the power to control the composition of 25% or more of the company's governing body; or
- the right to exercise or control the exercise of 25% or more of the voting power at a meeting of the company.
As noted above, the market has previously interpreted limb (a) as referring to the true owner of the securities, looking through any custodial or other bare trustee arrangements. However, the OIO's position is that (a) also applies at the registered holder level. Therefore, if a custodian that is itself an overseas person is on the register as the holder of the shares, notwithstanding that those shares may be owned by New Zealand investors, for the purposes of the 25% threshold, the shares will be deemed to be held by overseas persons.
Consequences of this interpretation
As a large number of the major New Zealand custodians are overseas persons under the Act, and a large proportion of the shares held through those custodians are owned by New Zealanders, this interpretation dramatically increases the proportion of shares in New Zealand listed companies generally that are deemed to be held by overseas persons for the purposes of the Act.
In our view, this is likely to mean that a number of listed issuers who did not previously consider themselves to be overseas persons under the Act are in fact overseas persons in the OIO's view, with the attendant consent requirements for transactions involving sensitive land or significant business assets.
This interpretation also means that any share purchase by a New Zealand investor through such a custodian is deemed to be an acquisition of shares by an overseas person. Consent is required under the Act for any acquisition of securities by an overseas person in a company that holds sensitive land, if that acquisition will result in the company becoming an overseas person. Therefore, the OIO's interpretation has the consequence of requiring New Zealanders to apply for consent under the Act if shares they propose to acquire will result in a company which holds sensitive land having 25% or more foreign ownership, simply because they intend to have those shares held on their behalf by a custodian which is an overseas person.
Not only do these issues apply to transactions going forward, given that the OIO's position is that this has always been the OIO's interpretation of the Act (notwithstanding that market practice and the OIO's enforcement record since the Act was brought into force would indicate otherwise), the position adopted by the OIO calls into question a wide range of previous transactions undertaken without OIO consent and would require retrospective applications for consent for such transactions.
The OIO has indicated that it has in the past provided exemptions to bare trustees with the effect that those bare trustees will not be considered overseas persons under the Act (and therefore only shares held by those bare trustees on behalf of overseas persons will count towards the 25% threshold). Subsequent to becoming aware of the OIO's interpretation, we have also assisted in obtaining such exemptions for certain custodian entities.
However, the OIO provides these exemptions on a confidential basis, disclosing the details of the exemptions only upon receipt of an Official Information Act request. This serves to highlight the problematic nature of the OIO's position, as without those exemptions being public there is no way for a New Zealand listed company, or an investor in such a company, to accurately assess whether a transaction will require OIO consent.
We understand that the OIO is considering providing a class exemption along the lines of the individual exemptions currently in place to certain bare trustees. However, the scope and timing of this exemption is currently unclear.
Implications going forward
In our view, the only acceptable outcome is for a position to be reached, whether by regulation or by the OIO reverting to what we consider to be the correct interpretation of the Act, whereby holdings of custodians or nominees as bare trustee are ignored for the purposes of calculating overseas ownership of a listed company under the Act, with the beneficial holder of those securities being all that is relevant. Anything more limited will risk continued breaches of the Act as a result of transactions that are in no way inconsistent with the purpose of the Act.
Until such time as this position has been reached, listed issuers and investors in listed issuers will have a much more difficult task in interpreting the application of the Act to any particular company or transaction. Custodians and nominees that have overseas ownership will also need to consider whether to seek an exemption from the OIO to ensure that they are not falling afoul of the requirements of the Act. We see this as an unhelpful and altogether avoidable result that creates an additional burden for transactions never intended to be caught by the Act.
BACK TO TOP
This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.