Fonterra offered inferior deal to farmers out of revenge   14 Sep 2016

Wednesday 14 September 2016 03:52 PM

Fonterra offered inferior deal to farmers out of revenge, lawyer tells Court of Appeal

By Sophie Boot

Sept. 14 (BusinessDesk) - Fonterra Cooperative Group held a grudge against farmers who had left and offered them a worse deal than the rest of its suppliers as an act of revenge when it bought a failed Canterbury dairy business out of receivership, the Court of Appeal has heard.

The milk processor is appealing a decision by the High Court in Auckland last December, where Justice Matthew Muir ruled it breached the Dairy Industry Restructuring Act (DIRA) under which it operates by imposing inferior terms on farmers who had previously supplied New Zealand Dairies Limited (NZDL).

Fonterra acquired the independent processor's plant in 2012 and took on the farmers, who supplied milk from farms in North Otago and South Canterbury. Fonterra made a deal with the farmers, agreeing to buy their milk under a "growth contract", rather than a fully share-backed supply, where farmers purchase one Fonterra share for every kilogram of milk solids they supply in a season and are paid the farmgate milk price plus a dividend on each share.

Under the growth contract, the farmers were entitled to 5 cents less per kilogram of milk solids than the contract milk price and bought 1,000 Fonterra shares but couldn't "share up" - become fully share-backed - in their first year of supplying Fonterra.

According to DIRA, the legislation enabling the merger of the Dairy Board with the New Zealand Dairy Group and Kiwi Cooperative Dairies, Fonterra is not able to give new entrants different terms from its existing shareholding farmers. The high court judge found that the farmers qualified to become fully-fledged shareholders and Fonterra misled them about their ability to buy more shares.

In the second day of the appeal hearing, the farmers' lawyer David Goddard QC said he would spend most of his time on Fonterra's breach of DIRA, which was "at the forefront" of the respondents' claim.

There was no difference in the farmers' circumstances which justified Fonterra's lower offer to them and the milk processor bore a grudge because they had supplied Fonterra before switching to NZDL, Goddard said. The purpose of DIRA is to promote efficient operation of dairy markets in New Zealand.

"In a competitive market, the fact that people are displeased with someone because they've left and want to waltz back in is not a reason to pay them less, because someone else who didn't have that grudge against them would be offering them a competitive price and if you wanted their milk you'd have to match it," Goddard said. "There was nothing especially costly about this, it was very convenient for Fonterra."

Goddard disagreed with Fonterra's QC Jack Hodder's characterisation from yesterday of the 1,000 shares held by each farmer as a 'token', and said the whole point of the shareholding was for the farmers to become shareholders who were bound by Fonterra's constitution.

The payment of about $20 million in 'retros' - money which was owed to the farmers by NZDL which Fonterra agreed to pay as part of its deal - didn't justify the less desirable terms, Goddard said.

"The reason for these unfavourable terms wasn't linked in any way to the payment of the retros in a way that would happen in an efficient market."

Before making the deal in 2012, the farmers were told that nobody could get additional shares by Fonterra's Christine Burr, who was using the term in a technical sense to refer only to "dry shares" (shares not backed by milk supply) which Fonterra had put a moratorium on acquisition of in 2012 in the lead up to its implementation of share trading among farmers.

The farmers understood Burr as referring to wet (supply-backed) shares, which they wanted to acquire, Goddard said. They believed that Fonterra's board couldn't offer them any different terms, and that no other new suppliers would be getting additional shares, so thought there was no point in them pushing back against the terms. Fonterra stood to make a $20 million surplus from the deal, so the farmers had leverage, Goddard said.

(BusinessDesk)

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