Changes in the M&A regulatory environment

  • Publications and reports

    16 February 2023

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In the last two years the overall regulatory environment for M&A has seen significant change, particularly in relation to Foreign Direct Investment (FDI). The M&A activity over the same time has also meant that there has not been much time for the dust to settle. What can we expect this year from the key M&A regulators and their regulatory regimes?

Overseas Investment Office

Of the key M&A regulators in New Zealand, the Overseas Investment Office (OIO) and the regime it administers has undergone the most significant change in a fairly compressed timeframe. The heavy volume of M&A activity in 2021 and early 2022 has not allowed for much downtime to develop and reflect on the interpretation of and process for the new regime.

By way of summary, the last two years have seen the adoption of a new simplified investor and benefits test, the National Security and Public Order (NSPO) and national interest regimes, mandatory tax disclosures, various low risk transaction exemptions, processing timeframes and many other technical amendments.

Overall, as we have said before, many of the changes have improved the functioning of the OIO regime, such as the new simplified investor and benefits tests. These have allowed the OIO to be more streamlined and pragmatic in their approach to consent. But there is still work to be done to fine tune the regime. A particular example, in our view, being the overreach of the national interest regime in relation to private equity and fund
manager transactions. Where aggregator investment vehicles happen to have unrelated foreign government investors from the same country with small individual holdings collectively going above a 25% threshold, a national interest assessment is required. This incurs substantial additional cost (NZD83,700), and in most cases the investors involved (passive pension funds etc) do not warrant that level of scrutiny.

Over the coming year, the OIO and Treasury will likely have more bandwidth to develop, practice and fine tune the new regime. However, other than changes to fix technicalities, we do not expect changes to the core regime – particularly in advance of the election. We also expect to see processing timeframes getting shorter as M&A volumes ease.

Commerce Commission

As with the OIO, the pressure on the Commerce Commission from the high M&A activity in 2021 and early 2022 has subsided. Accordingly, we expect to see their processing timeframes reverting to their historical pre-Covid timing in 2023.

The Commerce Commission’s focus in 2023 will likely be the implementation of the new misuse of market power test coming into force on 5 April 2023. The new provision is intended to address the misuse of market power by prohibiting a business with a substantial degree of power in a market from engaging in conduct that has the purpose, effect, or likely effect of substantially lessening competition in a market.

Takeovers Panel

We do not expect to see fundamental changes being proposed to either the Takeovers Code regime or the operation of Schemes of Arrangement in the coming year, other than to address technicalities identified in past consultations.

Of interest, is the Panel’s recent commentary on deal protection devices concerning Code companies. While deal protection devices can have a role in eliciting offers (and offers at higher prices) the Panel may have concerns where deal protection devices have the effect of inappropriately reducing the potential for competing transactions.

The Panel has therefore encouraged boards to think carefully before adopting overly restrictive or coercive deal protection devices early in a transaction. Given the current economic climate and the resulting generally depressed asset prices, there is likely to be greater hostile competition for assets. We believe that there is real scope for deal protection devices to be tested in the coming year. 

Financial Markets Authority

The FMA has a new enforcement focus on ‘greenwashing’ i.e. misleading conduct through overstating the “green” features of a product. Related to this is also the arrival of the climate-related disclosures regime next year for various significant entities (e.g. listed issuers, and large banks, insurers and investment managers).

We expect “green” due diligence to continue to become a more prominent feature of M&A, particularly for fund managers considering the FMA’s recent review of integrated financial products. Further, for those entities caught by the climate-related disclosure regime, there will be significant internal due diligence work to prepare climate records, identify the information required to prepare disclosures covering governance arrangements, risk management, strategies and metrics and targets for mitigating and adapting to climate change impacts and verifying the same.

While the FMA has signalled an intention to take an educational and constructive approach on the launch of the regime, and while there are transitional reporting provisions, the FMA will expect climate reporting entities to have a ‘proper crack at it’ in exchange.