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New Zealand’s foreign investment regime – the Overseas Investment Act (OIA
) – has been the subject of increasing criticism in recent times. The good news is the government is finally taking an active interest. The bad news is their proposals don’t go nearly far enough and appear unlikely to resolve some of the investor community’s core complaints.
The Act requires that overseas investors apply to the Overseas Investment Office (Office
) before acquiring “sensitive New Zealand assets”, the main categories of which are:
- sensitive land - chiefly rural land, land adjoining waterways, reserves and parks, and historic and heritage sites
- business assets over $100 million in value ($498 million for non-government Australian investors, $104 million for the Australian government), and
- fishing quota.
There are two main problems with the screening system as it is applied today.
First, the process of obtaining consent has become extremely prolonged, to the point that it routinely becomes a barrier to completion of transactions. There is no statutory deadline and so no legislative standard to which the Office can be held. The Office aspires to complete 90% of ‘Category 2 applications’ (the classification into which most applications fall) within 50 working days, but currently reports that it meets that target in only 51% of cases.
The average time for the Office to issue a decision in cases which do not require Ministerial input is 91 working days. The average time for a case that does require Ministerial input is a whopping 147 working days (seven months).
That compares unfavourably to the process for most other common regulatory conditions to closing (e.g. competition law clearance). The consequence is that OIA consent is often the last condition to be satisfied.
The second problem is that the framework can be inflexible when it comes to edge cases. The OIA sets out a complex set of very technical rules and triggering conditions intended to ensure that investors cannot evade the regime through deal structuring. But the consequence is that the Act captures a range of transactions that arguably do not engage its policy or objectives. For example, consent is required for acquisitions involving:
- assets held by overseas custodians, nominees or trustees on behalf of a New Zealand beneficial owner
- land which is not itself sensitive but adjoins sensitive land (such as a waterway)
- global mergers or restructurings that, while they effect no material change in New Zealand, result in a change in ultimate control from one overseas investor to another, and
- overseas investors re-acquiring minority stakes in a target they had previously wholly owned.
The strict application of the triggering rules in the OIA was intended to be softened by the ability to issue exemptions, either on an individual basis by the Office, or on a class basis by way of regulations. But the Office has been reluctant to make significant use of its exemption power, and the regulations have lagged far behind commercial reality.
It is against this background that the government has announced a package of changes intended to improve the performance of the Office and address some of the more frustrating edge cases. The Minister was careful to emphasise that legislative change is not on the government’s agenda, but expressed her commitment to bringing assessment times down to manageable levels.
The OIO is recruiting additional staff and moving to a more “customer-centric” focus.
It will further tighten its initial quality assurance application review to incentivise potential investors to provide complete information on lodgement. It will also make greater effort to keep applicants informed through the assessment process and provide more clarity about when a decision can be expected.
The quid pro quo is the OIO is asking the business and legal community to do more as well. Currently the OIO is rejecting one in four applications at the initial quality assurance phase (although this is not Chapman Tripp’s experience).
Treasury has announced proposals to provide exemptions for:
- acquisitions of leasehold farmland from the current requirement to first offer the property on the open market (this will be limited to leases of up to 20 years cumulative duration, including rights of renewal)
- the need to seek approval where a previously consented lease is being renewed or re-granted with no change in conditions or underlying ownership
- sensitive land transactions between overseas parties where consent has previously been granted, the transaction is incidental to a larger global transaction and the land concerned is urban land of less than five hectares which is classified as sensitive only because it abuts sensitive land
- transactions where approval is required because the land is vested under the Public Works Act 1981 and does not exceed five hectares and is not inherently sensitive
- overseas owned custodians who hold shares in their custodial capacity, fixing an issue that came to light earlier this year.
Exposure drafts of these exemptions will be released in the coming months for comment.
Improvements the OIO is exploring to sharpen efficiency include:
- changes to the management structure to free up capacity for the core function of reviewing consents
- delegating decision-making downwards for simpler matters, and
- relieving bottlenecks by developing parallel decision-making tracks.
Our view is that the changes are good, as far as they go, but there is scope to be bolder. The exemptions that have been announced, for example, are very narrowly drawn and deal with only a subset of the edge cases that we regularly encounter.
The key question is whether assessment times will come down. The changes announced demonstrate the Government’s commitment to improving performance, but we have yet to see tangible results. And there are forces pulling in the opposite direction. For example, it recently emerged that an investor approved by the Office featured in the Panama Papers, which has prompted the OIO to toughen up its approach to assessing the character of overseas investors, and identifying the beneficial owners that lie behind opaque holding structures.
While it is hard to argue with that initiative, the result is more delay. The reality is that the Office’s task is only getting harder, which does not bode well for investors that find themselves subject to the New Zealand OIA regime.
is a partner at Chapman Tripp specialising in all aspects of commercial and property law.
is a senior associate in competition, regulatory and public law