As anticipated by our Big Picture publication last month, key changes include the implementation of a national interest test that will bring the Act into line with jurisdictions overseas, and the simplification of the assessment process, including by removing low risk transactions from the regime for which screening is unnecessary.
The Bill is expected to have its first reading on Tuesday 31 March 2020. At this time, a range of supplementary information to guide readers through the Bill will be released, including:
- a detailed description of what each provision of the Bill aims to achieve and why, and
- an overview of the Regulations intended to be made to support the Bill's operation.
At this stage, the government still seems set on passing the legislation during this Parliamentary term, which will involve passing all legislative stages by early August. This has always been an ambitious timeframe and it remains to be seen whether this will still be achievable given the level of government attention that will be focussed on addressing the consequences of the COVID-19 outbreak.
The new Act will come into force 42 days after it receives Royal assent (so possibly as soon as September). However, commencement of the new benefits test and the national interest test will be deferred until the Regulations setting out relevant criteria for applying these tests are drafted. The new tests will come into force no later than one year after Royal assent (or earlier by Order in Council).
At first glance, the Bill largely reflects the position set out in the 2019 Cabinet Paper. However, there are some twists and some notable additional detail in some areas.
- National interest test: This test will allow the Minister to deny consent to any overseas investment considered to be contrary to New Zealand's national interest, bringing our regime into line with some overseas jurisdictions. The test will apply to overseas investments in New Zealand's “strategically important business" assets, or investments made by foreign governments. As expected, the draft legislation has not clarified the criteria that will be used to determine whether a transaction is in the national interest. The operative provision simply states that: “[t]he Minister may decline consent to a transaction of national interest if the Minister considers that the transaction is contrary to New Zealand's national interest." We will be pushing for detailed guidance to be released and consulted on well ahead of implementation.
- Call-in power: The Bill establishes a detailed regime for managing an acquisition of New Zealand business assets that does not otherwise need to be notified to the OIO, but relates to a “strategically important business". The government will have broad powers to intervene in such transactions (including prohibiting them outright, imposing conditions, ordering disposals or even placing a business under statutory management) where a transaction is “likely to give rise to a significant risk to national security or public order". We expect that this will be used very rarely in practice, but we will be seeking from the government more guidance on what might constitute a risk to national security or public order.
- More stringent farmland advertising requirements: The requirement to advertise land before an agreement is entered into could create substantial difficulties for any transactions that involve farm land, and in particular corporate M&A transactions. While the Bill introduces a more detailed exemption regime, it is not clear when exemptions will be granted (the detail of this will be provided through an update to the Gazette notice). This could be of concern if it is not made clear that normal corporate transactions with a small farm land component need not comply with onerous advertising requirements in advance of a transaction.
- New tax information requirements: Not foreshadowed in the Cabinet Paper, the Bill includes a new power to make regulations that require an applicant to provide information to the IRD for the purposes of assisting with the administration or enforcement of tax law. Again, this is similar to requirements in overseas regimes, but the detail of the regulation will be critical in determining how onerous such an obligation might be.
- Enforcement: As expected, the Bill increases the maximum penalties for breaching the Act to NZ$500,000 for an individual and to NZ$10 million for corporates and other entities. These amendments bring the penalties into line with the current upper limit for restrictive trade practices in the Commerce Act 1986. The Bill also introduces enforceable undertakings that can be used to deal with mid-level breaches. The OIO will have broad discretion to accept enforceable undertakings from an investor as an alternative to bringing proceedings. The maximum penalties for breaching an undertaking are to be set at NZ$50,000 for an individual and NZ$300,000 for corporates. Finally, the Bill expressly empowers the OIO to seek injunctive relief from the Court to restrain conduct that would breach the Act. The specific injunctive relief provisions are consistent with similar powers given to regulators under the Commerce Act and Financial Markets Conduct Act.
- Adjoining land: The Bill amends the types of “adjoining land" that can make land sensitive. Even though on its face the list of adjoining land types has grown (the list in the Bill is now longer than the list in the current Act), the Bill has pleasingly narrowed the types of adjoining land by focusing on particularly important sensitive public land held under statute. It is encouraging to see the Bill removing immaterial reserve or open space land as an adjoining land trigger. The new adjoining land list also resolves the inconsistency in the current Act caused by defining sensitive adjoining land by reference to a regional or district plan. This has resulted in the same parcel of land being sensitive in one region or district but not in another because of the way different councils describe the use of open space and reserve land. Overall, this should lower costs for investors in assessing sensitive land holdings and remove some transactions from being screened under the Act at all.
- NZX listed entities: NZ listed issuers will no longer be considered overseas persons, unless they are more than 50% owned by overseas persons or one or more overseas persons hold 10% or more and combined these substantial shareholders account for more than 25%.
- Fundamentally New Zealand entities: There will also be a new power for Ministers to exempt from the regime persons, transactions, interests or assets that the Minister considers to be fundamentally New Zealand owned or have a strong connection to New Zealand. We strongly support these changes as we see all too frequently, what are fundamentally New Zealand entities being unnecessarily dragged through time-consuming and expensive OIO consent processes. In the last year alone, we have been involved in multiple OIO consent processes for investments undertaken by entities that are majority beneficially owned by New Zealanders. We look forward to seeing the criteria that will be used to determine whether an entity is 'fundamentally New Zealand owned', and the detail of the forthcoming regulations will be critical in determining how useful this exemption will be.
On the whole, the changes will be welcomed by the business community. They address long-standing and fundamental concerns about the current regime, which have made it a global outlier in terms of complexity and consent timeframes. However, the Bill as it stands is an extensive piece of legislation that will have a significant impact on New Zealand's overseas investment landscape. There is a substantial amount of work and review still to be done if the government wishes to ensure the benefits intended by the reform will truly result from the amendments without unintended consequences.
Bell Gully will be lodging detailed submissions on the Bill and we encourage those impacted by the changes to do the same.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.