Statement of reasons
The following statement of reasons is published for the purposes of section 61F(5) of the Overseas Investment Act 2005
This statement sets out the Minister’s reasons for recommending the exemption regulations in the Overseas Investment Amendment Regulations 2021 and why the Minister considered each exemption to be necessary, appropriate, or desirable. The Minister responsible for the Overseas Investment Act 2005 (the Act) (the Minister of Finance) formally delegated authority to recommend the making of regulations under the Act to the Associate Minister of Finance (Hon David Parker).
Under section 61E(1) of the Act, the Minister may recommend exemption regulations only if the Minister considers that—
there are circumstances that mean that it is necessary, appropriate, or desirable to provide an exemption for any of the matters referred to in section 61B(a) to (c) of the Act; and
the extent of the exemption is not broader than is reasonably necessary to address those circumstances.
When considering whether to recommend that an exemption regulation be made, the Minister must have regard to the purposes of the Act, which are—
to acknowledge that it is a privilege for overseas persons to own or control sensitive New Zealand assets by requiring overseas investments in those assets, before being made, to meet criteria for consent and imposing conditions on those overseas investments; and
to manage certain risks, such as national security and public order risks, associated with transactions by overseas persons.
The Minister may also have regard to all or any of the factors set out in section 61E(2)(b) of the Act, including any other factors that seem to the Minister to be relevant to the circumstances.
Reasons for exemption for corporate dealings: other acquisitions if a 25% or less change in ultimate ownership and control by overseas persons (regulation 37(1)(a))
This exemption is for the purpose referred to in section 61B(a) of the Act—allowing for exemptions where compliance with the Act would be impractical, inefficient, unduly costly, or unduly burdensome, taking into account the sensitivity of the sensitive assets and the nature of the overseas investment transaction.
This amendment would expand the existing exemption in regulation 37(1)(a) so that the transfer of sensitive assets between entities in a corporate group that are directly or indirectly 75% or more owned by the same overseas person do not require consent. This is a reduction on the 95% threshold previously in place.
I consider that this exemption is appropriate and desirable, having regard to the Act’s purposes. The Act does not require consent where overseas persons acquire 25% or less ownership of sensitive assets. Accordingly, it is unduly burdensome to require consent for the transfer of sensitive assets between entities in a corporate group, where—
the existing ultimate ownership of the sensitive assets remains at least 75% the same; and
other overseas persons (that is, overseas persons not indirectly or directly controlled by the same ultimate owner) collectively do not gain a more than 25% ultimate ownership of the sensitive assets (which is the threshold for requiring consent under the Act).
I further consider that this exemption is not broader than is reasonably necessary because it is limited to situations where there is a 25% or less change of ultimate ownership of sensitive assets by overseas persons, which does not confer an increase in the ability to direct the use of the sensitive asset. Any transaction resulting in a more than 25% change of ultimate ownership of sensitive assets by overseas persons would require consent, according to the Act’s usual rules.
Reasons for exemptions for corporate dealing: other acquisitions if ultimate ownership and control by overseas persons is by the same 2 or more overseas persons (regulation 37(1)(ba))
This exemption is for the purpose referred to in section 61B(a) of the Act—allowing for exemptions where compliance with the Act would be impractical, inefficient, unduly costly, or unduly burdensome, taking into account the sensitivity of the sensitive assets and the nature of the overseas investment transaction.
This exemption would allow companies and other entities that are overseas persons and own sensitive assets to transfer the sensitive assets to different entities where—
the proportion of direct or indirect ownership of the sensitive New Zealand asset that is held by overseas persons remains the same; and
those overseas persons with that interest remain the same and hold their interest in the same proportions.
For example, if 2 overseas persons (OP1 and OP2) each hold 30% of the securities in a significant business asset and a New Zealand company owns the remaining 40%, the exemption would allow the significant business asset to be transferred to a holding company in which OP1 and OP2 each hold 30% and no other overseas persons hold an interest.
I consider this exemption is appropriate and desirable, having regard to the Act’s purposes, because overseas persons’ control and ownership of the asset is not changing as result of the transaction. Requiring overseas persons to obtain consent in these circumstances would be inefficient and unduly burdensome for affected overseas persons.
In addition, these types of transactions are common for preparing an asset for sale and public listings. Removing such barriers to public listings is important to improving New Zealand’s financial markets.
I consider that this exemption is not broader than is reasonably necessary because it is limited to where the proportions of overseas ownership of an asset remains identical.
Reasons for exemption for minor increases if ownership or control has dipped below consented level (regulation 38)
This exemption is for the purpose referred to in section 61B(c)(iii) of the Act—allowing for exemptions for minor increases in ultimate ownership and control by overseas persons or associates of overseas persons, if consent has already been granted for those overseas persons to own or control sensitive assets.
