Change to Overseas Investment Act Due to Covid-19 – What You Need to Know

Monday 8 June 2020

Change to Overseas Investment Act Due to Covid-19 – What You Need to Know

The Overseas Investment (Urgent Measures) Amendment Bill was introduced when New Zealand as soon as parliament reopened after the Lockdown on 14 May 2020. The purpose of that Bill is to respond to the heightened security and economic risks created by the Covid-19 pandemic. It became law in just over 2 weeks on 2 June 2020, highlighting the urgency of the measures required.

The main purpose of the Bill is to ensure that important and strategic assets in New Zealand which may come under financial pressure due to Covid-19 do not fall into foreign hands without the Government’s consent. It introduced the following measures to deal with those risks:

1. Emergency Notification Requirement: Temporarily and from 16 June 2020, foreign investors will have to notify the Government of all transactions which may give them over 25% control of an existing business. This requirement to notify applies regardless of value. Previously only the sale of businesses worth over $100 million requires consent. With Covid 19, the value of certain businesses may reduce to a point where financial thresholds will provide no meaningful protection. The emergency notification requirement allows the Government to assess the notified transactions and determine if they are contrary to New Zealand’s national interest. It is expected that the vast majority of notified transactions will proceed quickly, i.e. within 10 working days, without any government intervention.

The emergency notification power will be reviewed every 90 days and will only remain in place while Covid-19 and its associated economic effects continue to have a significant impact in New Zealand.

2. National Interest Test: A national interest test will automatically apply to investments that already require consent under the Overseas Investment Act and which warrant greater scrutiny such as where a foreign government or its associates will hold 10% or more interest in an asset or investments in certain strategically important businesses (e.g. ports, airports, water infrastructure, telecommunications). The Government may subject other applications to the national interest test.

It is expected this test will apply only as a backstop and will be used rarely and only where it is necessary to ensure protection of New Zealand’s core national interests.

3. Call-In Power: Once the emergency notification regime is removed, it will be replaced with a narrower security and public order call-in power. The call-in power will allow the Government to review certain investments and strategically important businesses (such as critical national infrastructure) that do not require consent under the Act. Unlike the emergency notification power and the national interest test, the call-in power can only be used to manage significant risk to New Zealand’s national security or public order.

The Bill also simplifies parts of the Overseas Investment Regime. It allows regulations to be introduced which will set out the timeframes for the different types of applications to provide certainty to investors. However, only the timeframes for processing notifications under the emergency power will be set out initially. Other timeframes will not come into force until after the regulations are enacted which will be 1 year after commencement of the Bill.

In summary, the above will create an additional step for any sale to an overseas investor of more than 25% in the control or ownership of a business. In addition, all investments which would otherwise require consent under the Overseas Investment Act will also potentially be subject to review under the national interest test. The Government may apply the test to any sale of infrastructure assets, and investments in strategically important industries and assets.

So what determines whether something is in NZ’s national interest? The Government has indicated that the following factors will be generally considered:

1. National security, public order, and international relations.
2. Competition: whether an investment will grant the investor market power either within New Zealand or globally.
3. Economic and social impact.
4. Alignment with New Zealand’s values and interests, and broader policy settings.
5. Character of the investor.

The above list does potentially give the Government very wide powers to intervene in the change and control of any business or asset.

Ultimately, what constitutes “national interest” is open to political interpretation. While some guidance on the test has been published by the Government, how the test will be applied in practice remains to be seen. As the Government is aware, it is delicate to balance protecting New Zealand’s national interest on the one hand, and maintaining New Zealand’s attractiveness to investors from overseas on the other.

The Treasury’s paper “Reform of the Overseas Investment Act Information Release” May 2020 states (on page 11):

“In some rare cases, exercising the national interest test may result in a firm needing to close, unless another source of capital can be found. The Minister will need to consider the potential of this outcome when exercising any such power.

While this may result in requests for Crown funding, I consider the threshold for imposing conditions on, or blocking, a foreign investment transaction is lower than the threshold for Crown funding, given the additional costs and risks that Crown funding places on taxpayers. In practice, this may mean that a proposed transaction could be blocked with the effect that the business fails, even where the Crown is unlikely to take an equity interest to keep it operating.”

These are difficult trade-offs at the best of times. At a time where capital will become more scarce, no doubt those trade-offs will only become more difficult.

Teresa Chan

5 June 2020

This article is for general use only. Advice should be sought for specific circumstances. Please consult Teresa Chan at Teresa Chan Law Limited, Level 3, Westpac Building, 106 George Street, Dunedin 9016, ph. 477 1069, or email teresa@tchanlaw.co.nz