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 fourth and final in a series of articles discussing the changes introduced by the Bill – the first article having covered the new national interest test and call in powers, the second article having reviewed the exclusion of lower-risk investment from the scope of the regime, and the third article having analysed the new investor and benefit tests.
As noted in our previous articles, the Bill will struggle to pass before the election. The timeframes were already tight and the Government has since undertaken not to advance its normal legislative programme in light of COVID-19. Comments from David Parker suggest that the immediate focus will be on changes to the Act viewed as urgent in light of COVID-19 impacts. A key focus is likely to be the national interest test where, as a result of COVID-19, strained New Zealand businesses are more vulnerable to purchase by well-capitalised overseas investors (referred to recently in the media as "predatory acquisitions"). There may also be concerns about the consent process under the Act acting as a barrier to firms needing urgent finance or equity in order to survive the crisis.
The Government has two options: to fast-track the Bill through Parliament or to introduce separate legislation that brings forward the most urgent parts of the Bill together with any other COVID-19 related amendments. The second option may well be preferred given the Bill is lengthy and complex and arguably requires the full Parliamentary process, including the opportunity for submissions at the Select Committee stage. It is notable that the Bill is currently in the bottom half of the Order Paper, which further suggests a separate Bill could be the preferred option for short-term fixes. We will provide a further update once changes, if any, are announced.
This final article covers a range of other changes to the Act, intended to streamline the consent process and strengthen or clarify the Overseas Investment Office's (OIO) enforcement powers. We also summarise commencement dates and transitional provisions.
We welcome you to join our CPD seminar on Tuesday 5 May 2020, where will be discussing the range of changes to the Act that we have covered in this series. To register your interest in attending, please email [email protected].
Streamlining consent processes and strengthening the OIO's powers
In addition to the big-ticket items in the Bill discussed in our previous articles, the Bill introduces a series of amendments that clarify or seek to improve more operational aspects of the Act. These include:
- Amending the farm land advertising requirements, to provide that advertising must occur prior to a transaction being entered into – addressing concerns by investors, vendors and the OIO, that advertising requirements were outdated, inflexible and insufficient. As a consequence, applicants will be able to seek an exemption to this requirement in advance of entering into the transaction (noting other changes to the Bill mean that exemptions will be more difficult to obtain than currently).
- Amending the current requirement for the vendor to offer special land (foreshore, seabed, riverbed or lakebed) to the Crown as a condition of a transaction. This Bill provides that the offer is made by the overseas person rather than the vendor, which means it can be dealt with following the transaction (and consent). The offer will be recorded on the title, compensation provisions will apply and the Crown will be required to make a decision whether to acquire the relevant land within set regulatory timeframes. This amendment is welcome as it removes the current significant delays and costs that can be associated with addressing special land offers in advance of consent.
- Providing for regulations to set statutory timeframes for reviewing applications. Treasury has previously indicated that these timeframes will be tailored to the type of application made (eg, significant business assets or sensitive land) and extensions will be available. However, while considered at the consultation stage, there are no consequences for the OIO if it fails to meet the statutory timeframes, other than having to report on compliance with them. Whether this is sufficient to create any significant impetus to improve consent timeframes or increase investor certainty remains to be seen in practice.
- Increasing the civil penalty cap from $300,000 to $500,000 (in the case of an individual) or $10 million (in any other case, ie, for corporates). The upper limits in the Bill reflect the limits for penalties for restrictive trade practices in the Commerce Act 1986 and reflect a broader policy that corporates should face higher penalties than individuals in order to achieve compliance.
- Providing the OIO with the power to accept enforceable undertakings. The OIO currently enters into settlements outside any legislative framework. This amendment provides clarity around the powers and, arguably, checks and balances for applicants.
- Clarifying the OIO's ability to seek injunctive relief. The OIO can already seek injunctive relief under the Court's inherent jurisdiction – this will now be specifically provided for in the Act.
Commencement of the provisions in the Bill will likely be staggered, most notably where the national interest test must be implemented within six months, and the call in powers and changes to the benefit test within 12 months.
As with the Phase I reforms, the amended provisions will not retrospectively apply to existing transactions, applications and contraventions (except that the OIO can enter into enforceable undertakings for previous contraventions). For consent holders that cease to be overseas persons under the amended Act, an application can be made for variation to the consent (eg, to relieve the consent holder from compliance with certain conditions), although such a variation does not have to be granted.
Farm land advertising and special land
Farm land advertising
At present, farm land must be advertised for sale on the open market in accordance with detailed regulatory requirements before the OIO can consent to a sale or lease. That advertising can be carried out after the transaction for which consent is sought has been entered into. Exemptions are available but cannot be sought in advance of the substantive application being made.
These provisions attracted criticism from applicants, given the outdated and ineffective nature of the advertising requirements (for example, placing a placard on the land) and the lack of flexibility around alternative forms of advertising. The fact that the advertising requirement could be met after
a conditional sale and purchase agreement also appeared to encourage vendors to enter into bare minimum advertising arrangements.