Sections 12 and 13 of the Act allow an overseas person (either alone or together with their associates) to increase their interest in a sensitive New Zealand asset by any amount within ownership or control interest limits. This means that, without an exemption, an overseas person that temporarily drops below an ownership or control interest limit will be unable to return to their previously consented level of interest.
This amendment would exempt overseas persons that reduce their interest in a sensitive asset below the limits of more than 25%, 50%, 75%, or 100% to increase their interest back to within their previous ownership or control interest limit without consent, provided that—
the overseas person or their associate (alone or together with their associates) previously held consent; and
their ownership or control did not reduce to 0% following the consent.
For example, if an overseas person (A) acquired a 60% interest in a sensitive New Zealand asset (B) with consent, then subsequently reduced its interest in B to 40%, regulation 38 would allow A to increase its interest in B back to 60% without consent.
I consider this exemption is appropriate and desirable, having regard to the Act’s purposes. The exemption will only allow minor increases in ultimate ownership and control by overseas persons above their previous level of consent, within the constraints of any ownership or control interest limit that would apply to the originally consented acquisition. Screening investments in securities that return to a level of ownership or control that has already received consent would have limited value from a risk management perspective.
I also consider that the exemption is not broader than is reasonably necessary to address those circumstances. The exemption is limited to circumstances where the overseas person’s interest has not been extinguished and to where they (or their associate) holds consent. These limitations ensure that overseas persons continue to be required to comply with conditions of consent when they return to an interest between the control limits that they previously had consent to hold an interest within.
Reasons for exemption for the transmission of sensitive assets from a deceased person to an overseas person that is the administrator, trustee, or executor of their estate (regulation 40)
This exemption is for the purpose referred to in section 61B(a) of the Act—allowing for exemptions where compliance with the Act would be impractical, inefficient, unduly costly, or unduly burdensome, taking into account the sensitivity of the sensitive assets and the nature of the overseas investment transaction.
Currently, regulation 40 exempts from consent requirements the transfer of sensitive assets by a trustee, executor, or administrator of the will or estate of a deceased person to an overseas person who is a beneficiary of property under that will or estate or under a trust established by that will or estate.
This amendment would provide an exemption for the transfer of sensitive assets from a deceased person to the trustee, executor, or administrator of the will or of the estate of that person, if the trustee, executor, or administrator is an overseas person.
I consider that this exemption is appropriate and desirable, having regard to the Act’s purposes. The transactions covered by the new exemption only result in a temporary change in ownership or control of sensitive assets, as these are subsequently passed on from the trustee, executor, or administrator of the will or estate to the beneficiaries of the will or estate. Requiring consent for such transactions is impractical and unduly burdensome as they pose little to no risk, are commonplace, and are regulated by other regimes.
Furthermore, I consider that the exemption is no broader than is reasonably necessary, as it is limited to a very specific type of transaction, rather than a broader range of transactions involving trustees.
Reasons for further exemption related to rights or interests under insurance contracts that are ancillary to permitted security arrangements (regulation 42A)
This exemption is for the purpose referred to in section 61B(a) of the Act—allowing for exemptions where compliance with the Act would be impractical, inefficient, unduly costly, or unduly burdensome, taking into account the sensitivity of the sensitive assets and the nature of the overseas investment transaction.
The existing regulations 41 and 42 allow overseas persons to acquire “permitted security arrangements”
in certain circumstances without consent.
The existing exemptions for permitted security arrangements exclude a number of rights and interests under insurance contracts that are also transferred together with those permitted security arrangements but do not fall within the definition.
The amended exemption will also exempt acquisitions of these rights or interests from the need for consent if—
the insurance contract relates to the same property as the permitted security arrangement; and
the contract is a contract of insurance against physical loss or damage of the property; and
the acquisition is in good faith and in the ordinary course of business; and
the transaction is not entered into with the intention of acquiring a sensitive New Zealand asset.
I consider that this exemption is appropriate and desirable, having regard to the Act’s purposes. An overseas person acquiring these rights or interests under an insurance contract is very unlikely to change the effective ownership or control of the underlying sensitive asset.
In addition, facilitating the trading of security arrangements is important to support access to finance on reasonable terms. As such, the exemption is also desirable to avoid limiting overseas persons’ willingness to lend money to people acquiring sensitive New Zealand assets.
Further, I consider that this exemption is not broader than is reasonably necessary because of the limitations in the third paragraph above.
Reasons for exemption for transfer of certain debt obligations (regulation 42B)
This exemption is for the matters referred to in section 61B(a) of the Act—allowing for exemptions where compliance with the Act would be impractical, inefficient, unduly costly, or unduly burdensome, taking into account the sensitivity of the sensitive assets and the nature of the overseas investment transaction.
