The Government urgently passed a string of changes to overseas investment rules in a bid to protect companies with strategic national security importance. Laura Walters looks at why countries around the world are rushing to protect their valuable IP and technology assets from a Chinese buyout in the wake of Covid.
While New Zealand was coming out of lockdown and heading back to work, the Government passed new overseas investment legislation under urgency, in a bid to protect strategically important companies that would be more vulnerable to foreign takeovers in the post-Covid economic environment.
While the Government doesn’t explicitly say the law changes are in reaction to recent behaviour by Chinese companies with close ties to the Chinese Communist Party, experts say the lawmakers have China on their mind.
The changes in the Overseas Investment (Urgent Measures) Amendment Bill were announced in 2019. They were to make up the second tranche of overseas investment reforms, following on from the 2018 changes to stop foreign investors buying up existing New Zealand homes. But Covid changed the legislative plan.
It’s partly about getting rid of red tape, cutting costs for investors, and speeding up the process, especially where non-sensitive land was being unnecessarily screened due to its proximity to sensitive or valuable land.
More interestingly, the new law vastly broadens the Government’s ability to scrutinise, put conditions on, and block the sale of assets and companies it believes are strategically important to the country’s national interests and national security.
When employing these new call-in powers and applying the national interest test, the Minister of Finance will consider things like economic, security, and international relations implications, as well as whether an investor is part of, or associated with, a foreign government.
Until now, this type of scrutiny was largely reserved for acquisitions in the defence industry, and New Zealand did not have the means to block the sale of other businesses unless they were valued at more than $100 million.
But countries around the world are now recognising national security goes beyond defence.
Cutting-edge technology companies, with important intellectual property, are often small and in need of investment. They are also vulnerable to buyouts from foreign companies – particularly those in China with strong links to the Chinese state – that are looking to gain access to valuable IP. And with Covid-19 and small companies struggling to stay afloat, some experts say China will be bargain hunting.
“We need to minimise the possibility that cornerstone businesses in our productive economy are sold in a way contrary to our national interest while the pandemic is causing the value of many businesses to fall.”
Jason Young, director of Victoria University of Wellington’s New Zealand Contemporary China Research Centre, said the introduction of the national interest test reflected changes in the patterns of investment coming into New Zealand from countries with models of political economy that differed to the standard liberal market economy.
“In many countries, such as China, we see a prominent role of state-owned enterprises and government guidance of companies in fields from science and technology to financial institutions.”
It was necessary to have ministerial discretion to ensure investments were in the national interest, did not negatively impact international relations and could have a positive impact on New Zealand’s economy, society and polity, he said.
Victoria University of Wellington political science and international relations lecturer Matthew Castle said the economic downturn would also lead to low or negative interest rates, which meant large overseas investors would want to put their money somewhere that wasn’t the bank.
Large institutional investors, like pension funds, would be looking to park their very significant capital somewhere where they would get a decent return – like overseas businesses.
“Given the global scale of the Covid recession and the widespread adoption of loose monetary policy, we could see significant changes in asset ownership over the next couple of years globally.”
This legislation was a way of trying to ensure the changes in asset ownership did not take place without proper scrutiny, and that they supported New Zealand’s economic recovery.
Upon introducing the legislation to Parliament last month, Associate Finance Minister David Parker said emergency legislation was necessary to protect these types of assets from falling unnecessarily into foreign ownership as the economy recovered from the fallout of the pandemic.
“We need to minimise the possibility that cornerstone businesses in our productive economy are sold in a way contrary to our national interest while the pandemic is causing the value of many businesses to fall,” he said in a statement at the time.
He declined to comment further for this article.
The new law also includes the temporary application of the national interest test to any foreign investments, regardless of dollar value, that would result in more than a 25 percent ownership interest, or that increased an existing interest to – or beyond – 50 percent, 75 percent or 100 percent in a New Zealand business.
While Parker believed it was necessary, some had reservations about rushing through the inclusion of the national interest test.
Last year, Treasury told the Minister it needed more time and resources to create good regulation relating to the national interest test. Then in its Regulatory Impact Assessment, Treasury said “the complexity, scale and time pressures create risks of unintended consequences”. However, this was being mitigated by extensive consultation and inter-agency cooperation, with departments such as LINZ, the MBIE, MFAT and DPMC, as well as looking to similar reforms in other jurisdictions.
During the brief select committee process, some submitters, including major law firms and University of Auckland law professor Jane Kelsey, questioned the rush to add the ministerial call-in power, given the temporary notification provision could be used as a stop-gap measure during the Covid economic downturn.
They suggested more time and scrutiny would be helpful.
“Considering how incredibly weak many companies are at the moment, they are very vulnerable to takeovers.”
But a UK-based China expert says if anything, governments across the world have been too slow to react to China’s corporate buying spree.
Elisabeth Braw, the Royal United Services Institute for Defence and Security Studies (RUSI) senior research fellow, said the UK, the US and European countries have been experiencing a recent spate of buyouts and takeovers from Chinese companies, which have close links to the Chinese Communist Party.
Last year, Chinese entities invested more than NZD$20 billion in European Union countries, with most of the money going into mergers and acquisitions. In 2018, Chinese companies invested more than NZD$38b in the US.
A recent study out of Sweden found Chinese entities had majority ownership in 51 Swedish companies.
It showed most of the companies were in four sectors: industrial machinery, biotech, electronics and automotive, and that some developed high-tech products such as microprocessors and satellite navigation systems.
In 30 of the cases, there was a link between the acquired technologies and those highlighted in the State Council’s Made in China 2025 industrial development strategy.
This so-called buying spree of cutting-edge technology companies fitted in with the Chinese Government’s ambition to become the world’s economic superpower, Braw said.
“Where that poses a problem for western countries is if it does so by essentially buying up very promising western companies.”
Now western countries are aware of this pattern, they are moving quickly to block the takeover of sensitive assets.
In April, the UK blocked Chinese state-owned investment firm China Reform from a bid to take control of the board of Imagination, a leading British technology firm that makes smartphone chips. And Chinese gaming company Beijing Kunlun Tech agreed to a request from US lawmakers to sell its majority share in gay dating app Grindr, on national security grounds – the app’s database contains personal information such as a user’s location, messages, and HIV status.
Now the US, Canada, Australia, the EU and the UK have laws to better scrutinise sales and protect strategic assets. And some have further expanded their powers in recents days and months, in a similar way to New Zealand.
In recent days, the UK lowered the threshold to scrutinise and intervene in mergers in the sectors of: artificial intelligence, cryptographic authentication technology and advanced materials.
And it added an ability to scrutinise and block the sale of companies that would help it respond to a health crisis, such as PPE manufacturers. New Zealand’s temporary notification regime would also cover vital health sector companies.
RUSI’s Braw said New Zealand was right to follow suit.
“Considering how incredibly weak many companies are at the moment, they are very vulnerable to takeovers.”
And while she pointed to the many acquisitions and mergers that had already taken place, and others that would no doubt go through undetected, she had a ‘better late than never’ mindset.
The Chinese Communist party’s handling of the pandemic had changed attitudes towards China, she said, adding that many governments and private citizens had been naive about the Chinese State and its expansion plans.
But while Braw welcomed the scrutiny and protection of these new laws, she encouraged western governments to create investment funds or opportunities for struggling companies.
Some of these cutting-edge technology companies would not survive without investment, and they needed options that didn’t come from the Chinese state.
