Last week, Ministers accepted (for a second time) a recommendation by the Overseas Investment Office (OIO) to grant an overseas applicant consent to acquire the Crafar farms. This followed wide-ranging criticism of the OIO and the Ministers responsible for approving the application in January, and the subsequent setting aside of that consent by the High Court in February.

However, while the Crafar farms sale and related OIO processes may have polarised debate in New Zealand on overseas ownership of sensitive New Zealand assets including farmland, the outcome may not have materially altered the way in which New Zealand's overseas investment regime will be applied.

What can be taken from both the High Court's decision on the Crafar farms sale and the subsequent OIO recommendation and following Ministerial decision (the Crafar farms' decisions), are a number of practical implications for both vendors and overseas investors. In particular, the Crafar farms' decisions highlight some uncertainties in the OIO approval process and provide some important guidance for preparing future applications involving acquisitions of interests in "sensitive land".

In brief, the implications of the Crafar farms' decisions for OIO applications involving "sensitive land" include the following:

  • vendors and overseas bidders will be required to devote more resources to the OIO process;
  • an appreciation that Ministers have a wide discretion when applying the overseas investment criteria and they are unlikely to be successfully challenged so long as they apply the right legal test;
  • the OIO and Ministers are likely to require a greater degree of specificity about, and evidence of, benefits to New Zealand;
  • contrary to the OIO's previous approach, the High Court held that the relevant counterfactual for establishing an economic benefit to New Zealand is to be based on a "with or without" assessment rather than a "before and after" comparison (although, in practice, this may not in itself result in a substantive change for most applicants because in many cases the "status quo" may still be the correct counterfactual);
  • it may not be necessary for the applicant to have a strong economic case if it can establish a number of non-economic benefits; and
  • Ministerial decisions may take longer. This will certainly be the case for complex applications involving politically sensitive assets, including those relating to relatively large areas of rural New Zealand.

Background to New Zealand's overseas investment regime

Foreign investment into New Zealand is regulated by the Overseas Investment Act 2005 and related regulations (the legislation). Approval is required for an "overseas person" to acquire "significant business assets" or an interest in "sensitive land". The regime applies both when the acquisition is made either directly or through the acquisition of securities where the "overseas person" acquires 25% or more of the securities.

To obtain a "sensitive land" approval, the "overseas person" must satisfy certain "good investor" criteria and establish that the investment will or is likely to benefit New Zealand. Benefits are assessed against economic, environmental, social and cultural factors unless the applicant intends to reside in New Zealand indefinitely.

Most major sensitive land applications are decided by two Ministers having received a recommendation from the OIO. All other decisions are made by the OIO under delegated authority.

The Crafar farms sale: the Pengxin application

The Crafar farms sale involved the application by Milk New Zealand Holding Limited (Milk NZ) for approval to acquire a freehold interest in 16 farms located in the Central North Island of New Zealand, collectively known as the "Crafar farms" (the Pengxin application). Milk NZ is a Hong Kong company ultimately owned by two brothers, Zhaobai and Lei Jiang through Shanghai Pengxin Group Co. Limited, which is incorporated in China.

The vendors who owned the Crafar farms were companies in receivership.

Other parties had been interested in acquiring the farms, including a New Zealand group who referred to themselves as the Crafar Farm Independent Purchaser Group (CFIPG), but their bid was not accepted by the receivers.

Milk NZ promised to invest $14 million to bring the farms back to full production, claiming that this investment would benefit New Zealand and should be a factor taken into account by the OIO for the purposes of satisfying the criteria for consent under the legislation.

On 19 January 2012, the OIO provided to the Ministers its report on the Pengxin application and recommended that it was approved.

Later that month, a company associated with CFIPG brought judicial review proceedings challenging the OIO's recommendation to the Ministers. The plaintiffs alleged that the OIO had not correctly applied one of the "good investor" criteria being that relating to "business experience and acumen".

Later in January the Ministers granted consent to the Pengxin application. Soon after, CFIPG amended their claim to also challenge the OIO's application of the "benefit" criteria and the Ministerial approval.

The High Court's decision

The High Court heard the application early in February 2012 and delivered its judgment (Tiroa E & Te Hape B Trusts v Chief Executive of Land Information [2012] NZHC 147) soon after:

  • The first ground of review, regarding business experience and acumen, was not upheld;
  • The second ground of review was successful. The court set aside the consent and directed that the Ministers review the Pengxin application. The court directed the Ministers to reconsider the economic factors by assessing what would happen "with and without" the overseas investment rather than the "before and after" test that had been applied by the OIO. This has been described as the "counterfactual test".

