The O'Brien Column: BIL case shows need for 'national asset' ruling

Friday 12th May 2000

The proposed sale of Brierley Investments' 50% shareholding in Sealord Group moved into the political arena last week and raised questions about foreign investment and ownership that went beyond the immediate issue of access to, or control of, fishing quota.

There is a fundamental difference between the sale of, for example, privately owned New Zealand farmland to a private, overseas-based investor who would build an exclusive resort or a personal hideaway and cases such as BIL/Sealord.

BIL is a stock exchange-listed company and was classified as foreign-owned - even before the transfer of head office to Singapore and incorporation in Bermuda - because overseas shareholders held more than 25% of the shares.

It should be noted that any disposal of BIL's holding in Sealord involves the sale of shares, rather than a physical asset, although the access to fishing quota flows from ownership of the shares.

The government's decision to take the primary approval of the sale of BIL's Sealord shares away from the Overseas Investment Commission had the potential to stop an overseas company disposing of shares in a New Zealand company to another overseas company.

New Zealand governments have the power to do anything through their control of the parliamentary legislative process but the current situation does nothing to resolve issues of overseas investment and/or ownership of assets based here.

A government decision to block sale of the BIL holding in Sealord to an overseas bidder would be nothing more than an expedient in a one-off case, irrespective of whether such action was seen as being in the "national interest" or an unwarranted interference in the "property rights" of a private owner.

It certainly would not create a precedent for the future, although the government and its supporters might think so.

There are different degrees of foreign ownership of companies, all brought under the umbrella of the 25% rule.

The 25% can constitute several foreign holdings which in aggregate exceed the threshold, or one holding, the latter being more than 50%, or less than 50% but effective control.

There are situations where the government would be powerless to stop the transfer of interests that eventually control physical assets.

Assume the US-based majority owner of Carter Holt Harvey decided to sell its controlling shareholding to another overseas company.

The New Zealand government would have no control over that transaction unless, for its own perverse satisfaction, it enacted legislation extending its writ beyond the jurisdiction.

Extending the writ would have little practical effect because the buyer of the holding would still have constructive control.

It is unlikely any New Zealand government under our political and social framework would go as far as blocking access to the assets represented in that shareholding.

Even if it tried to, it would have to face the practical problem of differentiating what part of the shareholding related to the New Zealand physical assets and those based in other countries.

The only effective solution would be to nationalise the local company, which would mean the improbable result of nationalising physical assets located overseas.

There is another side to the question of foreign investment in New Zealand that also goes beyond the immediate situation of BIL's shareholding in Sealord.

Too many people equate "foreign ownership" with "foreign investment" and they are on both sides of the desirable/undesirable argument.

The Overseas Investment Commission has acknowledged that many of the deals it approves have little or nothing to do with the influx of new investment capital into New Zealand.

They merely switch the ownership of shares or other assets from one holder to another, with the latter then deciding whether to beef up the assets through investment of new funds or maintaining the current capital base.

Stock Exchange transactions are the best example of changes of ownership having nothing to do with new investment. Overseas companies and investment funds buy and sell shares in New Zealand companies daily.

Some of those deals could take foreign ownership of a particular local company over the 25% threshold for foreign ownership but they add nothing to new investment in productive enterprises.

They may put more money in the hands of former New Zealand shareholders presuming the latter sold at a profit, but, equally, the sale of an overseas holding to a New Zealander transfers funds to the seller with no reduction in the level of "foreign investment" in the economy.

The failure to distinguish between investment and ownership has muddled the debate about who owns what and who invests what.

New Zealand was built on foreign investment which entailed foreign ownership but that no longer applies in an environment where the two terms are not synonymous.

The distinction is important for local equity investors who should be watching the debate (often an emotional debate) and wondering whether the financial goalposts will be subject to regular change depending on the whim of particular governments and their MMP coalition partners.

It is in the interests of all New Zealand companies and individuals who own assets - either through holding shares or physical assets - that someone sets out what can be sold and what may be classified as "strategic" or "national interest" assets.

The BIL/Sealord case should be the impetus for such a decision.

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