Poor legal drafting leaves us more confused (and slightly alarmed)
Introduction
1. On 1 August 2022, Fiji moves to a new regime of foreign investment regulation. The old Foreign Investment Act 1999 (FI Act) ends and the new Investment Act 2021 (Investment Act) takes effect. The Investment Act is meant to eliminate the process of obtaining “Foreign Investment Registration Certificates” (FIRCs), replacing this with a requirement for consent only for investment in specific sectors. Unfortunately:
- the new consent requirements are unclear. They lead to more uncertainty, not less
- some of the bureaucracy which the new Act meant to eliminate has crept back into the new regulations[1]
- the new law introduces, for the first, time, criminal sanctions on foreign investors who do not comply with its rules. This is unnecessary and certainly unhelpful.
The “executive summary”
2. The critical problems of the new law are in our view as follows:
- key words – the definitions of foreign investor, investment and direct investment – are vague and therefore almost impossible to legally pin down. If we don’t know who is a foreign investor and when they are (directly) investing, it is impossible to know which rules apply
- the problems are not confined to new investors. Existing investors, including those who complied with the old FI Act, are not immune. They may now need to apply for permission to make new investments. Some companies who were not previously foreign investors may find they are now in that category (and vice versa)
- the regulators themselves seem to believe the rules apply differently to what the law says – see paragraphs 12 and 17 below.
We expand on these issues in the “longer version” below.
Fundamental problems
3. An unkind analysis of the Investment Act would be that it is cut and pasted from a consultant’s report. While there is talk of “investor rights” – “freedom to invest”, “freedom to manage one’s own business”, etc – the reality for foreign investors is that these “freedoms” are (necessarily) conditional on laws governing exchange control and immigration. The Act lays down the law on restricted and reserved activities – to be applied as an exception only; and investment incentives – which must be designed and precisely targeted to achieve specific policy objectives. These words are policy, not law. They add nothing to the certainty or legal predictability needed by foreign investors to do business.
4. The problems created by the Investment Act fall into three broad areas:
(a) the basic problem of understanding who is a foreign investor
(b) the vague section 7, requiring investors to seek the consent of the Minister for investments in a sector that may have potential effects on, inter alia, critical infrastructure…etc
(c) overly prescriptive regulations that restrict investor flexibility and expose them to criminal prosecution.
Who is a “foreign investor”?
5. A “foreign investor” is from, 1 August 2022:
(a) any person who is not a Fijian citizen; or
(b) any legal person having its headquarters registered or incorporated outside of Fiji, making a direct investment in Fiji.
6. For an individual, the test is straightforward. However, for any other legal person – a Fiji company, a foreign company, a joint venture or trading trust – it is not. The question of what is the “headquarters” of a foreign-controlled company is not defined in the Investment Act or anywhere else. The term is potentially subjective. For example, is the “headquarters” of a Fiji-incorporated company its registered office in Fiji (which may simply be a plaque at the offices of the company’s accountants)? Or is it where the majority of its directors reside and make decisions? A “headquarters” is not something that is “registered” or “incorporated” – it’s a matter of fact.
7. For at least the last 20 years, Fiji laws have generally treated the Fiji-registered branch of a foreign company in the same way as a Fiji-registered company. The “headquarters” test has the potential to upend that treatment and force foreign investors into legal structures that, for a host of unrelated reasons, they may find unattractive – and which may still not give them legal certainty anyway.
What is an “investment”?
8. The Investment Act has two definitions of related terms – investment and direct investment. However the definitions do not work well together. While a direct investment appears to mean an equity/ownership interest in a business, the word investment appears to apply to any asset used to establish or expand a business. So that means that an existing investor, who complied with the old FI Act, may need permission to invest in new assets if it is affected by the rules we refer to in paragraph 10 below.
“National security interests” and “critical sectors”
9. Under s.7(1) of the Investment Act, the Minister may prohibit a foreign direct investment for the protection of national security interests. But national security interests are not defined.
10. Next we have possibly the vaguest provision in the Investment Act, at s.7(2), which we set out in full below:
A foreign investor intending to invest in a sector that may have potential effects, on inter alia-
(a) critical infrastructure such as energy, transport, communications, data storage or financial infrastructure;
(b) critical technologies such as artificial intelligence, robotics, semiconductors, technology with potential dual use application, cyber security or nuclear technology;
(c) the security of supply of critical inputs; or
(d) access to sensitive information or the ability to control sensitive information
must submit a proposal of the investment to the Minister for an approval to invest in that sector.
11. It would be a brave lawyer who claimed to know how to advise on this. It lacks any precision or certainty. So, for example:
- what is a sector that may have potential effects on something else?
- the term inter alia is Latin for “among other things”. But what are the “other things” that a foreign investor is supposed to know about but which are not clearly set out?
- terms such as critical infrastructure are defined as including specific things (such as energy, transport, communications) and critical technologies as including (technology with potential dual use application …). But an “inclusive” definition of this kind means that other, unstated, things might be included. Who is to know what these are?