The court:

  • held, in relation to each economic benefit claimed, when applying the "with and without" counterfactual, that it was a matter of enquiring whether the benefit was likely to happen absent the overseas investment. Accordingly, the court held that the Minister was wrong to count Milk NZ's $14 million investment to restore the farms to full productivity as a benefit to New Zealand, since this investment would happen regardless of whether Milk NZ or someone else acquired the farms, i.e., it would arise in the counterfactual;
  • did not accept that a complex analysis of alternative scenarios is required; and
  • held that the required benefits do not need to be quantified.

The court did not rule out the possibility that the right "counterfactual" may be the "status quo" (i.e., the position before the transaction) in appropriate cases. Rather, the court found that in this case the Ministers wrongly insisted on a status quo counterfactual.

The second Ministerial decision

Following the High Court's decision and after receiving further submissions, the Ministers, in line with the recommendation of the OIO, approved the Pengxin application for the second time on 20 April. Full details of the OIO recommendations and the Ministers' decision are available here.

The OIO's papers presented to the Ministers include a number of comments on the way in which the legislation should be applied. Of particular note are the comments that the Ministers are responsible for deciding the relative importance of each factor and that there is no requirement for economic factors to be given more weight than non-economic factors and vice versa. Further, the question of whether or not an application demonstrates the necessary benefits is a high level decision for Ministers involving Ministerial judgment with a significant policy content. The OIO note that in making the assessment, the Ministers should consider the relevant factors collectively.

Unusually, the OIO considered that only three out of the six "economic" factors resulted in a benefit to New Zealand, and that "economic" factors made up only three out of twelve of the factors identified by the OIO as resulting in benefits to New Zealand. In addition, there was only one economic factor and six non-economic factors that the OIO recommended to Ministers were of "high relative importance".

New proceedings still to be heard on the Crafar farms' decisions

CFIPG is continuing its challenge against the Government's approval of the Pengxin application.

Following the High Court decision, CFIPG lodged an appeal with the Court of Appeal on 20 February challenging the High Court's finding that the OIO and the Ministers had correctly applied the test of business experience and acumen relevant to the overseas investment. This week, it also issued proceedings in the High Court so that the challenge applies to the Ministers' second decision on the same grounds, and CFIPG is looking into having the two proceedings merged and heard together in the Court of Appeal.

However, as none of the matters under review relate to the High Court's finding on the requirement for a "with or without" counterfactual in determining whether an overseas investment benefits New Zealand (or is likely to do so), and as the Crown has decided not to appeal that finding, the High Court's decision continues to represent the current law on that aspect.

What are the practical implications for "sensitive land" applications?

As the OIO is now required to apply a "with or without" assessment in determining whether an overseas investment provides the required economic benefits to New Zealand, both vendors and potential overseas purchasers of "sensitive land" will need to put more thought into establishing the relevant counterfactual and in identifying and presenting to the OIO the economic, environmental, social and cultural factors that support their application.

The status quo has not been ruled out as a counterfactual: rather, following the High Court's decision, it is now clear that it will not always be the relevant counterfactual. The counterfactual will need to be based on evidence and on a commercial and pragmatic judgment – mere prophecy and speculation of what may happen is unlikely to be sufficient, and would be challengeable.

For vendors this may mean that they will need to:

  • plan their OIO strategy carefully and be more actively involved in the bidder's OIO application;
  • establish a minimum price and plans for the business if it is not sold. This could be as simple as acknowledging it will be "business as usual"; and
  • where a competitive auction is involved, undertake a comparative assessment of bidders' OIO applications including some due diligence in respect of the "benefits" to New Zealand that are claimed.

Overseas bidders would be advised to:

  • seek assurances from the vendor that they will support an application by the bidder including relevant counterfactual information being provided to the OIO;
  • establish from the vendor whether they are bidding against New Zealand bidders;
  • seek from the vendor information on the vendor's intention should the highest bid fail to obtain OIO approval; and
  • work hard to identify benefits to New Zealand, particularly in relation to environmental, social and cultural factors as well as the obvious economic factors. Bidders may need to spend money on these "non-economic" factors and this cost will need to be taken into account when deciding the total cost of the acquisition.

Final thoughts

The degree of Ministerial discretion which has been built into New Zealand's overseas investment regime provides the government of the day with flexibility to effectively alter the application of the legislation by altering its overseas investment policy without the need to also change the legislation. This structure is seen as beneficial by many, but also means that if the government's policy is not clear there is an unacceptable level of uncertainty for vendors and overseas investors.