Overseas Investment Amendment Bill (No 3)

Background

The Overseas Investment Amendment Bill (No 3) (No 3 Bill) passed its third reading on 19 May 2021. The No 3 Bill introduces significant changes in order to rationalise the overseas investment regime by removing transactions of minor impact from screening and streamlining processing of applications for transactions needing consent. Most of the new law introduced under the No 3 Bill will be effective 42 days after enactment.

The No 3 Bill is the second of two bills introduced in 2020 which aims to ensure that risks posed by foreign investment can be managed effectively, including increased risks during the ongoing economic impact of COVID-19, the first being the Overseas Investment (Urgent Measures) Amendment Act 2020 (Urgent Measures Act) which came into force in June 2020.

We set out the main changes to the Overseas Investment Act 2005 (Act) as a result of the No 3 Bill below.

Benefit to NZ test

As part of a consent application for sensitive land, overseas persons are required to show that the investment is likely to result in a benefit to New Zealand.

As part of the No 3 Bill, the benefit to New Zealand test will be changed to a simple “before and after” test to be proportionate to the sensitivity of the land and benefits factors consolidated. As part of the new test, the relevant Ministers must assess the benefit to New Zealand by comparing the likely result of the investment against the existing state of affairs as at the time the overseas investment transaction is entered into or the time the application is made (whichever occurs first). The existing “with or without” test will be removed which is expected to make applications far more straightforward.

Removing screening requirements for less sensitive transactions

The No 3 Bill amends the Act to only apply to leases of 10 years or more instead of 3 years where the land is sensitive (but not residential) land.

A large range of low-risk transactions would no longer be required to get consent. For example, the No 3 Bill removes the requirement for consent for:

  • certain categories of sensitive land that is currently only caught because it adjoins sensitive land; or
  • transactions involving fundamentally New Zealand-listed entities (which currently receive standing consents under the Urgent Measures Act).

Application of the national interest test

The Urgent Measures Act introduced a power for the relevant Minister to decline an application where the Minister considered the investment not to be in the national interest (see more information here).

The Finance and Expenditure Committee reported that the national interest test was unintentionally capturing investments that did not pose risks to New Zealand’s national security or national interest. The No 3 Bill attempts to address this issue by altering the test in the following ways:

  • the test automatically applies if a single foreign government holds more than a 25% in an investor seeking to acquire sensitive land or a sensitive New Zealand asset (the current threshold is 10%): and
  • the relevant Minister has the power to exempt “passive” foreign government investors from the automatic application of the test. The criteria for such exemptions is to be prescribed in regulations.

We note that the test will continue to automatically apply to investments by foreign governments in strategically important businesses (SIBs) (see further details below).

Scope of transactions subject to the call-in power

The Urgent Measures Act added a national security and public order call-in power to the overseas investment regime which will allow the Government to review certain investments in strategically important businesses (such as critical national infrastructure) (SIB). The call-in power is due to come into effect once the temporary emergency notification regime is repealed (discussed further below).

The call-in powers only apply to SIB transactions that are not subject to consent under the Act (i.e. not sensitive land, not fishing quota, or worth less than NZ$100m). The assessment as to whether a transaction is approved under the call-in power is broad and covers risks to national security or public order (which incorporates consideration of economic, security and other interests). The No 3 Bill limits the scope of the call-in power in relation to the acquisition of property and makes certain other changes to the original power proposed under the Urgent Measures Act.

The below table provides an overview of the requirements for certain call-in transactions for the acquisition of securities in entities who directly or indirectly carry on a strategically important business:

Entities within scope:  Military or dual use technology Critical direct suppliers to defence and security services Sensitive data (e.g. sensitive core personal data of New Zealanders) Media business with significant impact Other SIBs
Notification mechanism Compulsory Compulsory Voluntary Voluntary Voluntary
Trigger level >0% interest >0% interest >0% interest >25% interest >0% interest
Listed trigger level for the acquisition of securities* 10% interest 10% interest 10% interest >25% interest 10% interest
Trigger level incremental investments
  • An increase in any existing ownership or control interest over the above thresholds that:
    • equals or exceeds the relevant ownership or control interest limit (i.e. 25%, 50%, 75%, or 100% depending on the existing ownership or control interest); or
    • is in securities of a different class to the existing interest held; or
    • gives the overseas person or their associates any or more disproportionate access or control of the target.
Decision-making framework
  • All consents subject to automatic national security or public order condition.
  • Any other conditions can be included if the transaction gives rise, or is likely to give rise, to a significant risk to national security or public order, but must have regard to New Zealand’s international obligations.

