The Government has introduced the Overseas Investment (Urgent Measures) Amendment Bill (Urgent Measures Bill) to fast track amendments to the Overseas Investment Act 2005 ("Act") in response to the economic impact of COVID-19. The Urgent Measures Bill carries over some of the key changes proposed in the Overseas Investment Amendment Bill (No 2) ("Amendment Bill No 2"). It also introduces a new temporary notification power that applies to transactions that do not require consent, and goes considerably further than what was proposed in the Amendment Bill No 2.
The Bill is a response to the Government's concern that productive firms and strategically important assets are vulnerable to acquisition by overseas investors at "fire sale prices" because of the impacts of the pandemic. At the same time, the Government wants to ensure that the application of the Act does not unnecessarily jeopardise the viability of distressed businesses that need quick access to finance.
These competing objectives are achieved by:
- Bringing forward the national interest test that currently sits in Amendment Bill (No 2). This applies to "transactions of national interest" which includes transactions that involve non-New Zealand government investors and strategically important businesses (SIBs), noting that the Minister has a power to effectively deem any transaction a national interest transaction. We consider it likely, given the approach under the temporary notification power, that all transactions requiring consent will be assessed against the national interest (at least while the temporary powers remain in place).
- Introducing a new temporary notification power that will stand in for the call-in power carried over from Amendment Bill No 2:
- This power temporarily requires notification of all transactions that do not require consent, regardless of their dollar value, where an overseas person acquires a 25% or more interest in a business (or increases an interest above certain thresholds) or acquires assets equal to more than 25% of the business' assets. It then extends the broad national interest test to such transactions (under the Amendment Bill No 2 this test only applied to transactions that required consent).
- It is considerably more far reaching than the call-in powers which are on hold while the temporary powers are in place. Specifically, the call-in powers are limited to transactions involving SIBs and narrower national security and public order considerations.
- This is a notification rather than consent process, requiring a completion of a simple online form without the payment of a fee (as opposed to a detailed consent application). To further mitigate concerns, time frames will be introduced in regulations with "all clear" decisions to be given within 10 working days (which is expected for the vast majority of cases) and within 30 working days to 60 working days where a more detailed review is required.
- On notification, the Minister can impose conditions on, block or unwind transactions, although the Government / Treasury have stated that this will be used sparingly and is not intended to force assets to remain in New Zealand ownership.
- Bringing forward provisions in Amendment Bill No 2 that remove the need for consent for low risk investments, including changing the threshold for the definition of "overseas person" for New Zealand listed companies from 25% to 50% ownership or control, and reducing the scope of what constitutes sensitive adjoining land. Note that the transactions that are removed from the scope of the Act may still be subject to the temporary notification power.
- Bringing forward provisions in Amendment Bill No 2 that simplify the investor test, including amending the "good character" test so that only serious proven matters and matters before a court are considered.
- Introducing new exemptions by way of regulations in order to support New Zealand's ability to access debt and equity financing.
The Government states that the national interest test and temporary notification powers will be rarely used to decline or prohibit transactions. In relation to distressed businesses, it notes that, wherever possible, it remains committed to such investments proceeding, with or without conditions, to ensure business viability. However, the uncertainty arising from the broad discretion provided in the Urgent Measures Bill, particularly around the national interest, could unnecessarily deter the beneficial overseas investment that New Zealand also urgently requires.
The Government seeks to mitigate the uncertainty risk by introducing guidelines on factors that will be considered when assessing the national interest and introducing timeframes around response to notifications under the temporary notification power (the 10 or 30 to 60 working days referred to above, depending on the detail of the review).
The changes introduced by the Urgent Measures Bill will effectively mean that any business acquisition, and the injection of new equity in many cases, will require notification to the OIO. We would highly encourage anyone with any planned acquisition, sale or equity injection to get in touch to discuss the implications of the changes.
Legislative process and transitional arrangements
There will be a truncated Select Committee process, with the Urgent Measures Bill due to pass in mid-June 2020, so there may be a limited opportunity to make submissions. Importantly, the new Act will only apply to transactions entered into after it comes into force (which is two weeks after it is passed). The existing Act will continue to apply to all transactions entered into before the commencement date, including ‘conditional agreements’ for sale and purchase.