The Bill amends the Act to require that farm land (or the interest being acquired) must be advertised for sale on the domestic open market in accordance with regulations (yet to be provided) before
a transaction is entered into with the overseas person. Exemptions can be granted for advertising altogether or as to specific requirements (and either for a single transaction or to a class of transactions or overseas persons by way of regulations). The same pre-requisites applying to exemptions more broadly under the Act apply also to advertising exemptions (ie, it must be necessary, appropriate or desirable and not broader than is reasonably necessary). Applicants can seek exemptions at any time (ie, in advance of transacting), which if granted may be subject to conditions, and publication of the exemption decision can be deferred or dispensed with.
The application of pre-requisites for general exemptions from the Act to the farm land advertising exemptions suggests that these will be granted infrequently (where the OIO has taken a conservative approach to the general exemption provisions introduced in the Phase I reforms). While allowing advance applications for exemption is helpful, it is a necessary consequence of requiring that the compliant advertising be carried out prior to a transaction being entered into. The benefits of allowing early exemption applications will largely depend on how quickly the exemption application can be processed.
Currently, where sensitive land includes special land (foreshore, seabed, riverbed or lakebed) the offer of that land to the Crown by the seller (not the overseas person acquiring the land) is treated as one of the "benefits to New Zealand" or (in the case of forestry) is a compulsory requirement. These provisions create significant delays and increase compliance costs, but have only resulted in a very small number of Crown acquisitions of special land.
Under the Bill, purchases of freehold interests or pastoral leases where the land or lease includes fresh or seawater areas will be subject to the potential acquisition of those areas by the Crown from the overseas person – ie, following completion of the transaction.
The process set out in the new Schedule 5 takes a similar approach to the acquisition of land under the Public Works Act 1981, allowing for a notice to be placed on the record of title and adopting the compensation assessments from that Act. The Crown may decide not to acquire the relevant land, but must make a decision within a set timeframe (to be set out in regulations). Other details will be set out in regulations, such as the standard terms of acquisition (although these are negotiable).
These changes will significantly decrease the time and cost impacts that fresh and seawater areas (formerly special land) can have on a transaction by shifting the survey and valuation activities from pre-consent activities to post-completion activities, but avoiding enduring uncertainty as to the outcome by including an acquisition deadline.
While the conditions are mandatory (where they apply) the Minister for Land Information has a discretion not to proceed with an acquisition where the Minister is not satisfied with the acquisition cost, or that the amenity and conservation value of the fresh or seawater area outweighs any potential risk, liability and the costs of acquisition or ownership. This is likely to be particularly relevant for riverbeds in remote forestry blocks where the costs of survey are significant and public access and conservation benefits are limited.
Application processing timeframes
Application processing timeframes
The lack of statutory timeframes and the extent of the delays under our existing regime are out of step with international practice, and are major issues for investors. The unclear and potentially lengthy decision timeframes can create significant uncertainty and disruption to business operations for both applicants and vendors, and more broadly, have a chilling effect on beneficial investment in New Zealand. While the regulator has attempted to bring some certainty to its operations in recent years through reporting mechanisms, the delays remain a major concern.
The Bill enables regulations that set timeframes for the exercise of powers, performance of functions and duties and the provision of services under the Act. Regulations will also require reporting on compliance with set timeframes. The details of such timeframes will not be known until the regulations are made available, but Treasury outlined the likely approach in its update late last year, including that:
- Timeframes will be tailored to each type of application (for example, different timeframes for significant business assets and for sensitive land applications). This is intended to reflect the different levels of complexity that apply in each circumstance. While varying deadlines may cause some initial confusion (particularly for investors who make a variety of investments), on balance it appears preferable to enable lower risk transactions to be completed within relatively shorter periods of time.
- The OIO will have an initial period to review an application, to give it an opportunity to determine whether further information is required – similar to the current quality assurance process it adopts.
- The OIO will be able to extend timeframes, either for prescribed periods or as agreed with applicants.
Notably, failure to comply with the statutory timeframes will not impact the outcome of the application, and the legislation explicitly notes that investors will not be entitled to compensation or relief if the timeframes are not met. In its consultation paper, Treasury had raised the possibility that timeframes could be binding, with the effect that failure to meet the deadline would automatically deem the transaction approved (an approach taken in jurisdictions such as Canada). This approach was raised on the basis that it would encourage applicants to make high-quality submissions (to pass the initial review process) and the regulator to appropriately direct resources to application assessments. Ultimately this was not adopted.
Without giving the timeframes any real teeth, questions remain as to how effective these changes will be at improving the status quo, and the utility of any regulations relating to extensions – given, in effect, there is no legal need for such an extension.
As with all regulations, the devil will be in the detail, and we look forward to seeing the details of the timeframes and whether these will, in practice, provide any real comfort to investors. We also note that reduction in the scope of the Act (by changing the definition of overseas person in relation to listed New Zealand companies, among other things) and the changes to the benefits test may better enable more expeditious treatment of applications.
