I commented on the effect the capital restructure had on sharemilking agreements. I recommended that dividends should be excluded from the payment calculation in order to avoid any dispute in the future; especially on who was entitled to retentions.
I also promised more information on how the capital restructure would impact on the sale of dairy company shares in an agreement for sale and purchase of a supplying dairy farm.
It is well known and understood that as a result of the capital restructure a distinction is now drawn between the price paid for the supply of milk and the dividend paid to the shareholders.
The relevant facts are:
1. The dairy season is 1 June to 31 May;
2. The milk price is paid for the supply of milk in a dairy season.
3. The financial year for Fonterra is 1 August to 31 July.
4. The dividend is paid on the profits made by Fonterra in that financial year;
5. The dairy season and the financial year clearly do not coincide, which gives rise to potential problems if the shares are included in the sale of the operating dairy farm.
6. It can be safely assumed that the vendor will want to secure the payment of all of the milk price for that season. Likewise, it can be assumed that the vendor will want to secure the payment of the dividend in that financial year.
7. Fonterra advises that if the sale of shares occurs on or before 31 May, then the final dividend will be paid to the purchaser. This is unlikely to be the intention of the vendor.
On the basis of the facts above, vendors should settle on or after 1 June in order to ensure that the final dividend is paid by Fonterra to the vendor, and not to the purchaser.
I also think it is important to make it clear in the agreement that even though the purchaser may own shares in the month of June (having settled on (say) 1 June) the dividend for that month is still payable to the vendor on the basis that it is profit arising from the supply of milk in that season.
I have posted a comment on the Government’s meddling in the affairs of dairy farming land owners in the MacKenzie Basin.
Now we have a publicly listed Hong Kong company acquiring four farms in the North Island with the promise to invest $1.5 billion to purchase a few more and build a factory!
It was interesting to see that the purchasing company did not purchase the farms subject to Overseas Investment Office consent and Kerry Knight (the company’s solicitor) is confident that a belated application will be successful. I guess you’ve got to give them credit for having the audacity to do it.
I don’t imagine the Government will see any connection between:
- the Government misusing the Resource Management Act to force New Zealanders who own land and legitimately want to produce milk and contribute to the economy, to abandon that quest (refer previous post), and
- permitting Asian investors to own farms and processing factories in New Zealand for the purpose of exporting liquid milk directly to China, in direct competition withFonterra.
The Chinese would not let us to do it in China – necessitating the Fonterra joint venture with San Loo.
I suppose the question now has to be asked:
Will the Chinese be allowed to convert the MacKenzie Basin to dairy farms?!
I am a little afraid that the answer might be “yes!”
Your comments are welcomed.
What an outrage! What a disgrace.
The National Government calls on the Resource Management Act to frustrate the legitimate entrepreneurial pursuits of dairy farmers.
This is the political party that promised to amend the Act to prevent the very thing that they have now done – frustrate, delay and increase the costs to land owners who want to utilise land for legitimate legal purposes.
How hypocritical is that? I haven’t heard what John Key has to say - he’s run a mile from any involvement and for good reason.
Richard Peacock, Director of Southdown Holdings Limited properly criticised the Government. You can hear his interview with Geoff Robinson on Morning Report last Friday at the following link:
BlackmanSpargo is holding its next seminar at the Reporoa War Memorial Hall on Wednesday, 5 May. The seminar deals with Resource Management Act issues. Harmen Heesen (MD Technipharm) is guest speaker and will be talking about cow houses. Learn more about this seminar by visiting http://www.rurallaw.co.nz/news.php?news=BlackmanSpargo%20are%20presenting%20their%20second%20seminar%20in%20the%20%27Working%20Knowledge%20for%20Farmers%27%20series
Farmers make a huge contribution to the NZ economy.
The Tax Working Group (“TWG”) looked at tax reform with a recommendation to introduce a land tax!!
The TWG focused on taxing real property because investment in land is harmful to economic growth. Yeah, right. So is high income tax and uncontrolled Government spending.
And how can we trust the recommendation of the TWG with Mark Weldon, NZX Limited, Gareth Morgan, Gareth Morgan Investments Limited, and a bevy of accountants as members. Do the members of the TWG understand that most farmers do not earn enough off the land to pay tax.
I ask you. When is the Government (or for that matter the citizens of this country) going to recognise the contribution made by the farmers? And back off.
Why should farmers be penalised for the bad investment habits of the townies.
In the past a National Government protected farming and farmers. The Government are wary about the political backlash of introducing a capital gains tax. Farmers should be up in arms about an annual land tax on farm land.
