What has happened?
The Government has announced that it will amend the Overseas Investment Act in mid-June. From then, the proposal is that all foreign investment that results in a more than 25% ownership interest, an increase in existing interests to, or greater than, 50%, 75%, 100%, or effectively a change of control in the underlying business, must be notified.
The new notification regime is temporary and will be reviewed every 90 days. It is to be in place while the economic aftermath of COVID-19 continues to have significant impact. Given current forecasts - that could be years away.
The process is to involve a simple notification. The Government says that the new process will be quick.
The Government is also going to bring forward its proposal to introduce a “national interest” test. This change will be permanent.
What does this mean?
Until now, generally, only overseas investment transactions involving sensitive land or consideration over $100m had no be notified to the Overseas Investment Office (OIO). Those transactions will still require OIO consent.
A very large number of transactions involving foreign investment will now need to be notified to the OIO for screening. All transactions will now need to pass a new “national interest” test. This creates a great deal of uncertainty for potential foreign investors as the proposed drafting of this test is very wide. Should a transaction be deemed to be of national interest, conditions may be imposed on the transaction or it may be prohibited.
Although the notification process is supposed to be quick, it remains to be seen whether the OIO will have the additional resources required. New Zealand has one of the slowest foreign investment consenting processes in the developed world. The process is very likely to delay transactions.
It looks as if there may be a loophole for existing foreign investors to increase their stake to below 50% without notification, if the transaction does not require consent.
Other proposed significant amendments include removing some of the restrictions around the purchase of sensitive land (although these do not appear to be significant and will not be relevant to most transactions), simplification of the “good character” test and an increase in the penalty for breaches to $500k for an individual and $1m for all others.
What we think
The NZ Government is not alone in seeking to impose new controls on foreign investment. Australia has reduced monetary thresholds for FIRB approval to zero as part of its plans to hibernate its economy. These moves by both Governments are part of a disturbing global trend towards economic nativism.
The national interest test was already in the legislative pipeline. The Government has decided to use the current economic circumstances to accelerate it.
This new test is subjective and vague. It gives the government of the day the opportunity to veto a wide range of transactions it does not like for political reasons.
For example, the Ministerial announcement referred to the possibility of a significant tourism company having a low value that may need to be protected from foreign investment. Given the fragmented nature of the tourism industry - who would have thought any participants were strategically significant 6 months ago? Why would a business suddenly become of national interest because it is cheap?
The politics of transactions will now need to be carefully managed. Foreign bargain hunters may not be welcome.
We would have preferred a more objective national interest test. Reciprocity would have been a good start. We should continue to welcome investment from the shrinking number of countries where Kiwis would be free to make the same investment.