Regulating Overseas Investment in Forestry

Clive Taylor, Partner | May 2001

Introduction

Overseas investors wanting to buy New Zealand farm land or forestry blocks are generally required to obtain the consent of the Overseas Investment Commission (the OIC) before the purchase can proceed. Usually, the parties enter into a conditional agreement to purchase land and then look to obtain consent before finalising the purchase.

The OIC acts as a watch-dog to foreign investment in New Zealand by administering the Government's inward foreign investment rules. The OIC has a broad discretion under the Overseas Investment Act 1973 and the Overseas Investment Regulations 1995 (the Regulations) to grant consent to a proposed acquisition by an overseas person (with or without conditions), or to turn down an application.

Much has been said about regulating foreign investment in New Zealand. Many believe that the level of foreign investment in New Zealand is too high and argue that opportunities are being lost to foreigners. Others argue that foreign investment is integral to bringing resources and social benefits to New Zealand.

In this article we provide a general overview of when OIC consent is required and what criteria the OIC uses in assessing applications. We also identify an important forestry related exemption to the overseas investment requirements.

When is OIC consent required?

OIC consent is required when an "overseas person" is acquiring control of significant assets in New Zealand. This includes both land and non-land acquisitions (e.g. the acquisition of shares in a company).

Overseas person

Generally, an "overseas person" includes, but is not limited to, the following:

1. any individual who is not a New Zealand citizen and who is not ordinarily resident in New Zealand;

2. a company that is incorporated overseas; and

3. a New Zealand company, partnership or joint venture with 25% or more of its shares or voting power held overseas.

Significant assets

Generally, an overseas person acquires control of "significant assets" when they acquire or take control of:

1. any business acquisition where the value is + NZ $50m;

2. any land with an unimproved value of +NZ $10m;

3. any land that exceeds 5 hectares in area;

4. any land forming part of an island;

5. any land that exceeds 0.2 hectares in area and that includes or adjoins the foreshore;

6. any land that exceeds 0.4 hectares in area and that includes or adjoins:

   1. a lake over 8 hectares in area; or

   2. any land that exceeds 0.4 hectares in area and is held for conservation purposes, provided as a reserve, or is or forms part of an historic place.

Accordingly, if an overseas person wishes to acquire a farm, a forestry block, or farmland to use for forestry purposes, and the land area exceeds 5 hectares or exceeds any of the other thresholds above, then OIC consent will be required.

It should be noted that if an overseas person is acquiring land in New Zealand that physically adjoins land already owned by that person, then the combined land area of the two properties is used to see if the thresholds are met. For instance, if the overseas person owns a 4 hectare forestry block and proposes to purchase an adjoining 2 hectare forestry block, OIC consent will be required as the aggregate area is 6 hectares which exceeds the 5 hectare threshold set out above.

OIC consent will also be required when an overseas person acquires 25% or more of the shares or voting rights in a New Zealand company that owns land that exceeds the threshold set out above.

Exemptions

There are a number of circumstances where OIC consent is not required. In particular, OIC consent is not required for the acquisition of a forestry right or a right to harvest a crop of trees under a contract or arrangement. This is a significant advantage to overseas investors who are satisfied with taking a forestry right over land instead of buying the land outright.

The concept of a forestry right is very broad. It can range from a simple right to go on to another person's land and harvest trees, to a long-term (+ 20 years) right to plant, tend, and harvest a forest on another person's land. Forestry rights can be registered against the title to the land over which it is over in order to protect the interest of the party with the benefit of the forestry right.

New Zealand foresters are now acknowledged as global experts in the farming of plantation-grown pine species, especially radiata pine which makes up approximately 89% of New Zealand's planted forest area (which covered an estimated 1.80 million hectares as at 1 April 2001*). Radiata pine is regarded as sustainable, environmentally friendly, energy efficient and cost effective - advantages which make it a logical alternative to threatened native and tropical timbers. Further, New Zealand can produce excellent quality radiata logs in 25 years, which is nearly 20 times faster that can be achieved in many Northern Hemisphere countries! Accordingly, New Zealand's forest industry has been subject to much overseas interest over the years.

Other exemptions of note include:

1. leases of less than three years' duration (including any rights of renewal) where the expenditure incurred does not exceed $10 million; and

2. the acquisition of Maori freehold land where the transaction has been approved by the Maori Land Court.

Obtaining OIC consent

When OIC consent is required, the overseas person must make an application to the OIC. There is no specific application form but the OIC has released guidelines on what information should be included in an application.

The overseas purchaser should ensure that the agreement for sale and purchase is conditional on obtaining OIC consent, and on the purchaser being satisfied with any conditions imposed under the consent.

