Fonterra’s Capital Restructure and Sale & Purchase Agreements
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.