The remaining provisions in the Amendment Bill (No 2) that have not been fast tracked will be moved to a new Overseas Amendment Bill (No 3). This (No 3) Bill will go through the usual legislative process and is expected to pass within 12 months. Importantly, the Government has indicated that, during this process, consideration will be given to the changes introduced under the Urgent Measures Bill. This means that, while some of the changes have been fast tracked, they will still be scrutinised (eventually) by a Select Committee with the benefit of submissions and ongoing official advice.
Further discussion of key amendments
Permanent national interest test
The Urgent Measures Bill brings forward the national interest test from Amendment Bill No 2, which only applies to transactions that already require consent under the Act and acts a backstop tool allowing the Government to overlay national interest considerations in addition to the existing investor and benefits test. Full details of the national interest test can be found in our article here.
In short, the test applies to "transactions of national interest", defined as transactions that involve SIBs (eg ports, airports, electricity, telecoms – the details will be in regulations) and non-New Zealand Government investors. However, the national interest test can also be applied to any other application for consent if notified by the Minister as a national interest transaction. Further what is the "national interest" is not defined. If the transaction is considered contrary to the national interest, conditions can be imposed to mitigate any risks or consent may be declined.
As noted above, the test is intended to be rarely used. Indeed the Cabinet Paper accompanying the Urgent Measures Bill acknowledges that "overuse of the national interest test during the pandemic, or at any time in the future, would risk being seen as protectionist and could reduce New Zealand’s attractiveness to foreign investment". It notes that this would undermine one of the key priorities of the Phase Two reforms.
However, the uncertainty arising from the broad discretion in the Act risks having a chilling effect on potential investors already facing an expensive and often protracted application process. To address this risk the Government is issuing guidance on factors it will consider when applying the national interest test. However, based on the Cabinet Paper, the factors remain very broad and, accordingly may be of limited assistance in reducing risks associated with uncertainty. These factors are outlined below.
Temporary notification scheme
As noted above, the new temporary version of the call-in provisions extends this broad national interest test to transactions that do not require consent where the acquisition results in an ownership interest (25% or greater) or increase an existing interest up to our beyond 50% or 75% or up to 100%. Unlike the call-in provisions in the Amendment Bill No 2, investors are required to notify all transactions that fall within this ownership interest category (notification was optional for some transactions under the Amendment Bill No 2).
In practice, the temporary notification power will mean that a wide range of transactions, previously not subject to the Act, will be required to be notified to the Overseas Investment Office in advance of completing a transaction. The Cabinet Paper notes that the introduction of the notification power will significantly expand the scope of the Act and risks "creating significant uncertainty, higher workloads and costs for investors, their advisors, and the [OIO]". It also risks "slowing low risk, economically valuable transactions that support firm viability".
This is a notification process, not a consent process so detailed information is not required, nor is any fee payable. The form is a 2 to 5 page document that will be available on the OIO website. It will require information such as the identity of the investor, ownership and control of the investor, any links to foreign governments, the nature and size of the transaction, and the commercial rationale for that purchase. The extent to which this process is kept simple will depend in part on how much detail the OIO requires.
Once the Minister receives notification, he or she can take a range of actions including imposing conditions, prohibiting a transaction, ordering disposal of the asset or recommend statutory management. In the vast majority of cases it is expected no action will be taken and the transaction can proceed. If allowed to proceed after notification, the transaction cannot subsequently be unwound so some certainty is then provided.
To mitigate against negative impacts on overseas investment the Government has proposed a triage process where David Parker (the Associate Minister of Finance) will be responsible for considering whether a more detailed review of a transaction is required (within 10 days). Any subsequent decision on whether the transaction is contrary to the national interest will be made by the Minister of Finance (within 30 days with an option to extend by a further 30 days).
