COVID-induced changes to the Overseas Investment ActPosted on August 26, 2020 in Commercial , Property , Private Client (Tags:)
Back in 2018, the Government announced changes to the Overseas Investment regime which brought all residential land into the pool of assets covered by the Overseas Investment regime. It also introduced a special benefit test for forestry assets. Capturing residential land has had an impact on the domestic property market, particularly in light of New Zealand being seen as an attractive destination to overseas persons in the midst of the COVID-19 pandemic. For the most part it is only New Zealanders and people who have residency permits who can now purchase residential property in New Zealand.
It was always intended that there be a second phase to the changes to the Overseas Investment regime and these have been accelerated by the COVID-19 pandemic. The second phase of changes came in on 16 June 2020 and particularly affect asset sales and purchases of any value.
The key changes brought about by the phase two amendments are:
- A temporary emergency notification requirement.
- A new national interest assessment for some transactions.
- Simplifying the regime for low risk transactions.
- Stronger enforcement powers.
The Government is concerned that there may be opportunistic investment attempts as a result of falling values of New Zealand businesses as a direct result of the COVID-19 pandemic. The changes introduce a notification pathway for business transactions which involve the acquisition of a controlling interest. Previously, only transactions over a certain value or those involving sensitive land assets have been captured by the Act. There is now no value threshold which has brought a much wider range of transactions under the scrutiny of the Overseas Investment Office.
How does the new temporary emergency notification process work?
The Minister of Finance will review certain types of transactions for consistency with the national interest. Those transactions may come through the temporary emergency notification pathway or the usual consent pathways. The emergency notification regime will apply to transactions involving overseas persons entered into on or after 16 June 2020. Overseas investors must notify the OIO of all investments, regardless of value, to be undertaken in New Zealand by overseas investors and their associates that would result in:
- More than 25% overseas ownership of a New Zealand business or its assets; or
- An increase to an existing holding beyond 50% or 75% or up to 100%.
The test is deliberately broad to encourage responsible foreign investment and has no monetary threshold. The current test for an overseas investor set out in the Act is utilised but the transactions which must be notified represent a significant departure from the current regime.
What types of transactions are caught?
Direct Foreign Investment: An overseas person buying all of the shares of a New Zealand company must notify the OIO of the transaction. It makes no difference if the company is already overseas owned and/or has no assets.
Indirect foreign investment: An overseas person proposes buying all the shares of an Australian company which owns all the shares of a New Zealand company. The overseas person must notify the OIO of the transaction and it makes no difference if the other companies are already overseas owned and/or have no assets.
Asset acquisition: An overseas person buys a New Zealand owned manufacturing business for $100,000 including all its assets. The transaction requires notification to the OIO.
Leasehold interests are also caught under the Emergency Notification requirements. The OIO has indicated that the application of the regime to leases is quite complex and they intend to release further guidance.
How do you notify?
The form of notification is available on the OIO’s website and can be completed online. It is important to note that the OIO does not allow any manual submissions or any further information to be filed. The form is a “one size fits all” and is intended to cover both simple and complex transactions. The OIO estimates that it should take 30 minutes to one hour to complete the form depending on the complexity of the transaction.
The information required by the form is different to the traditional consent pathway. The information required is high level without the detailed information required for other consent pathways. There is no fee for completing an notification.
What happens next?
The OIO will review the information submitted and the ultimate decision maker is the Associate Minister of Finance who will decide if further assessment is required. The OIO does not make the decision as to whether the transaction should be called in for further assessment.
The OIO has indicated that most transactions will proceed as proposed. Some may be called in for further assessment and a small number may be prohibited from proceeding. It is also possible that they may be permitted to proceed with conditions imposed.
How long will the process take?
The OIO has indicated that the initial assessment will be made within 10 working days by which time most transactions will be able to proceed. If further assessment is required then a further 30 working days is permitted with the option of extending that period by a further 30 working days in extreme cases. The OIO will not accept applications for urgent assessments.
What are the consequences for non-compliance?
There are serious penalties for non-notification including civil penalties of up to $10 million for a corporate. In serious circumstances, the Government may prohibit the transaction, force the unwinding of the transaction or appoint a statutory manager.