By Pattrick Smellie
The Crafar farms saga continues, with the High Court ordering permission given to Chinese investor Shanghai Pengxin to buy the farms be set aside and reconsidered because the Overseas Investment Office had “materially overstated” the economic benefits for New Zealand.
While the judicial review issued today by Judge Forrest Miller does not kill the widely unpopular sale of the 16 farms, in receivership, he conceded it does place it “at some risk”. The farms’ receivers, Korda Mentha, were already operating beyond their own Jan. 31 deadline for concluding the sale, while they waited for today’s outcome.
“The parties to the transaction have agreed to delay pending my decision, but based on what I have been told about the agreement sale and purchase, either of them could respond to this judgment by cancelling it,” the judge said. “But there is no evidence that the transaction will fail if the decision is returned to ministers for reconsideration.
If the bid from Pengxin’s New Zealand entity, Milk New Zealand, “is much better than any competitor’s…then the receivers face an incentive to wait so long as they think Milk NZ enjoys reasonable prospects of success.”
“No one suggested that reconsideration need take long,” said Judge Forrest. “On the face of it, the OIO may simply recalibrate its existing recommendation. The error matters enough on the fact to justify taking such risk as there is.”
The OIO spent nine months assessing the Pengxin bid, which is reported to have valued the farms at $210 million, some $40 million higher than the bid by a consortium of New Zealand bidders led by merchant banker Michael Fay.
The Fay-led consortium sought the first ever judicial review of an OIO decision after the office recommended the Pengxin purchase, which involved a share-milking joint venture with state-owned Landcorp and investment of a further $14 million in the farms.
Judge Miller said the OIO had only discounted “an unquantified but plainly modest amount” to cover the cost of repair and maintenance of the farms which it acknowledged in its recommendation to ministers was substandard.
His judgment finds that any investor in the Crafar farms could be expected to return them to normal levels of production, and that Pengxin needs to show its investment would benefit the New Zealand economy beyond that.
“The ministers could scarcely serve the legislative objective if when assessing a given economic benefit they were to ignore clear evidence that the benefit will accrue anyway, should the land remain in … New Zealand ownership.”
“The benefits of overseas investment must be identifiable and substantial. If a given benefit will happen anyway, it cannot easily be described as a substantial consequence of the overseas investment,” said Judge Miller.
While it had been argued that such analysis would require complex second-guessing by the OIO, the judge said he did not believe such a test was unworkable “in a case such as this.”
“The weighing of economic benefits among themselves and against non-economic benefits requires not calculation but ministerial judgment.”
He found that the two ministers who recommended the deal proceed, Land Information Minister Maurice Williamson and Associate Finance Minister Jonathan Coleman had “misdirected themselves” by relying on the OIO’s “before and after” approach to assessing economic benefit from the Pengxin bid.
Judge Miller said the error was “not a mere technicality.”
“No one suggested that the farms are likely to remain in their present unsatisfactory state, whoever purchases them.”
Prime Minister John Key gave initial government reaction, saying it was “not unusual for a judge to see it a different way to internal counsel.”
“The Overseas Investment Office will have to go back and reconsider the application in light of the new ruling of the judge, and it’s eminently possible the Overseas Investment Office will come up with exactly the same recommendations and ministers will accept it,” Key said in the House today.
The Crown is “extremely unlikely” to appeal the judicial review, Key said.
Williamson said he expected to make a statement later today after receiving advice from the Crown Law Office and the OIO.
A spokesman for the Crafar Farms Purchase Group welcomed the decision.
“Our view was that Shanghai Pengxin’s offer brought no real economic benefit to New Zealand and it was not in the best interests of New Zealanders. It is reassuring that a High Court judge has come to a similar conclusion and set aside the ministers approval.”
Land Information Minister Maurice Williamson and Associate Finance Minister Jonathan Coleman released this statement on the decision on Wednesday afternoon:
Land Information Minister Maurice Williamson and Associate Finance Minister Jonathan Coleman said today’s High Court judgment on the judicial review of Shanghai Pengxin’s bid to acquire the 16 Crafar farms provides a new judicial interpretation of complex legislation.
The High Court considered the case on two grounds. These were:
- Under section 16 (1) (a) of the Overseas Investment Act and whether the bidder had the relevant business experience and acumen.
- Under section 16 (1) (e) (ii) and (iii) which requires the investment to deliver substantial and identifiable benefits to New Zealand. These are measured by 21 factors outlined in section 17 of the Act.
On the first issue, the Court found Ministers had applied the correct test under section 16 (1) (a) and there were no grounds for review on the basis of relevant business experience and acumen.
On the second issue, the Court ordered the decision to approve the sale be reconsidered. The Court’s ruling calls for a different test to be applied to the economic factors in section 17 of the Overseas Investment Act than the Overseas Investment Office had previously applied.
Instead of applying a ‘before and after’ approach to the economic factors in section 17, as the Overseas Investment Office did in its recommendation to Ministers, the Court has ruled those factors should be assessed by asking what would happen ‘with and without’ the overseas investment. In this case, it is likely this will only apply directly to four of the 21 factors – section 17 (2) (a) (i), (iii), (iv) and (vi).
“This ruling changes the interpretation of how the economic factors in section 17 should be assessed,” Mr Williamson says.
In light of this ruling, the Overseas Investment Office will now apply an approach consistent with the Court’s ruling and resubmit a recommendation report to Ministers.
“We don’t have a clear timeframe for this process but expect to receive the resubmitted recommendation report from the Overseas Investment Office in a matter of days, not weeks,” Mr Williamson says.
Here is Land Information Minister Maurice Williamson:
Read the full judgement in the document below:
(Updates with Question Time, judgement, video clip of PM Key on the decision, clip of land information minister Maurice Williamson)