While it is usual to make an approach for each purchase separately, for investors which make many purchases in a year, it is possible to get pre-approval for a buying programme.

Who determines the application?

The Ministers (the Treasurer and Minister of Lands) jointly determine all land applications involving sensitive land. Other land applications are determined under delegated authority as a means of speeding up the decision making process (usually 10 working days under delegated decision making as opposed to 20-30 working days for Ministerial decisions).

Criteria used to approve/reject an application

The OIC must be satisfied that the applicant meets the investor test and that the investment is in the national interest, before approval is granted.

Investor test

The OIC must be satisfied that:

1. the overseas person (or persons in control) has business experience and acumen relevant to the particular investment;

2. the overseas person has demonstrated financial commitment to the overseas investment; and

3. the overseas person (or persons in control) are of good character.

National interest

In assessing whether the investment is in the national interest the following matters must be considered:

1. Whether the overseas investment will or is likely to result in:

   1. the creation of new job opportunities in New Zealand or the retention of existing jobs in New Zealand that would or might otherwise be lost; or

   2. the introduction into New Zealand of new technology or business skills; or

   3. the development of new export markets or increased export market access for New Zealand exporters; or

   4. added market competition, greater efficiency or productivity, or enhanced domestic services in New Zealand; or

   5. the introduction into New Zealand of additional investment for development purposes; or

   6. increased processing in New Zealand of New Zealand's primary products.

2. Where land is currently being used for agricultural purposes:

   1. whether experimental or research work will be carried out on the land;

   2. the proposed use of the land by the applicant; and

   3. if the overseas person is an individual, whether the overseas person intends to farm the land for his or her own use and benefit and is capable of doing so.

3. Whether the overseas person, or any individual who exercises control over the overseas person, intends to reside permanently in New Zealand.

4. Such other matters as thought fit having regard to the circumstances of the particular overseas investment.

The OIC also considers many other matters that must be addressed in the application, such as the reasons for the acquisition and the proposed use of the property. Mid-last year the Ministers directed the OIC to seek further information so that it can be assured of the accuracy of information supplied by the applicant. Such information is likely to include indicative business plans for the proposed acquisition setting out any intended development expenditure as well as projected production levels.

In addition, consent will not be given for the acquisition of "farm land" unless there is evidence that the farm land has initially been offered on the domestic market for at least 20 working days to persons who are not overseas persons. This requirement does not prohibit owners from selling farm land to an overseas person, and the owner can enter into a conditional agreement with an overseas person to sell the property before undertaking the advertising. Provision can also be included in such an agreement for the overseas person to equal or better any genuine offer that may be made to the owner during the advertisement period (the provision would need to allow the owner to revert back to the offeror in circumstances where the overseas person did equal or better the offer, which creates a kind of silent auction process). It is interesting to note that the definition of "farm land" does not include land used for forestry purposes. Accordingly, it would seem that land covered in plantation forest falls outside the scope of the legislation. However, pastoral land being acquired for the purposes of conversion to forestry will be covered.

The additional farm land requirements are a recent change to the overseas investment regime and are intended to implement the key policy initiatives on overseas investment of the former coalition government, namely; to ensure that overseas investors demonstrate a commitment to New Zealand and that overseas investment involving farm land will only be approved if it results in substantial and identifiable benefits to New Zealand.

From our experience, the consent of the OIC is usually given provided the application includes the required information, and identifiable benefits result to New Zealand as a result of the acquisition e.g. where money is spent on developing the property, jobs are created, the owner will permit experimental research to be undertaken on the property.

Failing to comply

Where an overseas person acts in contravention of the Regulations, a prison sentence or substantial fines may be imposed on the offender. The OIC may also force the person to sell the asset by obtaining a court order to this effect.

Keeping information in the application confidential

If for reasons provided in the Official Information Act 1982 there is a good reason to withhold the existence of an application from the public domain, e.g. the information is commercially sensitive, the OIC will not disclose the existence of the application while it is being considered.

Once an application is determined the OIC issues a public decisions sheet. The OIC will always consult with the applicant and their representatives before releasing any information. Where the applicant can show that good reason exists for withholding some or all of the information in the respect of the application, the OIC will agree to withhold that information.

A decision to withhold information by the OIC can be overruled by the Ombudsman.

Concluding comments

It is likely that investment in farm land and forestry (other than by forestry rights which is a notable exemption) by overseas persons will need OIC consent. This is usually given provided the application is made properly, includes the required information, and identifiable benefits result to New Zealand as a result of the acquisition.

* Ministry of Agriculture and Forestry, A National Exotic Forest Description as at 1 April 2001, February 2002.