Negotiating New Zealand’s overseas investment regime
June 2015 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
New Zealand is an attractive destination currently for foreign investment – buoyed by strong demand, especially out of China, for primary production assets and a comparatively strong economy relative to the rest of the OECD.
New Zealand regulates foreign investment in significant business assets, normally having a gross value of NZ$100m or more, and ‘sensitive land’, including certain types of rural land, farm land and land including or adjoining bodies of water, islands and reserves. The definition is broad and can capture corporate transactions involving land of no special significance.
Aspects of New Zealand’s foreign investment regulation are becoming increasingly challenging for investors. In this short note we highlight some key issues faced by investors and how they can best be navigated.
Significant business investments
Obtaining consent for investments not involving sensitive land is typically a straightforward exercise. The investor must satisfy a limited ‘investor test’ that assesses character, relevant business experience and acumen and financial commitment to the investment.
Sensitive land investments
Obtaining consent for investments involving sensitive land is much more complicated. It is the rules around these assets which make New Zealand’s foreign investment regime the seventh most restrictive in the OECD.
In addition to the investor test described above, the applicant must satisfy a ‘benefit to New Zealand test’ before the investment can proceed. This test, often described as the ‘counterfactual’, examines whether the investment will deliver benefits to New Zealand (within specified categories) which would not be obtained if the investor was a New Zealand buyer (even if notional) or if the property were to remain in its current ownership (whichever is more likely).
The appropriate counterfactual will depend on the nature of the asset and the particular circumstances of its sale. In demonstrating benefit to New Zealand, the foreign investor will only get credit for benefits from the investment to the extent they exceed the benefits that would arise under the counterfactual. The benefits test is therefore a relative, not absolute, test.
Sensitive land applications may, depending on the land involved, also require the consent of two government Ministers. If Ministerial consent is required, this can add 4-6 weeks to the timeframe for obtaining consent.
The introduction of the ‘counterfactual’ is relatively recent, arising from a Court of Appeal judgment in August 2012, and has made the consent process more challenging – especially when the application concerns mature assets or passive investments, which can offer limited scope for adding jobs, deploying new technology or increasing efficiency, making it difficult to demonstrate the benefit to New Zealand required to gain consent.
The Overseas Investment Office (OIO), New Zealand’s foreign investment regulator, requires increasingly detailed information to substantiate and quantify those benefits that an investor asserts will arise as a result of the foreign investment, including hard data on forecast capital investment, job creation, productivity enhancements and increased export receipts.
These commitments are hardwired as conditions of the consent, meaning if they are not carried out the consent could be withdrawn. Compliance is monitored by the OIO and generally continues until the benefits of the investment have been realised.
Navigating the regime
An investor approaching a significant investment in New Zealand should be careful to ensure that the consent application they submit to the OIO is complete and to the standard required to obtain approval. Submitting an incomplete application, or an application lacking sufficient detail, will delay the consent process – often significantly. In our experience, there is rarely any benefit in submitting an insufficient application with the intention of supplementing it later.
For sensitive land applications, it is critical that the application demonstrates, with clear substantiation, that the investment will result in benefits to New Zealand. This often involves specific undertakings to implement particular capital projects or other investments in the business. These undertakings are typically best expressed through a business plan attached to the consent application.
Preparing a business plan can require a considerable commitment of time and effort by the prospective investor and its management team. It may also require the investor to make commitments relating to capital expenditure and employment without the investor having the benefit of owning and being ‘in’ the business.
The cooperation of the vendor is important as they know the business best and are best placed to advise the investor on what steps could be taken to provide the necessary benefits to New Zealand.
Applications which refer only to ‘intentions’ or ‘plans’, as opposed to concrete commitments, can result in the OIO declining to consider the application until further detail is provided or deciding that the application does not demonstrate the requisite benefits to New Zealand.
Timing is also a major challenge for investors seeking consent. Although there are no statutory timeframes within which consent must be given, the OIO has several non-binding targets depending on the type of consent required.
The target applicable to most business and land acquisitions is to have 90 percent of proposals assessed within 50 working days of active consideration. Actual timeframes, however, can be closer to 100 working days, or longer, because the targets do not allow for correspondence with the applicant or for the Ministers to consider the application.
Foreign investors looking to undertake transactions in New Zealand should be aware of the demands imposed by the OIO regime, and plan accordingly.
Tim Tubman is a partner, and Joshua Pringle and Adrien Hunter are senior associates, at Chapman Tripp. Mr Tubman can be contacted on +64 9 357 9076 or by email: firstname.lastname@example.org. Mr Pringle can be contacted on +64 9 358 9831 or by email: email@example.com. Mr Hunter can be contacted on +64 9 357 9501 or by email: firstname.lastname@example.org.
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Tim Tubman, Joshua Pringle and Adrien Hunter