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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 yesterday. 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.
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 on 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 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). It is difficult to see how any investment in non-urban land exceeding 5 hectares could result in a “substantial and identifiable” benefit in the context of the dairy and red meat sectors. It is highly unlikely that one farm or even a portfolio of farms would have a material impact on the level of exports from New Zealand or the productivity of the industry as a whole.
Moreover, the Ministers’ application of the “substantial” test appears to impose an impossible threshold in relation to any overseas investment in any fragmented industry.
Was land size a factor?
The size of the Lochinver Station was much greater than the average sized farm, and Pure (and its associates) already had interests in other farms. Accordingly, the Ministers may have adopted a higher threshold because of the size of the farm land in this case (in line with Minister of Finance directive on “large” areas of farm land).
There would still seem to be scope for the OIO to adopt a lower threshold to the “substantial and identifiable” test for farm transactions that are under the average farm size threshold. However, it is likely that the OIO will be very cautious in analysing the “substantial and identifiable” test now given the Ministers’ decision, no matter what size of farm is being acquired by an overseas investor.
Bell Gully is a major New Zealand law firm.