COVID -19: More on emergency changes to overseas investment regime

As a further (holding pattern) update, the changes to the Overseas Investment Act has been split into two bills.

The ‘Urgent Measures’ Bill has received its first reading (on Friday) and submissions are due tomorrow – with reporting back on Monday week (25 May) when I assume that it will be passed – to come into force by no later than mid-June.

There is also a further Bill (the No 3) containing the longer-term changes.  It is on a slightly longer track – with submissions not being due until 31 August.

Also in circulation is a Cabinet paper and a Treasury report. 

Pragmatically, there are unlikely to be any changes to the new emergency power referred to in my note last Thursday (and fleshed out a little further below).   These powers seek to perform a balancing act described in the Cabinet paper as:

failing or distressed firms increasing the risk of overseas investors being able to acquire ordinarily productive firms or strategically important assets at ‘fire sale prices’ without government scrutiny. This may be with an intention of undermining New Zealand’s national security, result in a transfer of knowledge and jobs, or the loss of entry points into global value chains or control of cornerstone businesses in sectors displaced by the COVID-19 pandemic. These would all trigger a corollary reduction in long-term domestic living standards, and an increasing number of economically distressed firms will require quick access to debt and equity finance to remain viable, and many such transactions currently require consent. Regulatory impediments to the flow of capital can compromise a firm’s survival.

From a nuts and bolts perspective, it is vital that the Overseas Investment Office (OIO) provides a clear/practical guide on the matters that will be considered – under the emergency powers, and to make sure that the timelines referred to below can be met.   This point is highlighted in the Cabinet Paper.  I would expect that the OIO will make good use of the 2 week window between 25 May and the target “go live” date in mid-June.

As an observation, made in some haste, there is the same issue highlighted by those of us who worked on submissions on the changes to the Companies Act, about the prospect of further changes by the Government (on the hood) being implemented by means of Regulations.  Putting to one side some of the more highbrow constitutional issues – the risk here is simply that of uncertainty (for the business community).  The helter-skelter process of implementing the Companies Act changes did indicate (pleasingly) that a couple of Government agencies understood this concern and it seems that Regulations will only be used to correct obvious errors.  As always, it remains to be seen how officials and any Government dealing with a crisis.

Temporary notification

As noted last Thursday, the Urgent Measures are part of the COVID-19 response.

This will require all overseas investments in New Zealand businesses (providing a 25% or greater stake- note that this includes increasing an overseas persons’ existing level of control beyond the 25%, 50% and 75% thresholds), irrespective of value, to be notified.  This is similar to the position in Australia.

There will be two steps:

• a 10 working day triage period (for the OIO to issue a no action letter); and
• a 30 day review period – if the OIO considers the deal requires further scrutiny.

The assessment criteria to be applied are those risk to the country / national interest test.

The temporary emergency regime will not be retrospective – and will be limited to transactions entered into after the mid-June go live date.

The Cabinet paper refers to the factors to be considered under the national interest test as being:

• National security, public order and international relations: Does the investment pose a risk to national security, public order and international relations. Here, inputs will be required from the relevant Government agencies.  (For example, the Ministry of Culture and Heritage in respect of transactions in the media sector and advice on international relations from MFAT).
• Competition: Does the investment grant the investor market power either within New Zealand (significant market share in a business segment / control of a vertical supply chain) or globally. This will be separate from any investigation by the Commerce Commission.
• Economic and social impact: The impact of the investment on the New Zealand economy and society, and the extent to which any benefits to New Zealand are commensurate with the sensitivity of the asset being acquired. The benefit to New Zealand test, is currently used in OIO assessments affecting sensitive land, will provide a guide for the types of matters the Government is likely to consider relevant.
• Alignment with New Zealand’s values and interests, and broader policy settings: The extent to which an investment supports broader Government priorities and policy settings and NZ’s values.  This includes considering an investment’s alignment with the Government’s economic plan, including whether it will support thriving and sustainable regions or NZ’s transition to a carbon neutral economy.
• Character of the investor:  This seems likely to require assessment under the existing “investor test” (with some streamlining).  That test gives the Government a broad discretion, where necessary, to assess an investor’s character and determine whether they are likely to comply with New Zealand’s laws, or have any characteristics otherwise rendering them unsuitable to invest in New Zealand (for example, are subject to international sanctions).

There is some concern about how this emergency notification process will impact on M&A deals – not just in terms of time frames, but whether it may create the risk of being seen to require excessive red tape and uncertainty, frightening off would-be investors and ultimately hampering an economic recovery.