A recent High Court decision (Tiroa E & Te Hape B Trusts v Chief Executive of Land Information  NZHC 147 (the Crafar farms decision)) has considered the Overseas Investment Office's (the OIO) application procedures and considerations as they apply to "sensitive land" under the Overseas Investment Act 2005 (the Act).
The decision arose from the Ministerial decision in late January this year to accept the OIO's recommendation to grant an overseas applicant (Milk NZ) consent to acquire the Crafar farms (a collection of farms within one corporate group).
The Crafar farms were in receivership and were being operated below full production. 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 for the purposes of satisfying the criteria for consent under the legislation.
The Minister agreed and counted this $14 million to restore the farms to full productivity as a benefit to New Zealand arising from the investment.
The question on review by the court
The decision was challenged on two grounds by a group of New Zealand purchasers making a competing bid for the Crafar farms. The second ground of review, and the topic of this note, was an allegation that the Minister had committed an error of law in counting Milk NZ's promised $14 million investment as a benefit to New Zealand arising from the overseas investment.
The Minister (and the OIO) had counted the $14 million benefit on the basis that this benefit was not available to New Zealand before the acquisition, i.e., while the farms were in the hands of the receiver. It was argued, however, that any purchaser would bring the farms back to full production and, therefore, Milk NZ's $14 million investment could not be said to create a benefit to New Zealand – that "benefit" would accrue whether Milk NZ bought the farms or not.
The court's decision
The court confirmed that the Act requires a causal connection between the investment and the benefit claimed.
Further, the court held that the test of causation requires a forward looking assessment comparing the benefits of the particular investment against what is likely to happen without the overseas investment, i.e., a "with and without" comparison. This has been described as a "counterfactual" test.
Applying this counterfactual test, if a benefit would accrue even if the acquisition did not proceed, it cannot be said to be caused by the investment. Accordingly, the court held that the Minister was wrong to count Milk NZ's $14 million investment 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.
Importantly, 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 Minister wrongly insisted on a status quo counterfactual.
Implications of the decision for sale processes
The main implication of the Crafar farms decision is that the Ministers must assess benefits as against the position likely to accrue absent the investment for which consent is sought.
While, as Justice Miller notes in the judgment, the Crafar farms decision may make it more difficult to buy distressed assets (in the sense that the benefits of bringing them out of distress may not be able to be counted), it does not follow that the hurdle will be materially higher for other investments.
For more detailed discussion on this case and the subsequent Ministerial decision, see Bell Gully's article: The Crafar farms sale: Are there new hurdles for overseas investors in "sensitive land"?