The Government has enacted long anticipated amendments to the Overseas Investment Act 2005 (Act) which regulates overseas investment in New Zealand. Some of the changes took effect on 5 July 2021, with the emergency call-in notification regime coming to an end before then.
In summary, the new legislation:
- repeals the existing emergency call-in notification regime and replaces it with a new call-in power relating to investment into defined strategically important businesses;
- allows incremental investments in securities up to certain thresholds without the need for consent from the overseas investment office (OIO);
- extends the threshold for the term of a lease from 3 years to 10 years (but not residential leases);
- adds a more stringent approach to the advertisement of farmland prior to sale; and
- simplifies the benefit to New Zealand test.
Emergency notification regime repealed
Transactions entered into after 7 June 2021 no longer need to comply with the emergency call-in notification regime.
Instead, if the investment is into a strategically important business, the national security and public order regime will need to be complied with. Investment in media businesses with significant impact, military or dual-use technology and high-risk critical national infrastructure (among others) are examples of transactions that may pose a risk to national security and public order.
It is possible for the Minister to impose conditions, prohibit, or even unwind these transactions if there is a significant risk to national security and public order.
Previously, where an overseas investor wished to increase its consented holding of sensitive assets in New Zealand, the investor would be required to seek a new consent under the Act, regardless of the percentage increase.
From 5 July 2021 investors with existing consents will be allowed to incrementally increase their ownership or control (also known as ‘shareholder creep’) without the need to obtain OIO consent. Consent will only be required where an investor’s ownership or control results in the investor meeting or exceeding thresholds of 25, 50, 75 or 100%.
For example, this means that an investor with a current consented holding of 25.1% in sensitive assets in New Zealand may increase that holding to 49.9% without the need to seek OIO consent.
Extending the lease term from three years to 10 years
Also, from 5 July 2021, the threshold for the term of a lease of sensitive land requiring OIO consent is extended from three years to 10 years.
However, the lease term threshold for solely residential land remains at three years.
Investment into farmland
Currently, farm sales must be advertised before the disposal/acquisition of the farmland takes place (that is, before the settlement or completion date), however this advertising is often a condition in the sale and purchase agreement and in reality is done alongside the purchaser’s due diligence.
The new legislation tightens up this rule and will require farmland to be advertised for sale on the open market before an overseas person can enter into any agreement to acquire the farmland. This will impact transaction time frames and should be factored in at the outset of these transactions.
This change is currently scheduled to come into force from 25 November 2021.
Benefit to New Zealand test
The current consent process requires the Minister to be satisfied that the investment will, or is likely to, benefit New Zealand based on a ‘with or without’ analysis. This test considers the benefit to New Zealand with the investment against the benefit to New Zealand without the investment.
The hypothetical ‘with or without’ analysis is being replaced with a ‘before and after’ analysis. The Minister will instead assess the result of the investment (‘the after’) against the current state of affairs (the ‘before’). It should be easier to satisfy the benefit test with this new approach and allow the OIO and the Minister greater flexibility in assessing the overall benefit to New Zealand. This new benefit test is now based on seven broad assessment factors, having been reduced from 21.
This change is likely to come into force from 25 May 2022.
The new legislation also:
- amends the definition of ‘overseas person’ by removing managed investment schemes and NZX listed issuers, provided they meet specified ownership and control thresholds;
- includes a new mechanism for capturing limited partnerships;
- removes the requirement for repeat investors to satisfy the ‘investor test’ for each subsequent investment,
- enabling the process for further investment by repeat investors to be streamlined;
- increases tax disclosure requirements in OIO consent applications; and
- removes the automatic application of the national interest test to consent applications if there are no specified national interest concerns.
What else to expect
The OIO is currently undergoing a review of OIO consent application fees, with a consultation having occurred in February 2021. The proposals, in some cases, seek to double or even triple the consent application fees.
Overseas investors, and potential sellers to overseas investors, should take into account this potentially dramatic increase in fees together with the timing of introduction of the new benefit to New Zealand rules, as they are likely to impact on transaction costs and consent outcomes.
If you need advice on overseas investment in New Zealand, please contact your lawyer.