- what are critical inputs at sub-paragraph (10 c)?
An investor is required to submit a proposal to the Minister for an approval to invest in that sector. No one knows what the proposal should say, what criteria the Minister will apply in his/her decision, and how long the Minister will take to approve it.
“What we intended was…”
12. Section 7(3) of the Investment Act says that the process for seeking a Ministerial approval may be prescribed by regulations. So it seems that the Government intends for Regulations to be made to decide what sectors need Ministerial approval. There are two problems with this:
(a) with about a month to go before the law comes into effect, there are no Regulations
(b) while Regulations may set out what needs Ministerial approval, this does not mean that anything else referred to in section 7 is excluded from Ministerial approval. That’s what the language of the law means.
Reserved and restricted activities are retained
13. One of the most frustrating aspects of the old FI Act for foreign investors was navigating the bureaucracy of the “reserved” and “restricted” activities (defined in tedious detail in the Fiji Standard Industrial Classification Code) in which foreign investors could either not invest or invest only under certain conditions. Section 5 of the new Investment Act recognises the undesirability of this. The new law specifically requires that these restrictions should be applied as an exception and only in areas where domestic businesses are considered vulnerable.
14. However, reserved and restricted activities appear to be back in new Regulations. So foreign investors must again analyse what they can, cannot or maybe can do with nightclubs, bars (“other than those operated within the vicinity of a hotel or resort”), fishing activities, hotels, homestays and real estate.
…and you can go to jail for not investing fast enough!
15. The old FI Act had complicated rules requiring a foreign investor’s capital to be brought in within 12 months of grant of a FIRC. The new rules require a foreign investor investing in a restricted activity to bring its investment amount into Fiji within three months from the date of incorporation[2]. This drafting fails to recognise that:
(a) an individual who is a foreign investor doesn’t “incorporate” and a foreign company investing in Fiji may have “incorporated” years ago
(b) assuming the rule is meant to apply to some sort of set-up or registration in Fiji, there may be multiple reasons why the investor will take longer than three months.
16. The Regulations say that a qualifying foreign investor who fails to meet the three-month deadline commits an offence. The penalty for the offence, for an individual, is a fine not exceeding F$10,000 or imprisonment for a term not exceeding five years – or both. Bodies corporate can be fined up to F$50,000.
17. To make matters worse, it’s not clear to whom this three-month rule applies. From a plain reading of the Regulations, it applies only to those foreign investors investing in restricted activities. However, the authorities appear to have expressed the view that it applies to all foreign investors – regardless of the activities in which they are investing[3].
18. Despite the plain words of the Regulations, it is difficult to see the Government prosecuting a foreign investor which does not bring in its money on time. But criminalising delay may create other issues for investors going to the legality of their investment – and double down on the uncertainty that has already been created.
What about existing investors?
19. The simple answer to this question is “no, you are not immune from the application of the Investment Act”. The Investment Act says[4] that any right, exemption or foreign investment registration certificate granted under the old FI Act continues according to its tenor. But for any practical purpose, that is saying nothing at all.
20. An earlier FIRC makes no difference to any existing investor’s status going forward. So, for example:
- a company which is 100% owned by Fiji citizens (and therefore not a foreign investor under the old FI Act) might now be a foreign investor under the new law because its headquarters is considered to be outside Fiji (see paragraph 6)
- a foreign company which complied with the old FI Act and considers itself “safely locked in” may find that, because the word investment includes the concept of expanding a business, any new project or capital spend potentially needs a Ministerial consent (refer paragraph 10 above).
How can this be fixed?
21. On questions such as when Ministerial approval is required or which “investments” must be brought in within three months, investors may be left depending on assurances from Government officials on what the law means. That is never a satisfactory solution because, in any disputed situation (including a dispute with the Government, or even between business partners) a court or arbitrator may read the law as it finds it and find differently. At that point, assurances from public servants are unlikely to hold sway.
22. The Government needs to go to the source of the problem – the legislation – and fix it. It should be doing so in consultation with existing investors and their professional advisers. The new Act has the potential to do some good – but not in its current state.
Conclusion
23. The language of the Investment Act is vague and unsatisfactory; the new Regulations appear to have made things worse; and the authorities’ interpretation of the new Regulations may be making things worse still. Serious investors rely on the laws of their target country to give them certainty and transparency. The Investment Act, unfortunately, does the opposite. In place of transparency and predictability there is significant potential for confusion and frustration.
Please contact Richard Naidu, Glenis Yee, Rajnil Krishna or Janice Fong for further information on this Alert.
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[1]Investment (Reserved and Restricted Activities) Regulations 2022 and Investment (Foreign Investors Reporting) Regulations 2022
[2] Regulation 3(2)
[3] The classic lawyer’s error of saying “and” when you meant “or”…
[4] At s.24
Disclaimer
The information and opinions in this Legal Alert are for general information purposes only. They are not intended as specific legal or other professional advice and should not be relied upon or treated as a substitute for specific advice. Munro Leys can accept no responsibility for any loss arising from reliance on the general information contained in this Legal Alert.