Big changes mooted for overseas investment regime
Treasury’s consultation document for reforming the Overseas Investment Act holds out the prospect of genuine and well-directed change.
The Act’s reach has been frustrating for several years. Our screening regime is rated the seventh most restrictive in the OECD and we are attracting proportionately less foreign direct investment than many other small, advanced economies, particularly greenfield investment.
So the review now underway is welcome. In our assessment, it is asking the right questions and is on track to provide a more efficient regime more in step with international practice.
Yes, it contemplates options for a significant increase in the discretion available to ministers to approve or decline applications on the basis of a “national interest” test and to call in transactions not normally within the Act where there is a perceived threat to national security and public order.
But ministers hold the decision-making powers under the Act now. Some are delegated to the Overseas Investment Office but decisions on strategic assets or cases involving political risk are referred to them anyway, and they can intervene in an application as and when they wish.
Arguably the effect of some of the proposed changes, therefore, is not to alter the power differential but to be more upfront about it. But, to provide genuine improvement, the design of any new “national interest” test or call-in rights must be carefully and clearly described to be as transparent as possible.
The defining issue of the review, and the one with the most far-reaching practical implications, is whether the benefit to New Zealand test should be replaced by a national interest test.
Four options are on offer.
Option one: to keep the current test but allow decision-makers to also take into account any negative effects that might arise from the acquisition (such as job losses), and any implications for New Zealand’s national security.
The Treasury notes, in what is almost certainly a coded reference to China, that the current Act does not create a distinction between government and non-government overseas investors and that government investors “may have broader political or strategic foreign investment objectives”.
Option two: to introduce a substantial harm test to operate in conjunction with a simplified benefit to New Zealand test.
The substantial harm test would give ministers broader grounds to decline investments posing a threat to public order, public health and safety, or essential security interests. This discretion could not be delegated to the Overseas Investment Office and would be based on OECD guidance.
Option three: to supplement the simplified benefit to New Zealand test from option two with a national interest test, effectively allowing ministers to consider anything they felt relevant in assessing applications, both positive and negative.
Option four: to apply the national interest test in option three to all applications, except for residential land and forestry. This seems to have the inside running among officials as it is described in the consultation document as “the simplest approach…and most similar to Australia’s foreign investment screening regime”.
Statutory timeframes to consider applications are proposed with clearly-defined extension rights. There is a default position, where a timeline is not met and no other action has been taken, and the transaction will be deemed to have received consent. This is based on the Canadian model and would remove one of the great headaches with the current system, but Treasury accepts it will require appropriate resourcing.
Fit for purpose?
Also in play is whether the investor test is cast too wide. Three options are offered.
- Retain the business experience and acumen criterion, remove the financial commitment and immigration criteria, simplify the good character test so allegations are considered only for certain crimes (eg, fraud, dishonesty, corruption or tax avoidance), and remove the requirement for decision-makers to consider “any other matter that reflects on the person’s fitness”, a catch-all generally accepted to be broader than any other character test on the statute books.
- Option one (above) with the removal of the business experience and acumen criterion and narrowing the good character test from allegations of misconduct to proven offences and contraventions.
- Move to a bright-line, checklist assessment, screening potential investors for criminal convictions punishable by imprisonment, civil penalties, adverse findings from a security agency, bankruptcy, disqualification from directing a business, and whether they have had a confiscation order made against them.
Who we screen
Here the review can deliver the most immediate benefits by simply removing anomalies in the existing law. For example, the Act deems some iconic listed New Zealand companies, such as Fletcher Building, Ryman Healthcare and Spark, to be overseas persons because 25% or more of their shares are owned overseas, even if holdings are widely dispersed or held by passive funds, and control is clearly in New Zealand hands.
Three options are proposed to raise the threshold for coverage:
- increase the percentage of overseas ownership required for a domestically incorporated and listed company to qualify as an overseas person from 25% to 49%, or
- target the regime at domestically incorporated and listed companies where;
- “substantial holdings” (5% or greater) in classes of securities conferring control rights, cumulatively totalled at 25%, are overseas-owned (this is similar to the Australian approach), or
- more than 49% of the economic returns flow to overseas owners and/or they collectively hold assets giving them 25% control.
Option four would keep the current definition of overseas person and allow locally-incorporated bodies to apply for an exemption from the Act if they have a strong connection to New Zealand and a strong record of compliance.
None of these is ideal in our view, as none acknowledges the practical realities that shareholdings can change daily, making it impossible for listed issuers to confirm their ownership in real time, or the proportion held overseas.
Our preferred approach is to exclude NZX-listed entities from the definition of overseas person if no single overseas person (alone or together with associates) holds more than 25% of the voting rights, a variation on option two.
Overall, the objective has to be advancing the purpose of the Act while developing a framework which is as streamlined and transparent as possible so prospective investors know the tests that need to be met and have sufficient certainty about the process to invest in New Zealand.
Tessa Baker is a senior associate at Chapman Tripp specialising in property and real estate