Currently, the court may order a person – either a corporate or an individual – in breach of the Act to pay a civil penalty not exceeding the higher of:
- three times the amount of any quantifiable gain;
- the cost of remedying the breach of condition; or
- the loss suffered by a person in relation to a breach of condition.
Penalties were not part of the consultation conducted by Treasury in early 2019, however, the Bill makes some significant changes in this respect. Specifically, the Bill increases the civil penalty cap from $300,000 to $500,000 in the case of an individual, and $10 million in any other case (eg, corporates).
Treasury has taken the view that the existing penalties are insufficient to deter non-compliance, based on the view that individuals and corporates stand to make significant financial gains if they breach the Act. The upper limits in the Bill reflect the limits for penalties for restrictive trade practices in the Commerce Act 1986 (which suggests there may be difficulty in persuading a Select Committee that alternative, lower figures are more appropriate). While it is a significant increase in the case of body corporates in particular, it reflects a generally accepted policy view that corporates should be subject to larger penalties than individuals, in order to encourage corporate regulatory compliance.
Note that these upper limits do not apply to a breach of an enforceable undertaking (discussed further below).
New enforcement tools
The Bill provides the OIO with a new power to accept enforceable undertakings from investors who have breached the Act. The courts will be able to directly enforce these undertakings. A breach of an enforceable undertaking make attract a civil penalty not exceeding $50,000 for an individual or $300,000 in any other case.
Under the status quo, the OIO enters into arrangements with a person in breach in lieu of prosecution but this is not a statutory process.
Enforceable undertakings provide the OIO an alternative to prosecution by enabling the party in breach to agree to do/not do certain things in exchange for the OIO not filing charges. It provides the OIO with more flexibility in its enforcement role and can avoid lengthy delays and uncertainty associated with court proceedings that could unnecessarily undermine a transaction or business operation. They are a feature of a range of regulatory regimes (including the Financial Markets Conduct Act 2013, the Commerce Act 1986 and the Health and Safety at Work Act 2015). While enforceable undertakings were flagged by Treasury late last year, they were not raised in the consultation in early 2019.
As in other regulatory regimes, enforceable undertakings would not save a person in breach of the Act from negative publicity. The Bill specifically provides that the regulator must publish a notice of the decision to accept an enforceable undertaking, and a summary of the relevant information or a copy of the undertaking (including any variations).
At present, the OIO has no explicit statutory power to apply for injunctive relief from the court to either prevent or require certain action. Rather, injunctions are sought and granted in reliance on the court's inherent jurisdiction. The Bill introduces an explicit power for the OIO (or any other person) to seek injunctive relief. Again, while not addressed in the 2019 consultation, this power was flagged by Treasury in late 2019.
The injunctive relief provisions demonstrate a further intention to align the OIO with other large regulators; the powers are consistent with similar powers given to regulators under the Commerce Act 1986 and the Financial Markets Conduct Act 2013.
A key difference from the status quo is that the court must not (as a condition of granting the interim injunction) require the OIO to give an undertaking to pay damages, in order to compensate the party the subject to the injunction for any damages sustained. Such undertakings are usually required under the court's inherent jurisdiction. Again, this revised position aligns with the Commerce Commission regime, which is similarly exempt from undertakings as to damages.
Commencement and transitional arrangements
Commencement of the Bill is staggered. Provisions relating to the national interest test, farm land advertising and special land/fresh or seawater areas come into effect no later than six months after commencement or earlier date by Order in Council, and provisions relating to the call-in powers and benefit test 12 months after commencement or earlier date by Order in Council.
The Bill sets out how the amendments will apply to existing transactions, applications and contraventions in Schedule 1AA. Importantly, as with the Phase I reforms, the amended provisions will not apply to existing transactions and applications. That is, the amended Act will only apply to transactions entered into or applications received on or after the commencement.
In relation to enforcement, the old Act will continue to apply to contraventions that occurred prior to commencement with the exception of enforceable undertakings, which will be available to address prior contraventions.
The transitional arrangements ensure the Bill does not have retrospective effect to avoid disadvantage to applicants (consistent with constitutional conventions that retrospective legislation should be avoided). However, retrospective application can be appropriate where there is a benefit to applicants – for example, if an existing consent holder or applicant is no longer an overseas person. The Bill addresses this by providing that persons who cease to be overseas persons on commencement of the Amendment Act may apply for variations to consents granted while they were an overseas persons (eg, to relieve the consent holder from compliance with certain conditions), although there is no obligation for such variations to be granted. Further amendments may be required to the Bill to clarify what happens with transactions that are completed before commencement but before consent is obtained, and after commencement would not otherwise be required to obtain consent.
Finally, the transitional arrangements clarify that an applicant must first meet the new investor test before relying on the repeat investor test provisions (discussed in Article 3
) and that circumstances and events prior to the Act will still be relevant to the new benefit and investor test assessments (eg, for the counterfactual/previous convictions).