We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
06 March 2012
The much-publicised sale of a group of New Zealand farms to an overseas company was stalled in February 2012 by a judicial review decision of the High Court. The farms, comprising nearly 8,000 hectares on 16 properties, are 'sensitive land' under the Overseas Investment Act 2005. Consent is therefore required under the act if they are to be sold to an overseas purchaser. Consent had been granted by the ministers of finance and land information on the recommendation of the Overseas Investment Office, but the court overturned the decision, finding that the office and the ministers had misdirected themselves regarding a key test.
The decision is significant, not only because of the intense publicity that the sale process had already received, but also because it established that the Overseas Investment Office and the ministers had applied an incorrect test in determining the likely benefits of sales to overseas investors. The court held that the correct test was to assess the benefits of the sale against a different counterfactual - that is, against what would happen if the farms were not sold to the overseas investor - rather than against the status quo (ie, the land remaining in the seller's hands), as the Overseas Investment Office and ministers had done.
The 16 farms used to belong to the Crafar family, which had built one of New Zealand's largest dairy-farming businesses. As the court stated in its decision, the farms had become notorious "in part from poor compliance with environmental obligations, and in part from the Crafars' well-publicised efforts to hold their creditors at bay". In October 2009 the Crafars' farm-owning companies went into receivership. Since then, the receivers had been trying to sell the farms which, the court found, were in poor condition and had low productivity due to underinvestment. The receivers entered into an agreement for sale and purchase with Milk New Zealand Holdings, a company registered in Hong Kong. Milk New Zealand was a subsidiary of Shanghai Pengxin Group Co Ltd, a Chinese company, which in turn was a subsidiary of Nantong Yingxin Investment Co, 99% owned by Zhaobai Jiang.
The agreement for sale and purchase of the farms was conditional on Milk New Zealand obtaining ministerial consent under the act. On January 19 2012 the Overseas Investment Office recommended that consent be granted and on January 26 2012 the ministers adopted the recommendation by signing it. The plaintiffs were members of a consortium which had offered to purchase the farms at a lower price in order to distribute them among its members. They sought judicial review of the decision to grant consent.
The act's stated purpose is to acknowledge that it is a privilege for overseas persons to own or control sensitive New Zealand assets by requiring that overseas investment meet certain criteria and by imposing conditions on such investments. The criteria for consent are cumulative. If an overseas investor does not meet all of the criteria, the decision maker (in this case, the ministers) must decline consent; but if all criteria are met, the decision maker must grant consent. The plaintiffs sought judicial review on the grounds that two of the criteria for consent were not met.
Relevant business skill
The first challenged criterion was that the overseas person (or, if not a natural person, the individuals controlling it) have the business experience and acumen relevant to the overseas investment. The plaintiffs argued that in this case, the individuals controlling the purchaser were required to have specific knowledge and experience of dairy farming.
The court found that the overseas investor's acumen and experience must be relevant to the particular investment, but that this did not entail specific experience of dairy farming in this case. The requirement that the business skills be relevant to the investment was aimed at ensuring that the investment delivered its promised benefits. In this case the investment involved not one but 16 farms. The evidence showed that Jiang and his colleagues were astute and experienced managers and investors. Furthermore, Milk New Zealand intended to engage a professional farm manager. The court held that the ministers were entitled to conclude that the skills of Jiang and his colleagues, although not specific to dairy farming or even agriculture, would ensure that the investment delivered the promised benefits. This ground of review therefore failed.
The second ground of review related to the requirement that unless all individuals who control the purchaser are New Zealand citizens, or residents intending to reside indefinitely in New Zealand, the ministers must be satisfied that the investment "will, or is likely to, benefit New Zealand (or any part of it or group of New Zealanders)". If the acquisition is of non-urban land exceeding five hectares, the ministers must also be satisfied that the benefit will be, or is likely to be, "substantial and identifiable". An exhaustive list of factors that the ministers may take into account in assessing benefits is set out in Section 17(2) of the act and in further regulations made under that section. The court noted that by not including financial benefits to the vendor, Section 17 ensures that an overseas investor cannot pass the benefit test merely by outbidding others.
This ground of review concerned the appropriate test for assessing the economic benefits of an overseas investment. It was common ground that the potential benefit of the investment should be assessed counterfactually (ie, against a specific state of affairs). The question before the court was whether the appropriate point of comparison was the state of affairs before the investment or the likely state of affairs if the investment did not proceed.
