The much publicised sale of a group of New Zealand farms to an overseas company was stalled two weeks ago by a judicial review decision of the High Court.  The farms, comprising 7,892 hectares on 16 properties, are "sensitive land" under the Overseas Investment Act 2005 ("OIA"). Consent is therefore required under the OIA if they are to be sold to an overseas purchaser. Consent had been granted by the Ministers of Finance and Land Information ("Ministers") on the recommendation Overseas Investment Office ("OIO"), but the High Court overturned the decision on the ground that the OIO and the Ministers misdirected themselves regarding a key test. 

The High Court decision is significant not only because of the intense publicity that the sale process had already received, but because it established that the OIO and Ministers had been applying 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 the correct counterfactual, namely against what would happen if the farms were not sold to the overseas investor and not, as the OIO and Ministers had done, against the status quo (the land remaining in the seller's hands).

Background

The 16 farms used to belong to the Crafar family, which had built one of New Zealand's largest dairy farming businesses.  As the High Court set out 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 starvation of investment.  The receivers entered into an agreement for sale and purchase with Milk New Zealand Holdings ("Milk NZ"), a Hong Kong registered company and subsidiary of Shanghai Pengxin Group Co Ltd, a Chinese company, which is in turn a subsidiary of Nantong Yingxin Investment Co, 99% owned by Mr Zhaobai Jiang.

The agreement for sale and purchase of the farms was conditional on Milk NZ getting Ministerial consent under the OIA.  On 19 January 2012, the OIO recommended that consent be granted and, on 26 January 2012, the Ministers adopted the recommendation by signing it.  The plaintiffs, who were members of a consortium, which had offered to purchase the farms at a lower price in order to distribute them among its members, sought judicial review of the decision to grant consent. 

Application for review

The OIA'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 the criteria, the decision-maker (in this case, the Ministers) must decline the consent; if all the criteria are satisfied, the decision-maker must grant it.  The plaintiffs sought judicial review on the grounds that two of the criteria for consent were not satisfied. 

First ground – relevant business skill

The first challenged criterion was that the overseas person (or, if it is not a natural person, then the individuals who control it) have the business experience and acumen relevant to that 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 Mr Jiang and his colleagues were astute and experienced managers and investors.  Further, Milk NZ intended to engage a professional farm manager.  The Court held that the Ministers was entitled to conclude that the skills of Mr Jiang and his colleagues, although not specific to dairy farming or even agriculture, would ensure the investment delivered the promised benefits.  This ground of review therefore failed.

Second ground – economic benefits

The second ground of review related to the requirement that, if all of the individuals who control the purchaser are not 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 s 17(2) of the Act and in further regulations made under that section of the Act. The Court noted that, by not including financial benefits to the vendor, s 17 ensured that an overseas investor could not 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 considered against a specific state of affairs, or counterfactual.  The question before the Court was whether the appropriate point of comparison was the state of affairs before the investment (the status quo) or the likely state of affairs if the investment did not proceed.

The OIO had taken the former approach, assessing the economic benefits which the Milk NZ investment would bring to New Zealand against the current state of the farms.  The OIO took into account almost all of the $14 m (approximately) that Milk NZ would spend to ensure that the farms reached full capacity, to comply with environmental requirements and to ensure that employees enjoyed good infrastructure and accommodation. The OIO emphasised that, in all these respects, the farms were presently substandard.

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 recognised that the Crafar farms would be sold, whether to an overseas buyer or to New Zealand interests, and the new owner would also invest in the farms and improve production. The plaintiffs argued that the Ministers had erred by characterising these benefits as benefits of overseas investment.

The Court held that the approach contended for by the plaintiffs, which it referred to as the "with or without" approach, was the proper test.  The Court found that the statute was forward-looking; therefore, the counterfactual should be too.  Further, 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 to someone.  The OIO 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 similar development plans as those proposed by Milk NZ and its manager.  Rather, the OIO 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 is 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 OIA did not require benefits to be quantified; the weighing of economic and non-economic benefits required the exercise of ministerial judgment rather than calculation. 

The Court also rejected the defendants' pleading that the plaintiffs should be denied standing to bring the 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 NZ'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 NZ: any solvent purchaser could be expected to bring the farms' production up to their potential.  The OIO had, therefore, materially overstated, in its advice to the Ministers, the economic benefits which would result from the overseas investment.  The OIA decision involved issues of high policy, including New Zealand's economic policy and international standing, placing it firmly within the province of the Executive.  Faced with an application that the Ministers were wrong in law, the Court will not make the decision itself but direct its reconsideration according to law.

Comment

Although the High Court's decision has been the subject of considerable publicity and political comment, in legal terms, it is a conventional exercise in statutory interpretation by the Court with consequential public law relief following from the conclusion that the decision makers, on the advice of OIO, had asked themselves the wrong question. 

It will be interesting to see what effect the decision has on future OIA applications, including the reconsideration of the Milk NZ application.  It appears that past decisions under the OIA in its present form were made 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 OIO must now undertake a new appraisal of Milk NZ's application, applying the "with or without" approach.  It is reported to be waiting on 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 High Court's rejection of the business experience criterion challenge.  This particular application is far from over.