Fonterra
fell foul of both its own legislation and the Fair Trading Act taking a tough
line against South Island farmers looking to rejoin the co-operative after rival
NZ Dairies Studholme processing plant went into receivership.
The High Court ruled Fonterra acted
improperly by discriminating against former NZ Dairies milk suppliers as part
of its policy to warn current suppliers there can be costs in changing to rival
milk processors. Dairy farmers in South
Canterbury and North Otago were left owed some twenty million dollars for milk
supplied when in 2012 Russian funders of the NZ Dairies processing plant at
Studholme put the company into receivership.
Affected farmers were left scrambling to find a replacement milk processor. They banded together to give themselves
greater negotiating power. Fonterra was
playing hardball.
Fonterra paid receivers $50 million to
buy the Studholme plant. Evidence was
given that Fonterra offered former Studholme suppliers a supply contract paying
five cents per kilogram less than the norm.
They were limited in buying only 1000 Fonterra co-op shares upfront,
with shares equating to their supply to be purchased in tranches over the next
three years. This worked to their
disadvantage. They would miss out on
share-backed dividends from Fonterra and, importantly, would be buying their
shares at a later date when share prices would be rising following the then
pending introduction of share trading between farmers. Fonterra took a take it or leave it
approach. Asked by NZ Dairies former suppliers
why they could not pay up front for their full share allocation, Fonterra said
they were outside the specified period set aside each year for buying in. It came out in evidence that Fonterra had
approved 26 applications elsewhere in the country for suppliers to buy in
outside the specified period. Fonterra
was held to have confused the issue by implying that it was Fonterra policy not
to allow any farmer to increase their supply-based shareholding in the lead up
to share trading between farmers when this was not in fact the case.
Internal Fonterra documents disclose a deliberate
policy to discriminate against NZ Dairies’ former suppliers; to send a message
to any farmers who might in future be persuaded to leave Fonterra and support
an independent milk processor. They were
to learn you could not “just waltz back in” and rejoin Fonterra as full
shareholders.
Fonterra was held to be in breach of the
Fair Trading Act in the way it responded to NZ Dairies suppliers questions
about new supply contracts. Justice Muir
also ruled Fonterra was in breach of its own founding legislation: the Dairy
Industry Restructuring Act. This Act
allowed the amalgamation of NZ Co-operative Dairy Company and Kiwi Co-operative
Dairy Company. The new giant co-op is
prohibited from discriminating between suppliers. It can refuse to accept new suppliers, on the
grounds of capacity for example. But
having accepted a milk supplier, Fonterra cannot then create sub-categories of
supplier and discriminate between them.
The High Court was asked to rule on
questions of Fonterra liability only. A
further court hearing is necessary to determine the extent to which individual
NZ Dairies suppliers joining Fonterra suffered any loss as a result.
By reducing the milk price payable to the
former NZ Dairies suppliers in the initial period of supply, Fonterra stood to
benefit in cash terms by some three million dollars. NZ Dairies paid its former suppliers their
twenty million dollars arrears for milk supplied prior to receivership out of
the Fonterra price paid for the Studholme plant.
MacIntyre
v. Fonterra – High Court (1.12.15)
16.014