While most transactions will be cleared within 10 working days, this can cause significant disruption for urgent transactions, and urgency is more likely to be a factor in times of economic stress. The additional up to 60 days where a detailed review is required could result in a transaction not proceeding and or a firm failing as a result.
This temporary power will be reviewed every 90 days, and will be removed once the COVID-19 pandemic or its economic aftermath cease to have a significant impact in New Zealand. The Cabinet Paper suggests it will extend beyond the first 90 days. Once it is removed, the call-in power provision carried over from the Amendment Bill No 2 will come into force.
Guidance on the national interest test
The Government proposes to publish guidance on how the national interest test will be applied. The guidance is attached to the Cabinet Paper at Appendix 2. This is intended to offer additional certainty to investors, advisors and agencies on the operation of the test. The Cabinet Paper states that these matters should include:
whether the investment poses risks to national security, public order and international relations (the security and intelligence agencies are responsible for providing advice on national security matters);
whether the investment results in the acquisition of a natural monopoly or other business with significant market share;
the investment’s likely economic and social impact - this includes considering an investment’s alignment with the Government’s economic plan, such as whether it will support thriving and sustainable regions or New Zealand’s transition to a clean, green and carbon neutral economy;
the investment’s alignment with New Zealand’s values and interests and broader policy settings,
the character of the investor, including whether it is a foreign government investor; and
over the period of the pandemic, whether the target business is in financial distress as this reflects increased risk that ordinarily productive businesses could be sold at depressed prices. The guidance states that, wherever possible, the Government remains committed to such investments proceeding, with or without conditions, to ensure business viability.
Changes that reduce the scope of the Act and otherwise improve its operation
The Bills will also bring forward provisions in the Amendment Bill that remove the need for consent for low risk investments. In particular, companies incorporated in New Zealand and listed on the NZX will no longer be an The Urgent Measures Bill will also bring forward provisions from the Amendment Bill No 2 that remove the need for consent for low risk investments. In particular, companies incorporated in New Zealand and listed on the NZX will no longer be an overseas person unless:
- the company is more than 50% beneficially owned by one or more overseas persons; or
- one or more overseas persons who each own 10% or more of the securities either:
- individually or together control the composition of 50% or more of the company's governing body; or
- exercise or control the exercise of more than 25% of the voting power at a meeting of the company's security holders.
In relation to changes to sensitive land, currently land can be classed as sensitive if it has certain characteristics or adjoins land with sensitive characteristics. The categories of adjoining land will be significantly reduced to include only coastal marine area (directly), lakebed conservation land, national parks and certain regional parks, and certain land significant to Māori. Sensitive adjoining land accounts for around 16% of all consent applications and removing these transactions from the Act. The term for leases will also be increased from three years to 10 years.
The Government is also bringing forward provisions that remove the need for consent for low risk investments, including:
- amendments to allow any overseas person entity to reorganise their corporate structure where there is no change in ultimate control or ownership of the assets, and
- amendments to allow overseas persons to make minor adjustments to existing shareholders
Further details on these changes can be found in our Overseas Investment Amendment Bill Series
New exemptions are also introduced by way of regulations in order to support New Zealand's ability to access debt and equity financing.
Importantly the Urgent Measures Bill will introduce the new investor test set out in the Amendment Bill (No 2). This is a significant improvement on the status quo, replacing the broadly drafted requirements for good character with a bright line test, removing the business experience and acumen factor and the requirement to demonstrate a "financial commitment" to the investment and providing that the investor test is a negative test.
Changes that will not be fast-tracked (will process under Amendment Bill (No 3)
Amendments that will progress within Amendment Bill (No 3), and are expected to pass within 12 months include:
- The repeat investor test (which enabled investors to rely on previously meeting the test);
- Changes to farmland advertising and heightened benefit test criteria for farmland;
- Enhanced tax disclosures;
- Special land changes;
- Benefit test changes (including changes to the counterfactual test and removal of the substantial and identifiable requirement);
- Removal of short term leases (the threshold to be increased from three years to 10 years); and
- Timeframes for ordinary consent applications.
Further details on these changes can be found in our Overseas Investment Amendment Bill series