• Rachel Dunne is a partner at law firm Chapman Tripp
Investment by foreigners in sensitive land or business assets worth $100 million or more requires government consent under the Overseas Investment Act (OIO). The law's purpose is to "acknowledge that it is a privilege for overseas persons to own or control sensitive New Zealand assets". So far, so good.
While many New Zealanders probably agree, few would realise that some well-known New Zealand listed companies, such as Fletcher Building, are classed as foreign and made subject to the OIO regime.
They find themselves in this strange position not by virtue of having one or more significant foreign shareholders with actual influence over strategy or operations, but because their shareholding base includes many unrelated foreign shareholders who individually hold truly insignificant amounts but together account for 25 per cent or more of their ownership.
This is a peculiar outcome for our capital markets and our foreign investment regime. New Zealand companies are forced to obtain OIO consent for actions that are part of their everyday operations (like renewing or entering into leases that may include sensitive land) or for acquisitions that will drive growth.
Where a listed company already owns sensitive land, the foreign investor who tips that company over the 25 per cent threshold (even if they only acquired a minimum holding of shares) must obtain OIO consent. The ownership of listed companies changes daily in the course of trading and the use of custodians is common, making it near-impossible for a listed company to accurately assess if it is classed as foreign, or close to it. This means foreign investors have no way of knowing whether even a small investment in a New Zealand listed company will require OIO consent and firms may find they have unwittingly breached the OIO regime.
Capturing listed companies in this manner is a poor use of the OIO's stretched resources and New Zealand taxpayers' money. It leads to further delays in the OIO's ability to scrutinise those transactions that merit close and careful examination.
Although aware of the issue, the previous Government declined to take any action. One easy solution, which would not undermine the purpose of the law, would be to adopt the approach taken by Australia, where only foreign shareholdings above 5 per cent (which is also the threshold at which a shareholding requires disclosure to NZX) are counted towards the foreign ownership threshold.
Much was said in 2017 about the lack of listings and the importance of reinvigorating our equity capital market. Foreign capital is an important element to the success of new listings and the continued viability of any sharemarket, as is regulatory certainty. We strongly encourage the new Government to provide much-needed reform in this space as part of its broader plans to update New Zealand's foreign investment laws into a "fit-for-purpose" regime.