Overseas Investment Office hits Invercargill City Council forestry company with costs and warning

Tuesday, 24 July 2018

An Invercargill City Council forestry company has been hit with settlement costs totalling $50,000 and issued with a warning by the Overseas Investment Office.

The Overseas Investment Office sent a formal warning letter, in respect of a breach of the Overseas Investment Act, to three companies - including Forest Growth Holdings Limited, a subsidiary company of city council-owned Invercargill City Forests Limited.

The Overseas Investment Office had investigated the purchase of 13 blocks of forestry land in the Wairarapa region between April 2014 and May 2016 by Forest Growth Holdings.

The investigation related to whether Forest Growth Holdings was an associate of Wairarapa Estate Limited, an investment company managed by Australian fund manager New Forests Asset Management PTY Limited [New Forests].

The upshot was all three companies received a warning letter around acquiring sensitive land without prior consent by using a New Zealand associate to allow amalgamation of land and delay the need for consent.

The forestry block transactions followed a business agreement, or term sheet, agreed on by New Forests and Forest Growth Holdings in 2013. 

The term sheet said New Forests would provide Forest Growth Holdings with information about its investment criteria; and that Forest Growth Holdings would acquire forest land and trees in the southern North Island and bundle the trees and sell them to Wairarapa Estate Limited at a price determined by an agreed valuation model.

The term sheet also said Wairarapa Estate Limited would pay rent to Forest Growth Holdings of a percentage of the value of land per annum, and, after Forest Growth Holdings had secured the land, Wairarapa Estate Limited would look to buy the land from Forest Growth Holdings for the amount set out by the land valuation, conditional on obtaining consent under the Overseas Investment Act at a later date.

Forest Growth Holdings and Wairarapa Estate Limited took legal advice before entering into the agreement, and Forest Growth Holdings went on to acquire the forestry blocks, the regulator said.

The term sheet was 'given effect according to its terms, including the sale of the land to Wairarapa Estate Limited'.

The regulator said there was sufficient evidence to prove Forest Growth Holdings and Wairarapa Estate Limited had contravened the act.

'Forest Growth Holdings contravened the act by acquiring land without consent in its capacity as an associate of Wairarapa Estate Limited, and Wairarapa Estate Limited was a party to Forest Growth Holdings contravention of the act.

'However, we also consider that the evidence is consistent with Forest Growth Holdings, New Forests' and Wairarapa Estate Limited's statements that they were acting on legal advice and did not intend to contravene the act.'

The regulator said the contraventions of the act arose from the associate relationship between Forest Growth Holdings and New Forests.

'We consider that Forest Growth Holdings acted jointly or in concert with New Forests and Wairarapa Estate Limited in relation to the purchase of the forestry blocks and Forest Growth Holdings participated in the purchase of the forestry blocks as a consequence of any arrangement or understanding with New Forests and Wairarapa Estate Limited.'

In the official warning letter to the three companies, Overseas Investment Office enforcement manager Kirsty Millard said: 'We are formally warning you, as the parties involved in the arrangement, that overseas investors must obtain consent before acquiring sensitive land, and must not use associates to avoid or delay the need for consent.'

The regulator's settlement agreement with Forest Growth Holdings involved the company being required to make a $20,000 contribution to the cost of the investigation and a $30,000 donation to the New Zealand Institute of Forestry Foundation to fund scholarships.

The regulator's settlement agreement with Wairarapa Estate Limited involved that company making a $20,000 contribution to the cost of the investigation, a $10,000 donation to the Tinui Parish ANZAC Trust and a $70,000 donation to the New Zealand Institute of Forestry Foundation to fund scholarships.  

Dean Johnston, the city council's finance director and a Forest Growth Holdings director, said the company's directors decided that paying the settlement was a better utilisation of the company funds than continuing to litigate it through the court system.

'An amount was allowed in the company budgets for this settlement and legal fees, so no ratepayer funds are directly required to pay this.' 

Forest Growth Holdings had stopped acquiring forests to accumulate in larger estates to on-sell to larger forest owners, because parent company Invercargill City Forests Limited had resolved to concentrate on capital forests in order to grow the dividend returned to Invercargill City Holdings Limited.

Forest Growth Holdings has paid dividends of $1.45m to Invercargill City Forests, Johnston said.