If land tax is introduced, then it would be important to relieve the land tax burden by imposing an exemption levy of say $50,000 per hectare which would have the effect of excluding a tax burden for most farmers.
Now that the Government has intervened to effectively prevent the dairy farm conversion at the MacKenzie Basin can we trust them not to introduce a tax which would limit the amount of money available to the rural sector for more development and growth.
I cannot believe that John Key agreed to allow Nick Smith to intervene: but this is the subject of another blog.
I comment under the blog entitled “Fonterra Capital Restructure and Changes to the Payout” that there are difficulties and complications in the owner and sharemilker persisting in referring to the “dividend” as part of the sharemilker’s entitlement. After a lot of discussion and debate about the best legal solution to these issues, I have come to the conclusion that the sooner the industry is told to exclude dividends from the payments calculation under sharemilking agreements, the better. The reasons for coming to this conclusion are:
- Fonterra is not permitted to pay a dividend to a non-shareholder.
- A dividend is the pro rata distribution of profit which has no direct correlation with production. The sharemilking agreement that pays a percentage of the payout is predicated on production. This distinction is highlighted in a situation where the production for the season is less than the number of shares held and conversely, where the production of the season is greater than the number of wet shares held.
- The industry is focusing on the issues arising from dividends which is destructive to the relationship between the parties and largely irrelevant. It would be far more constructive for the parties to negotiate a new agreement that focused on properly remunerating the sharemilker for the work that the sharemilker does, based on a percentage of the milk price. If, in order to retain the sharemilker, the owner needs to pay the sharemilker 51 or 52 percent, then that is a matter for the parties to agree to.
- Providing for the payment on the milk produced based on the milk price is very simple to draft in an agreement and easy for the parties to understand. Conversely, trying to calculate a percentage of the dividend is very difficult.
- By excluding the dividend from the calculation of the payment there are no potential issues with retentions. At the moment, there is scant regard to this issue in the current sharemilking agreement. It is expected that Fonterra will be retaining profits in the future. As you will undoubtedly know, the retentions are retentions from the dividend to be paid. It makes no sense that a sharemilker could claim a proportion of the retentions which legally are the entitlement of the shareholder.
If you would like to learn more about our solution to these post restructuring issues, attend our free seminar at Reporoa War Memorial Hall, 11am to 1pm on 17 March 2010.
A sharemilking relationship is one of a joint venture between the farm owner and sharemilker.
Both the farm owner and the sharemilker are pooling their assets to create income for their benefit.
There are a number of standard form sharemilking agreements within the industry which let the parties down. A simple case of filling in the blanks no longer protects either the farm owner or the sharemilker.
An agreement needs to reflect the special nature of each sharemilking relationship and filling in the blanks or not filling them in at all is creating problems and unfortunately disputes within the industry.
To learn more about Sharemilking Agreements attend our seminar on 17 March, details available at www.rurallaw.co.nz
I wonder how many dairy farm owners and sharemilkers understand the range of possible outcomes now that the payout is separated to a milk price and a dividend.
It is not simply an issue of whether the sharemilker is entitled to a portion of the wet shares as some advisers seem to think.
One example, if the farm does more production the sharemilker gets his/her portion of the dividend paid on the number of shares. The result: the sharemilker gets less if the production is greater than the shares owned.
Another example: if the owner held 150,000 shares based on last year’s production and the production was 20,000 kgms less (ie 130,000 kgms) and the sharemilker is entitled to (say) fifty percent of the dividend on the wet shares. The sharemilker is entitled to the dividend on 75,000 shares even though half of the production is 65000 kgms and the owner funded the excess shares. The result: the sharemilker gets more dividend than the proportionate production from the property.
And another thing, if Fonterra keeps back retentions and the sharemilker is entitled to a portion of the dividend, does the owner have to make up the difference? The owner may never get the retention directly. And, if the agreement between the owner and the sharemilker is for the sharemilker to be entitled to a percentage of the total dividend rather than based on production as before.
I don’t think many dairy farmers are aware of some of these issues. But don’t panic, if you can identify these issues then you will be able to protect yourself when you negotiate an amendment to the agreement.
ALSO, BlackmanSpargo have a seminar on sharemilking agreements coming up at the War Memorial Hall on Wednesday the 17th of March. You can get more information at the BlackmanSpargo website www.rurallaw.co.nz. We look forward to your visit.
Hello and welcome to all the farmers and rural advisers in New Zealand.
Chris Spargo and Ian Blackman are lawyers operating as BlackmanSpargo as rural legal specialists.
This blog gives us the opportunity to comment on current legal issues and get feedback from you, the farmer, on what we think are important matters for your consideration.
Please comment on our posts. We will respond!