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The decision by Government Ministers Paula Bennett and Louise Upston to decline consent to the NZ$88 million bid by Chinese-owned Pure 100 Farm Ltd (Pure) to buy the Lochinver Station made national headlines in September. Decisions to decline consent are very rare. Particularly notable in this case, the Ministers' decision went against the recommendation from the Overseas Investment Office (OIO) (although the OIO's recommendation was finely balanced).
In the Ministers' view, the key difference between their approach and the OIO's was the relative weight that they gave to the "benefit to New Zealand" factors. Their approach to the relative weight of the factors could well have a significant bearing on how the OIO assesses future Overseas Investment Act applications.
Counterfactual test
The benefits claimed by Pure were assessed by reference to the counterfactual test, which is now an entrenched part of the overseas investment application process. The test requires an investor to demonstrate benefits to New Zealand that are greater than the situation without the investor's acquisition (i.e. acquisition by other New Zealand bidders or the status quo). The counterfactual can have a substantial impact on the outcome of an application (and did in this case).
Here, the vendor indicated that, absent the sale to Pure, it would hold on to Lochinver Station until a suitable bidder was found. However, the OIO's view was that absent the sale to Pure, the land was "unlikely to remain in its present state". It based its assessment of evidence from an economist and the vendor's statements about other indicative bids (including two from New Zealand parties). Accordingly, rather than a counterfactual of the status quo (against which the benefits claims would be clearer) the OIO assessed the application against a purchase by a hypothetical New Zealand bidder.
"Substantial and identifiable" benefits
The OIO and the Ministers found that Pure would undertake certain development only on a small proportion of the land which would not be undertaken in the counterfactual. The key question then was whether this development was likely to result in a "substantial and identifiable benefit" to New Zealand.
A key aspect of the decision that will be relevant in future cases is how the Ministers applied the "substantial and identifiable" test. In particular:
In the case of investment in the land itself, the Ministers were quick to dismiss benefits as not substantial due to the small size of the land to be developed relative to the total size of land (379ha out of a total 13,843ha); and
In the case of benefits to the New Zealand economy via increased export receipts and greater productivity, the Ministers' view was that due to the small size of the land and the relatively large size of the dairy and meat sectors as a whole, the benefits are unlikely to be substantial.
The second point above could have significant ramifications for all future applications involving non-urban land exceeding 5 hectares (as the "substantial and identifiable" test applies to acquisitions of such land). The Ministers' application of the "substantial" test appears to impose an impossible threshold in relation to any overseas investment in any fragmented industry.
The ramifications of the Lochinver Station decision
Daking New Zealand Farm Group's (Daking) (55% owned by Shanghai Pengxin) recent decision to withdraw its proposed NZ$42.7 million acquisition of farm land in Northland shows the first real impact of the Lochinver Station decision.
The deal for 10 farms covering almost 3300ha of land in the Bay of Islands' Mangakahia Valley was struck in January this year and OIO consent was sought in April. Daking's Chief Executive has been quoted stating that "we simply are not confident enough of a favourable outcome to warrant putting the Northland vendors through a similar experience [to Lochinver]".
In addition to highlighting the immediate negative effect of the Lochinver Station decision, Daking's decision to discontinue its purchase, demonstrates the concerns over the timing of the OIO's process. The OIO does not have any obligation in relation to timing and instead aims to reach 90% of its decisions within:
50 working days of active consideration for 'Category 2' applications (which includes investments in significant business assets and sensitive land); and
70 working days of active consideration for 'Category 3' applications (which covers applications where there is foreshore, sea bed, river bed or lake bed involved).
OIO statistics show that in the period from July 2015 to September 2015 decisions in only 56% of "Category 2" applications and 50% of "Category 3" application were met within these self-imposed deadlines. However, the statistics also show that the OIO is currently considering a higher than usual number of applications.
Andrew Petersen
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Glenn Shewan
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