Lochinvar, the OIA and the lessons from Crafar

Print Friendly, PDF & Email

Before “Dirty Politics” emerged as the story of the forthcoming election, overseas investment in New Zealand farm land was the issue in the spotlight.

It followed the leak of Shanghai Pengxin’s proposed purchase of Lochinvar station near Taupo. This farm, comprising of some 14,000 hectares, has reportedly been sold for around NZ$70 million – that is, if the Overseas Investment Office approves the sale. The purchase follows Shanghai Pengxin’s controversial purchase of the Crafar farms.  The case law resulting from the attempts to stop that purchase, referred to here as the Crafar cases, interpreted the key tests for foreign ownership of farm land under the Overseas Investment Act 2005. Those interpretations will influence the approval process of the Lochinvar purchase.

Overseas Investment Act 2005 (OIA) – the law

The purpose of the OIA is to “acknowledge that it is a privilege for overseas persons to own or control sensitive New Zealand Assets” and to set criteria for consent.

An “overseas person” is an individual (natural person) who is neither a New Zealand citizen nor ordinarily resident in New Zealand or, briefly, a body corporate (company), partnership, or trust that is 25% or more owned or controlled by an overseas person or persons.

Land is “sensitive” if, amongst other things, it is “non-urban land” that is greater than five hectares. As you would expect, non-urban land includes “farm land”, which means land that is used exclusively or principally for agricultural, horticultural or pastoral purposes or for the keeping of bees, poultry or livestock.

Criteria for consent to purchase of farm land by overseas persons

The criteria for OIA consent to the purchase of sensitive land is set out in section 16(1), including that the overseas person must:

  • have business experience and acumen relevant to that overseas investment
  • have demonstrated financial commitment to the overseas investment
  • be of good character, and
  • not be ineligible for a visa or entry permission under the Immigration Act 2009.

In addition, Section 16(1)(e) requires that either the overseas person is ordinarily resident in NZ or intends to reside in NZ indefinitely; or that the investment must be, or is likely to be, of benefit to New Zealand as determined by the relevant Ministers.

If the land is non-urban, Section 16(1)(e) also requires that Minister(s) must determine that the benefit “will be, or is likely to be, substantial and identifiable”.  Where the land is farm land, there is a further requirement that the land must first be offered on the open market to persons who are not overseas persons.

Relevant business experience and acumen

Relevant business experience and acumen was the central question of the Crafar farms cases. Clause 16(1)(a) requires the experience and acumen to be relevant to the overseas investment. The Judge in the High Court found the wording of section 16(1)(a) to be “broad and flexible” and must be interpreted in the context of the particular case. The nature and scale of the investment were factors in determining the relevance of business skills.  It was acknowledged that Shanghai Pengxin had an established a track record of developing successful and substantial businesses in a number of different sectors and countries.

It was decided, and upheld on appeal, that the generic business skills of the managers of the applicant, and those of its related companies, as well as their proposed NZ partner (Landcorp) could be taken into account. Whilst Landcorp’s involvement might have been interpreted by some as admission of insufficient relevant experience, in this case the Court of Appeal stated:

“As long as the investor has some business experience and acumen that can reasonably be said to be relevant to the investment’s success, we consider that s 16(1)(a) will be met, even though the investor will have to supplement its experience and acumen by utilising the experience and acumen of others to ensure the investment succeeds.”

Substantial and identifiable benefit

This was the second issue in the Crafar farms cases.  Section 17(2) sets out what the Ministers must consider in determining whether there is a substantial and identifiable benefit, including whether the investment will, or is likely to, result in:

  • the creation or retention of jobs
  • the introduction to New Zealand of new technology or business skills
  • increased export receipts for New Zealand exporters
  • added market competition, greater efficiency or productivity, or enhanced domestic services, in New Zealand
  • the introduction into New Zealand of additional investment for development purpose, or
  • increased processing in New Zealand of New Zealand’s primary products.

However, the discussion focused on whether the correct legal measure was to consider benefits based on a “before and after” approach (as applied by the Overseas Investment Office).  That is, was there measurable benefit from what was there before the investment to what would be in place after. In the case of the Crafar farms, which were very run down (being in receivership), it would not have been hard to find that an investment of capital into the farms would have created a benefit.

The High Court found that the Ministers were required to assess “what would happen ‘with and without’ the overseas investment that they are being asked to approve”. That is quite a different test because it asks what would happen if the investment did not proceed. In that case, there was a domestic buyer who could also introduce significant capital and develop the properties and accordingly the Judge found that the Overseas Investment Office advice to Ministers materially overstated the benefits. The High Court stated:

“The Crafar farms will be sold to someone. The status quo may serve as the counterfactual under s 17(2)(a) only if the Ministers think it likely that in the hands of another owner, or owners, the farms will remain in their present state.

The result of the case is that Ministers will need to decide that there is additional benefit that the overseas investor would bring to New Zealand beyond those benefits attributable to an alternative New Zealand purchaser.

Effect of Crafar on Lochinvar?

Experience and acumen

It has previously been found that Shanghai Pengxin has the necessary experience and acumen to acquire a substantial farming operation in New Zealand. The facts of Shanghai Pengxin’s application to acquire Lochinvar are not publicly known, so whether Landcorp will again be their partner is also unknown. However, Shanghai Pengxin’s has previously been found to have the necessary experience and acumen, to acquire a substantial NZ farming operation. That experience and acumen can only have been strengthened by the last two years of ownership of the Crafar farms.

Substantial and identifiable benefit

The status quo at Lochinvar is in stark contrast with the Crafar farms, which were run down and in receivership. Lochinvar is considered a trophy station, and it is owned by the Stevenson Group, a substantial private group of companies, with interests spanning quarrying, mining, concrete, engineering, property and agriculture. To date, no alternative New Zealand purchaser has emerged publicly to compete for Lochinvar.

Applying the “with and without” test, if the application is declined we will still have a well funded New Zealand owner of a well run farm. If the Stevenson Group is not allowed to sell to Shanghai Pengxin but still wishes to sell then presumably it would have to drop its price. However, the sale price is not a measure of substantial and identifiable benefit.  The decision must turn on whether and to what extent Shanghai Pengxin proposes to invest in further development of the farm to increase production, jobs and export receipts or to introduce new technology or skills.

It is interesting to note that increased processing in New Zealand of primary products is a relevant benefit to be considered by Ministers.  One of the arguments against foreign farm ownership is that New Zealand risks being cut from the ‘export loop’ if New Zealanders neither produce nor process the products from New Zealand land for export. There is particular concern that if Shanghai Pengxin acquires Lochinvar it may now have, or be close to, a critical mass of land sufficient to justify construction of its own milk processing plant. Paradoxically, this may be a basis for approval of the Lochinvar sale.

Conclusion

The case of Shanghai Pengxin’s purchase of the Crafar farms clarified sections of the OIA, both exposing the breadth of the interpretation a Minister can apply to an overseas purchaser’s relevant business experience and acumen, and highlighting the need to consider alternative outcomes that could eventuate without the overseas investment in contemplating the benefit accrued from the proposed overseas investment.

Following the Crafar decisions, and Shanghai Pengxin’s ownership of the Crafar Farms, it seems likely that the OIA will again consider that Shanghai Pengxin has the necessary business experience and acumen.  To grant consent, the relevant Ministers need to be satisfied that Shanghai Pengxin will substantially improve Lochinvar for New Zealand, in a way that its current New Zealand owners can or will not, by investment into the farm to develop its production, create jobs and increase exports or processing within New Zealand.