In 1996, a new Cooperative Companies Act was passed, containing specific provisions applying only to cooperative dairy companies. However, the definition of “supplying shareholder” excluded Gisborne Milk and an amended definition was passed to incorporate it and others. In 1998, New Zealand Cooperative Dairy Company (NZCDC) acquired the assets of Bay Milk, with Gisborne Milk voting in favour of the merger on the basis that it would become a full shareholder in NZCDC.
Fonterra was created in 2001 and Gisborne Milk received its initial allocation of cooperative shares in Fonterra based on its existing shareholding in NZCDC. Gisborne Milk also received a copy of Fonterra’s Supplying Shareholder Handbook, setting out Fonterra’s standard terms and conditions of supply. Gisborne Milk did not comply with a number of the standard terms, such as collection of milk by Fonterra.
In late 2001 or early 2002, Gisborne Milk also received from Fonterra an Annual Supply Notification Form, requiring the company to estimate its supply for the upcoming season. As Gisborne Milk did not own a farm but instead represented a group of individual supplying farmers, it could not sensibly provide Fonterra with much of the information required.
The company accordingly wrote to Fonterra explaining its position and subsequently completed and submitted the Annual Supply Notification Form. Fonterra responded that it was currently reviewing arrangements made by the legacy companies prior to the merger. Shortly after, Fonterra made a unilateral decision to drop Gisborne Milk’s cartage rates for making deliveries to the Edgecumbe factory from 3c/litre to 1.4c/litre. It then cancelled the payments altogether.
In 2004, Gisborne Milk wrote to Fonterra asking whether it needed a special contract because it was not a farm supplying milk on a regular basis. Fonterra did not reply but continued to consider internally the position of suppliers such as Gisborne Milk.
In January 2007, a meeting was held and Fonterra advised that it was not clear whether Gisborne Milk could be both a shareholder and an independent processor under the 20% rule. Fonterra said other town milk companies in Gisborne Milk’s position had been wound up.
At a further meeting, the problem posed for Gisborne Milk by Fonterra’s “default milk” regime was discussed. In essence, the difficulty was that the price at which Fonterra was selling default milk was less than the price Gisborne Milk paid its own shareholders for the raw milk it used for its own processing operation. So the supply of default milk to other processors was adversely affecting Gisborne Milk’s ability to compete with them and its future processing viability was being called into question.
An increase in the default milk cap from 400 million to 500m litres announced in early August 2007 was the final nail in the coffin of Gisborne Milk’s bottling operation. It ceased in September and 30 staff were made redundant.
Delivery ends
Discussions between Gisborne Milk and Fonterra continued, with the latter advising in a letter from Mark Leslie in December 2007 that it was not, in the longer term, prepared to continue with an arrangement whereby Gisborne Milk delivered milk. Gisborne Milk completed a “cease supply” form and its suppliers signed individual contracts with Fonterra.
However, in June 2008 it became apparent that the end of season share adjustment meant that the price realised for Gisborne Milk’s shares would be over 20% less than the estimated price advised by Fonterra in February.
Gisborne Milk then brought court proceedings against Fonterra claiming that:
- Leslie’s letter constituted a refusal by Fonterra to permit Gisborne Milk to “share up” and that was in breach of section 73(2) of the Dairy Industry Restructuring Act 200.
- The letter constituted a demand by Fonterra that Gisborne Milk surrender its cooperative shares, in breach of its constitution.
- The letter contained statements constituting misleading and deceptive conduct under the Fair Trading Act 1986.
- Fonterra was estopped from relying on clause 5.4(c ) of its constitution, permitting it to require a shareholder to surrender its shares for non-compliance with Fonterra’s standard terms and conditions of supply.
Gisborne Milk sought a declaration of illegality from the court, an order requiring Fonterra to return its shares and an inquiry into damages.
Fonterra argued the December letter did not contain any relevant or actionable representations. However, if such representations had been made, they were correct because Gisborne Milk had no right to share up under section 73 because it did not fall within the Dairy Industry Restructuring Act’s (DIRA) definition of “shareholding farmer”. Fonterra was entitled to require surrender of Gisborne Milk’s shares because it had never complied with Fonterra’s standard terms and conditions of supply and had not agreed any special terms and conditions with Fonterra.
Justice Ellis said it had been the 2001 act’s most basic purpose to allow an amalgamation of the companies named in section 4(1), including most relevantly NZCDC and Fonterra. As a supplying shareholder of NZCDC, Gisborne Milk was indisputably entitled to – and did – become the holder of cooperative shares in Fonterra. It was from 2001-08 a supplying shareholder of Fonterra and a shareholder as defined in Fonterra’s constitution.
Justice Ellis said there was a “compelling basis” for concluding that there was no legislative purpose or intent to exclude Gisborne Milk from the 2001 act’s definition of “shareholding farmer” or to deprive it of the rights associated with that status.
“But the sticking point is the literal meaning of the words used to define a ‘dairy farmer: a person who produces milk from dairy cows as a business’.”
Justice Ellis said this implied physically milking cows, which Gisborne Milk had never done.
“I have carefully considered whether it is possible to say that the definition is ambiguous and can be given a meaning that appropriately reflects what I consider to be the wider context that I have discussed above. But to interpret the definition as including Gisborne Milk it is not simply a matter of giving the existing words a strained meaning. The words used in the definition as drafted are, in my view, not capable of bearing any meaning that would include Gisborne Milk within it.”
However, Justice Ellis said she was prepared to hold that the words “dairy farmer” meant “a person who produces milk, or intends to produce milk, in New Zealand from dairy cows as a business and includes a cooperative dairy company whose shareholding suppliers are dairy farmers as so defined”.
The court said that Gisborne Milk had not met the formal requirements to share up or down and its earlier indication that its preference was to share up was contradicted by its subsequent completion and submission to Fonterra of a cease supply form. Justice Ellis said Fonterra had not been legally able to require Gisborne Milk to surrender its shares for breach of clause 5.4 but Gisborne Milk had voluntarily decided – for a number of perfectly sound reasons – to surrender its shares.
Gisborne Milk was, and could have remained, a shareholding farmer in Fonterra and had been entitled to share up but it did not in fact apply to share up. All of Gisborne Milk’s claims accordingly failed.
“In the end, it is difficult not to think of the shareholders in Gisborne Milk as sailors caught in a perfect storm. It is impossible not to have considerable sympathy for them. But none of their claims can succeed.”
All of the causes of action were dismissed and costs were awarded against Gisborne Milk.