*unless for listed issuers (other than ones which are media businesses with a significant impact), the investor obtains any or more disproportionate access to or control of the entity. Disproportionate access generally means being more than a passive shareholder.

 

The below table provides an overview of the requirements for certain call-in transactions for the acquisition of assets used in carrying on a strategically important business:

Assets within scope: Military or dual use technology Critical direct suppliers to defence and security services Sensitive data (e.g. sensitive core personal data of New Zealanders) Media business with significant impact Other SIBs
Notification mechanism Compulsory Compulsory Voluntary Voluntary Voluntary
Trigger level If the acquisition of the property would result in the overseas person or associate becoming or being a SIB, or being capable of being a SIB If the supplier considers that the acquisition may impact its ability to provide contracted services to an intelligence or security agency If the acquisition of the property would result in the overseas person or associate becoming or being a SIB, or being capable of being a SIB If the value of the property acquired is more than 25% of the value of all property owned by the media business immediately before the acquisition If the acquisition of the property would result in the overseas person or associate becoming or being a SIB, or being capable of being a SIB

Power to reinstate an emergency notification regime

The Government must decide whether the temporary COVID-19 emergency notification regime, which was introduced as part of the Urgent Measures Act in June 2020, will remain in place by Tuesday 25 May 2021. A third review of the regime was completed on 24 February 2021, with Ministers deciding to retain the notification regime until 25 May 2021.

If the regime is removed, the No 3 Bill empowers the Government to reinstate an emergency notification regime through regulations. The relevant Ministers may only make a recommendation if they are satisfied that the effects of the emergency justify the emergency notification regime being reinstated and the regime:

  • must be limited in scope to transactions that do not require consent and that relate to the acquisition by an overseas person (or associate) of either or both of:
    • rights or interests in securities of a person; and
    • property (including goodwill and other intangible assets) in New Zealand used in carrying on business in New Zealand; and
  • must provide for risk management actions only in respect of risks associated with transactions by overseas persons that are contrary to New Zealand’s national interest.

Incremental investments

Overseas persons are currently required to obtain consent before they can increase their ownership or control of a sensitive asset for which they have already obtained consent. This is subject to certain exemptions (such as the shareholder creep exemption).

The No 3 Bill removes the requirement for investors to obtain consent for incremental investments that do not result in a change in ownership or control that equals or exceeds the relevant ownership or control limit (being 25%, 50%, 75% and 100%, depending on the level of existing ownership or control).

Investment in farm land

Where an overseas investment includes land which is or includes farm land, the No 3 Bill requires the relevant Minister to give the economic benefits and oversight or participation factors from the benefit test high importance. However, the relevant Ministers are not required to apply this more stringent test in certain limited circumstances (such as if the particular land is not productive for farming, and the land is likely to be used for commercial, industrial, or large residential developments).

The No 3 Bill also requires that farm land be advertised in New Zealand before an agreement to sell the land to an overseas person is entered into. However, an overseas person will now be able to seek an exemption to the requirement to advertise before entering into a sale agreement, and the relevant Ministers are able to take the nature of the land into account when determining whether an exemption from this requirement should be granted. We will be watching keenly to see whether the exemption offers a realistic alternative to advertising.

Our view

We welcome the changes under the No 3 Bill which remove time and cost constraints on transactions which clearly should not require screening and the lifting of a burden from the OIO. This will allow the OIO to focus on transactions which are of genuine concern.

Who can help