Is it in the national interest?

Infrastructure like Wellington Electricity (currently owned by CK Infrastructure Holdings and Power Assets Holdings) is likely to come under a new national interest test. Photos / Mark Mitchell

Critics are worried the test — subject to Government ideology — may scare off foreign investors, writes Fran O'Sullivan.

A proposed new "national interest" test for screening major investments by foreign companies puts considerable power in the hands of politicians to decide which deals pass muster.

The national interest test is outlined in a Treasury discussion document considering proposed changes to the Overseas Investment Act.

The Coalition Government says it needs the power to stop purchases that might harm public health and safety, and that the test will be applied sparingly.

It will look at whether proposed investments could threaten national security, impinge on iwi or water rights, or put the control of essential infrastructure such as power lines or airports in the hands of a foreign owner rather than a New Zealand Government.

Critics are worried that a test — which will be subject to the particular ideological stances of successive Governments — may scare off foreign investors.

The test is part of the second phase of the Government's Overseas Investment Act reforms. It follows changes made in late 2018, which banned purchases of residential property by overseas persons and simplified forestry investments.

Associate Finance Minister David Parker says the second round of reforms is focused on reducing the Act's complexity, to better support high-quality overseas investment, and aimed at cutting red tape and giving decision-makers the ability to consider the broader impact on New Zealand of potential investments.

"We're looking at where we draw the line as to what constitutes a New Zealand owned or controlled company, and what information the Government should request from investors to ensure they are of good character," he says.

"The options also look at how decision-makers could consider the broader effects of an investment, including whether to introduce a national interest test and whether there should be greater ability to consider national security, water, and Māori cultural values when assessing the impact of an investment."

Public feedback on the Treasury paper outlining the changes closes later this week. Feedback through the Capital Markets 2029 Review process suggests the proposed treatment of listed companies under the OIA is unworkable and a "significant disincentive to listing".

Listed companies are unable to reliably and readily determine their overseas ownership as the share register changes daily and shareholders are not required to identify themselves as overseas persons, a consultation paper released by the Capital Markets 2029 steering group says.

"Moreover, the blunt 25 per cent threshold for becoming an overseas person sees listed issuers with disparate (and in many cases de minimis) overseas shareholdings that do not act together, requiring it to comply with the OIA.

"In addition, if an 'overseas person' acquires shares in an NZX listed company with an interest in sensitive land and causes the listed company to trip the 25 per cent threshold, the overseas person who acquired the shares requires OIA consent."

Infrastructure like Auckland Airport are likely to come under a new national interest test. Photo / Jason Oxenham

MinterEllisonRuddWatts corporate partner Cathy Quinn adds that the definition of overseas person currently captures many New Zealand listed companies who in reality are not controlled by foreigners.

"New Zealand listed issuers can be tipped over to become an overseas person by a relatively small acquisition of shares by a foreigner," Quinn told the recent China Business Summit. "It is not actually easy for foreigners to be aware that their acquisition will push an NZX entity over to become an overseas person.

"Capturing these entities just adds compliance costs and adds no value."

The "good character test" required under the OIA is an issue.

Currently the law requires applicants who buy New Zealand assets on sensitive land are controlled by persons with particular characteristics including business experience and acumen, financial commitment, good character and immigration eligibility.

"This test opposes compliance costs and very frequently it requires information from people who practically have no control whatsoever over the New Zealand assets," says Quinn.

"One might also query the Overseas Investment Office's ability to judge a person's business acumen and experience," she adds. "There is a suggestion that the test be expanded to allow assessment of a corporation's character such as a parent company, tax arrangements, their labour and environmental practices."

Quinn cautions that New Zealand could end up with a regime that is "worse than we currently have".
"My sense was, for every suggestion to simplify things in the paper, there were options which might actually make things worse.

"It's a bit like, from my perspective, giving with one hand and taking back with two."

DIRECTORS

Directors can expect to attract more scrutiny from shareholders, stakeholders and regulators in the year ahead. That's the view of Chapman Tripp in its latest edition of New Zealand Corporate Governance Trends and Insights.

The legal firm says directors would increasingly come under the spotlight, particularly in the aftermath of the Hayne inquiry into the Australian banking sector.

Partner Geof Shirtcliffe said the "shareholder primacy model"may also be under serious challenge.

Shirtcliffe quoted Financial Markets Authority (FMA) chief executive Rob Everett who has suggested the "Milton Friedman model" — where the responsibilities of a listed company board were primarily aimed at the returns to shareholders — was broken.

The Hayne Royal Commission noted that directors have a duty to pursue the long-term interests of the business, as distinct from the short-term gain.

In addition, Shirtcliffe said there could also be increased liability risks for directors as litigation funders become more active in the NZ market, raising the importance for directors of good director and officer insurance cover and of boards being able to rely on manageable information flows.

Chapman Tripp partner Roger Wallis said several of the firm's clients expect to see a widening of the expectations both on and of directors. "But, as of now, the strict legal obligation is still relatively narrow — to act "in what they believe is the best interests of the company"which "will often, but not necessarily, be what is in the best interests of existing shareholders," he said. Other themes expected to occupy boardrooms include:

● a strong focus on culture as the ripple effects from the Hayne Inquiry and FMA/Reserve Bank reviews are "sluiced" through the system.
● closer scrutiny on directors from shareholders, stakeholders and regulators
● more comprehensive disclosure requirements
● increased liability risks, and
● development of a distinctive iwi strand in wider governance culture.