OIO emergency notification regime to capture controlling investments by overseas persons in any asset class regardless of transaction value
The Overseas Investment (Urgent Measures) Act (Urgent Measures Act) was passed into law on 2 June 2020, and came into effect on 16 June 2020.
The Urgent Measures Act brings forward some of the changes proposed in the Overseas Investment Amendment Bill (No 2) introduced in March 2020, and also introduces a temporary “emergency notification regime” designed to ensure that sales of business assets or business interests to overseas investors as part of the economic recovery phase (particularly “distressed” sales) are in New Zealand’s national interest.
The scope of the emergency powers means that they could create unnecessary delay and public scrutiny of smaller transactions, and potentially divert foreign capital from entering New Zealand at a time when some sectors are in need of new capital to survive. There is provision for the scope of the emergency powers to be reviewed after 45 days, and revised if it is considered to be over-capturing low risk transactions and/or discouraging productive investments.
The emergency notification regime requires all share or business asset purchase transactions to be notified to the OIO if an overseas person is:
- Acquiring an ownership interest of more than 25%;
- Increasing an existing ownership interest to or beyond certain ownership thresholds (50%, 75% or 100%); or
- Acquiring business assets representing 25% or more of an existing business.
The notification requirement applies regardless of the dollar value of the transaction and the nature of the assets.
The wording of the Urgent Measures Act means that the sale of land and buildings could be captured by the emergency notification regime where they are used as part of a business, even if the relevant land is not “sensitive land” under the Overseas Investment Act 2005.
It also applies to the sale of assets or interests from one overseas person to another.
Requirement to “Notify” and obtain Direction Order
Once a notification has been made, the transaction cannot proceed until the Government has issued a Direction Order.
On receipt of a notification, the transaction will be considered against a “national interest” test. National interest in not defined in the legislation, but the Government has issued guidance on how this test will be applied. The exercise of this discretionary power will likely involve considerations of:
- Whether the investment is in a business with large market share, or that holds unique assets, or operates in sensitive areas of the economy;
- National security, public order and international relations;
- Economic and social impacts;
- Alignment with New Zealand’s values and interests and broader policy settlings;
- Character of the investor;
- Whether the target entity is in financial distress, and/or whether the value is fundamentally lower than pre-Covid-19 valuations.
Following receipt of a notification, the Minister must then take one of four “risk management actions”:
- Issue of a Direction Order (allowing the transaction to proceed) – Direction Orders may be subject to conditions if such conditions are considered necessary to manage any potential national security risks;
- Issue of an interim Direction Order (pending fuller review);
- Issue of a Prohibition Order (stopping the transaction); or
- Issue of a Disposal Order (if the investment should have been notified, wasn’t and has been given effect).
The Minister will aim to make decisions on low risk transactions within 10 working days, but the legislation/regulations will allow them to take up to 40 working days (and to extend this timeframe by a further 30 working days if necessary). If the emergency notification regime remains if force over the upcoming election period, this could create additional timing issues.
The OIO is establishing an on-line notification process, and there should be no fee payable to the OIO for making notifications under the emergency regime.
The Minster must review the emergency notification regime at least every 90 days, to consider whether the circumstances justify its continuance. If they do not, the Minister will recommend that the regime is replaced with the more permanent call-in power.
Enduring National Interest Test & Call-In Power
The Urgent Measures Act also introduces the enduring national interest test and call-in power from the earlier Overseas Investment Amendment Bill (No 2) introduced in March 2020 (see our earlier commentary here). The national interest test will come into force alongside the emergency notification regime.
The remainder of the measures originally contained in the Overseas Investment Amendment Bill (No 2) are now contained is the Overseas Investment Amendment Bill (No 3) (the Other Measures Bill). This is being progressed on an ordinary legislative track.
If you have any questions about the Urgent Measures Act please contact a member of our overseas investment team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.