By: David Haigh
In the recent Court of Appeal decision, rejecting an attempt to stop the sale of the 'Crafar' farms to Shanghai Pengxin, it was held that the Ministers responsible for granting consent for overseas investments have considerable flexibility in determining what business experience and acumen is relevant to any particular investment.

The appeal, as most will be aware, relates to the acquisition of the Crafar farms, some 16 farms in all, totalling 7,892 hectares.  Shanghai Pengxin, by its subsidiary Milk NZ, was the successful bidder and developed a proposal to enter into a 50/50 joint venture with Landcorp to manage the farms.  Milk NZ would finance the joint venture, with Landcorp being the manager and operator.

In early 2012 the Overseas Investment Office (OIO) presented its request to the Ministers, recommending they grant consent to the acquisition.  That recommendation was on the basis that it was satisfied that the controlling individuals had relevant business experience and acumen (as required under the Overseas Investment Act) and, in particular, that Shanghai Pengxin had extensive business experience and that Landcorp would provide the specialist farm management experience.

A local consortium wanting to buy the farms issued judicial review proceedings challenging the Ministers' decision.  Two aspects of the consent requirements came under review.  The first being whether the experience and acumen of the controlling individuals must be directly related to dairy farming, or whether generic business experience and acumen is sufficient.  On that first issue the Court accepted that generic business experience and acumen were sufficient, and that the Ministers were entitled to conclude that their skills, although not specific to dairy farming, were relevant to the particular investment. That is, depending on the nature and scale of the particular investment, a wide range of business skills may assume relevance.

The second issue was whether the Ministers had applied an incorrect counterfactual (an alternative state of affairs) when assessing the benefit of the investment to New Zealand.  On this issue the Court found that the relevant counterfactual was what was likely to happen if the applicant was not permitted to make the investment (the "with or without" basis) rather than the basis applied, that of the position before and after the acquisition is made (the "before and after" basis).  The Ministers were required to assess the application on the basis that any benefits must be benefits that would not otherwise accrue.  Accordingly, the Ministers' consent was set aside.

The determination of the second issue will invoke little practical change to the process of obtaining OIO consent.  By their very nature, the large majority of overseas investments will satisfy the 'benefit to New Zealand' test by whichever counterfactual is applied.  Indeed, following the High Court decision, the OIO prepared a second report using the correct counterfactual and again recommended that the Ministers grant consent.  This recommendation was accepted.

The local consortium appealed against the High Court's finding that generic business experience was sufficient.  Their argument was that the business experience and acumen that the controlling individuals were required to have was that relevant to dairy farming and the dairy industry, because that was the nature of the investment.

The Court of Appeal dismissed this argument and found that as long as the investor has some business experience relevant to the investment, the statutory test will be met, even though the investor will have to supplement its experience by utilising the experience of others.  The Ministers were entitled to consider that the controlling individuals had the relevant business experience and acumen, even though they had not invested in dairy farming previously, because they had done what could be expected of sophisticated investors; that is, they obtained professional advice and entered into arrangements with Landcorp to obtain industry-specific experience. 

As the Court noted, "in order for this investment to succeed, a range of skills, experience and acumen will have to be brought to bear – from skills and experience related to the day-to-day operation and management of multiple dairy farms to those involved in funding and managing a large investment in what will be a substantial business enterprise. … It is accepted that … a purchaser need not have all the skills and experience necessary to make the investment a success:  possession of some relevant skills and experience is sufficient."

While both the High Court and Court of Appeal decisions clarify important points concerning the regime applicable to overseas persons who wish to invest in New Zealand, their application is limited.  The Crafar farms are one of the largest blocks of farmland ever sold to an overseas investor, and it was natural that the sale would generate interest.  For the vast majority of overseas investors, the decisions change little as to how their applications will be assessed, however they do provide more certainty on the tests they will be required to meet.

The Crafar decisions better illustrate that, at the end of a long day in this case, the Ministers must grant consent if they are satisfied that the overseas investor is of good character, has demonstrated financial commitment to the investment, has the relevant business experience and acumen, and that the investment will benefit New Zealand.
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