New Zealand’s overseas investment laws

Giving with one hand, taking away with the other

2021 was the “year of delivery” for the OIO, with the implementation of a number of long signalled changes to New Zealand’s overseas investment laws. As we discuss below, some of those changes have helped provide clarity and more timing certainty for the OIO process, but others have significantly added to cost and complexity. In some cases, we think the changes have expanded the reach of the OIO.

On the positive side, November 2021 saw the introduction of changes to the much criticised “benefit to New Zealand” test that is required to be met before an overseas person can acquire an interest in ‘sensitive land’. We expect this new test to provide more certainty and objectivity to the OIO process. It is accompanied by statutory timeframes and assesses the likely benefits of a proposed overseas investment in seven broad categories or ‘factors’ (economic benefits/creation of jobs, benefit to the environment etc). Importantly, the new test removes the previous requirement to measure the benefits against a “hypothetical New Zealand investor”. Instead, it requires that the (net) benefits under each relevant factor are measured against the current state – which will mean that applicants are more easily able to demonstrate those benefits. In addition, the new law provides guidance to the OIO to apply proportionality in assessing the benefits having regard to the sensitivity of the land and the nature of the investment (i.e. the more “sensitive” the land the greater the benefits that will be required to be demonstrated). The changes retain the previous rules in relation to “farmland” (including agricultural/viticulture land), which impose a higher threshold (i.e. the benefits need to be substantial), and place more importance on the economic and New Zealand involvement benefits.

On the more frustrating side, changes have been introduced that require additional scrutiny and ministerial approval for significant business assets (transactions over NZD100 million) and “sensitive land” transactions where the applicant is classified as a “non-NZ government investor” (or involves a “strategically important business”). These changes could result in significant additional cost to applicants. While the changes have helped the situation by increasing the threshold for “non-NZ government investor” interests to be more than 25% (instead of 10%) and require the interests to be from the same country, we consider that more can be done. In the context of private equity funds and institutional investors, the “non-NZ government investor” test has been very challenging and has proved somewhat unclear and arbitrary. Determining whether a fund qualifies as a “non-NZ government investor” requires a considerable degree of analysis of the investor base and can turn on the way that the fund is structured. While it is possible for funds to apply for exemptions, we strongly believe that the law needs to be amended further to ensure that vehicles managed by private equity funds which have a relatively minor passive indirect investment from government vehicles or government backed superannuation funds, are not treated as “non-NZ government investors”. This approach would be consistent with the approach taken in Australia.

The other major change in 2021 was the replacement of the temporary notification regime with the new screening/‘call in’ regime. In substance, this means that the OIO can review acquisitions of “strategically important businesses” (SIB) against national security and public order risks, even if the “significant business assets” or “sensitive land” tests are not triggered (i.e. for smaller transactions or transactions not involving sensitive land). The intent is to ensure that there is a screening process for all investments in “SIBs”, although the regime is only mandatory for certain classes of SIB (military/critical direct suppliers), and voluntary for all others. The rules set out a list of the core “strategically important businesses” categories (ports, airports, telecommunication networks, financial services infrastructure etc), and additional categories can be included by regulation. The existence of the “call-in power” and its largely voluntary nature has created uncertainty for transactions. While it is possible to obtain confirmation from the OIO that it will not be used, the process has added another layer of cost and uncertainty. This is particularly the case in the healthcare and financial services sectors as businesses in those sectors tend to have large amounts of sensitive customer/patient data, which can fall within the “call in” regime.

We expect that 2022 will be a period of settling in, with the OIO and legal advisors becoming more familiar with the regime. We also hope to see some positive amendments and OIO guidance being issued to ensure that the positive steps taken by the government in relation to the OIO in the last few years can be fully realised.

Read the M&A Forecast

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