There is currently a standing consent in the Act for acquisitions of interests or rights to be paid under a loan obligation. This standing consent will expire when the Overseas Investment Amendment Act 2021 comes into force (42 days after it receives Royal assent).
The new exemption will replace the standing consent and also exempt the acquisition of non-finance-like debts, such as trade receivables, as well as contingent liabilities such as a guarantee or an interest in insurance proceeds. As with the other exemptions for transactions involving the trade in debt interests by overseas persons, it also requires that the transaction is—
solely an interest or right to be paid money; and
not convertible into a security; and
entered into in good faith and in the ordinary course of business; and
not entered into with the intention of making an overseas investment in sensitive assets without consent.
I consider that this exemption is appropriate and desirable, having regard to the Act’s purposes. Facilitating the trading of debt is important to support access to finance on reasonable terms. As such, the exemption is also desirable to avoid limiting overseas persons’ willingness to provide finance in New Zealand.
Further, I consider this exemption is not broader than is reasonably necessary because it is limited to transactions entered into—
in good faith and in the ordinary course of business; and
with no intention of using the interest to acquire sensitive land, significant business assets, or fishing quota without consent.
Reasons for exemption for the underwriting by overseas persons of sales of securities (regulation 46)
This exemption is for the purpose referred to in section 61B(a) of the Act—allowing for exemptions where compliance with the Act would be impractical, inefficient, unduly costly, or unduly burdensome, taking into account the sensitivity of the sensitive assets and the nature of the overseas investment transaction.
Currently, regulation 46 exempts transactions that have the effect of an overseas person underwriting an issue of securities from the consent requirements, if the overseas person—
is a person whose ordinary business includes entering into bona fide underwriting or subunderwriting contracts with respect to offers of securities; and
acquires the securities as a result of entering into a bona fide underwriting or subunderwriting contract in the course of that overseas person’s ordinary course of business; and
holds the securities for less than 6 months; and
does not exercise any voting rights attached to the securities.
This amendment would extend the existing exemption, so that it also applies to underwriting by an overseas person of a sale of securities in New Zealand, as long as the parameters described in the paragraph above are met. This reflects that underwriting the sale of securities is substantively the same as underwriting the issue of securities.
I consider that this exemption is appropriate and desirable because, having regard to the Act’s purposes, requiring consent for such transactions is impractical and unduly burdensome, as the transactions are entered into in the ordinary course of business and do not result in a permanent change in ownership or control.
In addition, facilitating the underwriting of sales of securities is important to the functioning of New Zealand’s financial markets, by helping companies to raise capital and providing certainty about prices to vendors and issuers.
Furthermore, I consider that the exemption is no broader than is reasonably necessary, as it only applies to transactions that are carried out as part of the overseas person’s ordinary business, the overseas person must not exercise any voting rights attached to the acquired securities, and the securities must be disposed of within 6 months.
For those reasons, the terms and conditions of the exemption also substantially achieve the purposes of the Act.
Reasons for exemption for covenants that do not result in substantive ownership or control over sensitive land (regulation 55A)
This exemption is for the purpose referred to in section 61B(c)(x) of the Act—allowing for exemptions for estates or interests in land other than freehold or leasehold (for example, covenants).
This exemption would allow overseas persons to enter into land covenants without consent, as long as the covenant being entered into does not give the overseas person a degree of ownership or control that would ordinarily be associated with another estate or interest in land (such as a leasehold estate or a mortgage).
I consider that this exemption is appropriate and desirable because, having regard to the Act’s purposes, requiring consent to enter into land covenants that do not result in an overseas person gaining substantive ownership or control over sensitive land is inefficient, unduly costly, or unduly burdensome.
I further consider that this exemption is not broader than is reasonably necessary for the same reason (that is, it does not apply to covenants that result in an overseas person gaining substantive ownership or control over sensitive land).
Reasons for exemption for redeemable preference shares (regulation 63A)
This exemption is for the purpose referred to in section 61B(a) of the Act—allowing for exemptions where compliance with the Act would be inefficient and unduly burdensome, but where the purposes of the Act can still be substantially achieved through the exemption’s terms and conditions.
This exemption will result in redeemable preference shares (RPS) not being counted when determining whether a body corporate is an overseas person, provided that the RPS—
are redeemable only in cash; and
do not entitle the holder to exercise voting rights except if the dividend payable is in arrears.
I consider that this exemption is appropriate and desirable, having regard to the Act’s purposes, because RPS are—
an important form of finance for New Zealand businesses; and
low-risk investments, given that they are only a temporary ownership interest that expires when redeemed.
I consider that the exemption is no broader than is reasonably necessary due to the exclusions listed above. Those exclusions mean that the RPS will only allow the holder to exercise control rights in limited circumstances (where the issuer is not paying a dividend that is owing).
For those reasons, the terms and conditions of the exemption also substantially achieve the purposes of the Act.