Top law firm Russell McVeagh formally cautioned after ‘workaround’ advice led to foreign investment law breaches

The purchase of industrial land at Te Puna Station Rd, Tauranga sparked a probe by the Overseas Investment Office and $30,000 fine. Photo / Alex Cairns

One of the country’s top law firms has been formally cautioned by authorities after advising a client on a “workaround” for a multimillion-dollar property purchase that led to breaches of foreign investment rules.

The legal spat relates to the sale of 12ha of sensitive industrial land on Te Puna Station Rd in Tauranga, which was ultimately bought by ContainerCo - a company part-owned by the People’s Republic of China - which has now been slapped with a $30,000 administrative penalty.

Documents released to the Weekend Herald under the Official Information Act show ContainerCo planned to buy the land but was considered an overseas person under the Overseas Investment Act (OIA).

According to the documents, a complicated series of arrangements were agreed by which the land would be purchased and held under several New Zealand-owned trusts and companies until ContainerCo obtained the necessary Overseas Investment Office (OIO) consents.

An OIO report from May last year shows compliance officers identified several breaches of the Act after the matter came to their attention and an investigation was launched.

Some of those actions were taken after legal advice from Russell McVeagh.

“In this case, your clients have adopted what we consider to be such a structure to hold land ahead of seeking consent,” a senior OIO enforcement officer wrote in a compliance letter to Russell McVeagh in October last year.

“For the avoidance of doubt, please note our position that arrangements like this may contravene the associate provisions in the Act.”

The letter warned Russell McVeagh that further arrangments for overseas entities to secure land before consent was granted “are likely to be looked at closely by the office and may result in a stronger enforcement response”.

The May 2022 report says NZ investment company Beaumont Investment Trust entered into a sale and purchase agreement for the land with Iaccoca Holdings Ltd in February 2021. The value of the initial transaction was $4.7 million.

Before signing the purchase agreement, Beaumont had signed a memorandum of understanding (MoU) with ContainerCo in June 2020 agreeing that Beaumont would later nominate a joint venture company as purchaser.

The joint venture company would be 50 per cent owned and controlled by ContainerCo, and the land would be leased to ContainerCo for at least 20 years.

ContainerCo then sought legal advice on the MoU from another law firm, which advised the acquisition could not go ahead without OIO consent.

However, Beaumont went ahead with the sale and purchase agreement and was later found to be an “associate” of ContainerCo, meaning it needed to apply for OIO consent before executing the purchase.

On June 4, 2021, Beaumont and ContainerCo signed a second MoU terminating the first MoU and requiring Beaumont to incorporate a new company, Te Puna Industrial Ltd (TPIL), as purchaser once the sale contract went unconditional.

ContainerCo would be granted preferential shares in TPIL and become a 50 per cent owner of the company under a joint venture once OIO consent was obtained.

If consent was not obtained, another NZ company called Petroview Ltd would replace ContainerCo on the joint venture. Petroview Ltd was 100 per cent owned and controlled by ContainerCo director Ken Harris.

Concerns about a possible associate relationship emerged at a meeting in August 2021 after ContainerCo approached the OIO to apply for consent.

Top law firm Russell McVeagh was issued with a compliance letter by the Overseas Investment Office over advice it gave to a client.

Beaumont’s sale and purchase agreement became unconditional a few days later and TPIL was nominated as the purchaser.

A compliance investigation was launched, which identified actions that had likely breached the Act. These included:

• Beaumont entering into a sale and purchase agreement without obtaining OIO consent;
• The signing of the second MoU - “a structure intended to circumvent the Act”;
• TPIL acquiring the land and ContainerCo acquiring a leasehold interest.

However, the OIO found the breaches were “inadvertent” because the parties “did not intend entirely to circumvent the Act”.

The parties had been “upfront and cooperative” with investigators and had not sought to withhold information.

ContainerCo only learned of the need to obtain consent once the first MoU had been signed, the report says.

It then sought advice from Russell McVeagh on how best to “remedy the situation”.

“The parties adopted a structure and staged transaction they believed was compliant with the Act, albeit that it had the effect of being a ‘workaround’ to enable them to secure the land” while applying for consent.

The OIO was satisfied the parties had always intended to go through appropriate legal channels.

However, the watchdog was concerned that Russell McVeagh - “a firm with frequent interaction with the office” - took the interpretation it did given the lawyers that provided advice were “well aware” of the need for consent.

“We have communicated those concerns to Russell McVeagh separately through a compliance letter, and consider that this action is sufficient to address these concerns.

“The lawyers involved have been cautioned.”

The letter to Russell McVeagh said the fact ContainerCo acted on the law firm’s advice contributed to the decision not to take enforcement action.

“However the approach taken is a matter of concern to us, and we do not rule out taking proceedings in similar cases in the future.”

ContainerCo was granted retrospective consent to buy the land in October last year and fined $30,000.

The Herald sought comment from Russell McVeagh about the OIO reprimand and whether the law firm had offered to pay ContainerCo’s fine, given the breaches were partly the result of Russell McVeagh’s advice.

It declined to comment, saying only: “We continue to work collaboratively with the Overseas Investment Office”.

Harris told the Weekend Herald his company had acted on the advice it received, which in his view was “conservative and prudent”.

He did not see the ownership structure as a “workaround”.

“I just saw it as a commercial arrangement.”

As soon as the company realised consent was needed, it immediately approached the OIO and stepped back from ownership and management of the land while retrospective consent was sought.

“We were immediately transparent.

“For us, it was pretty straightforward. We just did the right thing. We didn’t do the wrong thing.”

The company is now seeking resource consent to turn the land into a business park and head office.