The Overseas Investment Office had taken the former approach, assessing the economic benefits that the Milk New Zealand investment would bring to New Zealand against the present state of the farms. The Overseas Investment Office took into account almost all of the expenditure (approximately NZ$14 million) that Milk New Zealand would make to ensure that the farms reached full capacity, to comply with environmental requirements and to ensure that the farms' employees enjoyed good infrastructure and accommodation. The Overseas Investment Office emphasised that the farms were sub-standard in all three respects.
The plaintiffs argued that the correct approach was to assess the claimed economic benefits against the state of affairs that would exist if the farms were not sold to the overseas investor. The plaintiffs submitted that this approach was appropriate because it was recognised that the Crafar farms would be sold, either to an overseas buyer or to New Zealand interests, and that the new owner would also invest in the farms and improve production. The plaintiffs argued that the ministers had erred in characterising these benefits as benefits of overseas investment.
The court held that the approach for which the plaintiffs contended, which it referred to as the 'with or without' approach, was the proper test. The court held that the statute was forward looking; therefore, the counterfactual should be too. Furthermore, causation occupied a central space in the statutory scheme. It would not serve the legislative objective if, when assessing a given economic benefit, the decision maker were to ignore evidence that the benefit would accrue anyway; nor could such a benefit be described as 'substantial'.
The court noted that under the 'with or without' approach, the status quo would sometimes be the counterfactual - namely, in situations where the status quo would remain if the overseas investment were not made. However, in this case it was clear that the Crafar farms would be sold. The Overseas Investment Office did not approach the matter on the basis that the farms would be likely to remain in their present state in the hands of other owners; nor did it dispute a submission by an objector that the average New Zealand farmer would adopt development plans similar to those proposed by Milk New Zealand and its manager. Rather, the Overseas Investment Office had advised the ministers that the act did not require an overseas investor to do more than a New Zealand investor would do, and asked only whether the investment would be likely to benefit New Zealand. The court described this as a 'before and after' approach to the economic factors set out in the act and held that, by adopting it, the ministers misdirected themselves in law.
The court rejected the defendants' submission that the 'with or without' counterfactual was unworkable. The court considered that the act did not require benefits to be quantified - the weighing of economic and non-economic benefits required the exercise of ministerial judgement, rather than calculation.
The court also rejected the defendants' pleading that the plaintiffs should be denied standing to bring their legal challenge. The court recorded that there was significant public interest in overseas investment. The plaintiffs shared the public interest and also had a private interest as a competing purchaser.
The court directed that the ministers reconsider Milk New Zealand's application for consent. In doing so, the court recorded that the error was not a mere technicality. No one had suggested that the farms were likely to remain in their present unsatisfactory state unless purchased by Milk New Zealand; rather, any solvent purchaser could be expected to bring the farms' production up to its potential. Therefore, the Overseas Investment Office's advice to the ministers had materially overstated the economic benefits that would result from the overseas investment. The decision under the act involved issues of high policy, including New Zealand's economic policy and international standing, placing it firmly within the province of the country's executive. As a result, faced with an application that the ministers were wrong in law, the court will not make a decision itself, but will direct its reconsideration according to law.
Although the court's decision has been the subject of considerable publicity and political comment, in legal terms it is a conventional exercise in statutory interpretation, with consequential public law relief following from the conclusion that the decision makers, on the advice of the Overseas Investment Office, had asked themselves the wrong question.
It will be interesting to see what effect the decision has on future applications under the act, including the reconsideration of the Milk New Zealand application. It appears that past decisions under the act in its present form were made by applying a test which has now been held to be incorrect, so the outcomes of past decisions may not be an accurate predictor of future applications.
The Overseas Investment Office must now undertake a new appraisal of Milk New Zealand's application, applying the 'with or without' approach. It is reported to be waiting for a legal opinion before reconsidering its recommendation. The new recommendation will then go to the ministers for a decision on the application. In the meantime, the plaintiffs have lodged an appeal against the court's rejection of the business experience criterion challenge. This particular application is far from over.
For further information on this topic please contact Chris Browne or Kate Morrison at Wilson Harle by telephone (+64 9 915 5700), fax (+64 9 915 5701) or email (email@example.com or firstname.lastname@example.org).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.