Fletcher Building Nominees Limited v Fletcher Building Limited

[2024] NZHC 2481

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2024-404-1203

[2024] NZHC 2481

UNDER

the Financial Markets Conduct Act 2013

IN THE MATTER

of an application for an order amending a governing document under s 140(1)(b)

BETWEEN

FLETCHER BUILDING NOMINEES LIMITED

Applicant

AND

FLETCHER BUILDING LIMITED

Respondent

Hearing:	21 August 2024
Appearances:	D J Cooper KC and J Moses for the Applicant J Hodder KC for the Respondent
Judgment:	30 August 2024

JUDGMENT OF BLANCHARD J

This judgment was delivered by me on Friday, 30 August 2024 at 3:00 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

Solicitors:           TGT Legal (J Moses), Auckland Counsel:      D Cooper KC, Auckland

J Hodder KC, Auckland

FLETCHER BUILDING NOMINEES LIMITED v FLETCHER BUILDING LIMITED [2024] NZHC 2481 [30

August 2024]

[1]    The applicant (the Trustee) is the trustee of the Fletcher Building Retirement Plan (the Plan), a superannuation scheme registered under the Financial Markets Conduct Act 2013 (the Act). The Plan is governed by a Trust Deed dated 13 September 2016 (the Trust Deed). The Trustee and the respondent (Fletcher Building) have agreed to amend the Trust Deed. The amendments are set out in an agreement between the parties made on 1 July 2023 and varied on 12 August 2024 (the Agreement). They concern what should be done with a surplus of funds.

[2]    Under cl 3.27(a) of the Trust Deed and s 139(3)(a) of the Act, the written consent to the amendments is required from all members of the Plan. It is impracticable for the written consent of all the members to be obtained. Accordingly, the Trustee has  applied  for  the  approval  of the Court to  the amendments under    s 140(1)(b) of the Act.

[3]Fletcher Building is named as the respondent but is supporting the application.

[4]    The application was served on all members of the Plan and the Financial Markets Authority (FMA). The FMA filed a memorandum advising that it does not intend taking any steps in the proceeding.

[5]    There is no  formal  opposition  to  the  application,  but  four  members  (John McDonald, Martin Farrell, David Sadler and Hugh Fletcher) filed a submission raising concerns with the amendments.  Two  of the members, Mr McDonald and   Mr Farrell, attended the hearing and made oral submissions.

The Plan

[6]    Although it is subject to the 2016 Trust Deed, the Plan was originally established in 1982. Fletcher Building became the sponsor of the Plan when the four divisions of Fletcher Challenge Ltd became separate companies in 2001. The Plan’s members are all employees of Fletcher Building and its associated companies or former employees of Fletcher Building and Fletcher Challenge, and their associated companies.

[7]    There are two types of members of the Plan, “Defined Benefit Members” and “Defined Contribution Members”. As at 31 March 2024, the Plan had 417 Defined Benefit Members. Their benefits are based on their final salary with a prescribed annual increase of 1.75 per cent. The Plan had 71 Defined Contribution Members. Their benefits are based on their contributions and employer contributions, together with gains or losses earned on the investment of their contributions.

[8]    As at 31 March 2024, the Plan had total assets of approximately $334 million and a surplus of approximately $146 million. The surplus represents the difference between the total assets and the amount expected to be paid out to members based on actuarial advice.

[9]    The amendments only affect benefits of the Defined Benefit Members. They relate to how the surplus should be shared between the Defined Benefit Members and Fletcher Building. The four members who filed a submission are Defined Benefit Members.

[10]   No new members have been admitted to the Plan for many years. This means the number of beneficiaries is reducing as members die. In the period from 31 March 2021 to 31 March 2024, the number of Defined Benefit Members reduced from 506 to 417 and their average age increased from 82 to 84.

The Trust Deed

[11]   Fletcher Building is required to contribute sufficient funds to ensure the Plan retains a Funding Ratio of assets to accrued benefit liabilities (the Funding Ratio) of 115 per cent.1 It can, however, give one month’s notice in writing that it will cease to contribute to the Plan, provided the Funding Ratio is not below 115 per cent.2

1      Clause 8.9.

2      Clause 4.6.

[12]   Benefits under the Plan may only be increased (beyond the prescribed annual minimum of 1.75 per cent) with the prior written consent of Fletcher Building.3 And the Trust Deed cannot be amended without the consent of Fletcher Building.4

[13]   However, this changes if the Plan becomes a closed plan. This occurs if an event happens that would otherwise trigger the dissolution of the Plan, but the Trustee decides to continue the Plan as a closed plan.5

[14]The events that trigger dissolution are:6

(a)Fletcher Building is placed in liquidation or receivership;

(b)Fletcher Building gives one month’s notice in writing that it will cease to contribute to the Plan (which it can only do if the Funding Ratio is not below 115 per cent);7

(c)Fletcher Building ceases to contribute to the Plan for any reason other than having ceased to have members in service without giving one month’s notice; and

(d)the Trustee after considering actuarial advice is of the opinion that the Plan is or is likely to be unable to fill its principal functions.

[15]   If the Plan continues as a closed plan, it does not dissolve until the Trustee resolves to dissolve it.8 In that case, benefits can be adjusted to the extent considered by the Trustee to be in the best interests of the beneficiaries and to allow the Plan to be continued as a closed plan.9 And the Trustee can amend the Trust Deed to facilitate the administration of the Plan without the consent of Fletcher Building.10

3      Clause 15.5.

4      Clause 3.27.

5      Clause 5.3(a).

6      Clause 5.1.

7      Clause 4.6.

8      Clause 5.3(b).

9      Clause 5.3(a).

10     Clause 5.4.

[16]   Upon dissolution of the Plan, the funds held by the Trustee are applied in accordance with cls 5.5 to 5.12 of the Trust Deed.11 Clauses 5.6(a) to (h) specify the member benefits to which the funds are to be applied. Clause 5.6(i) then provides that the balance remaining is to be applied as the Trustee decides, with the consent of Fletcher Building, to augment the member benefits.

[17]   Clauses 5.8 and 5.9 specify what is to happen to any remaining balance after the payments are made under cl 5.6. Under cl 5.8, the Trustee, with the prior written consent of the FMA, is to refund the balance to Fletcher Building. Under cl 5.9, if the FMA refuses to consent to payment of the balance to Fletcher Building, then the Trustee is to apply the funds to augment member benefits under cl 5.6(i) and in such case the consent of Fletcher Building is not required.

[18]   There is a clause that provides that any dispute concerning the provisions of the Trust Deed between Fletcher Building, the Trustee and the beneficiaries is to be decided by the Trustee.12 In determining the dispute, the Trustee is relieved from all judicial formalities and may abstain from following the strict rules of law. Any decision is to be made in accordance with an equitable rather than a strictly legal interpretation. However, this clause does not apply to certain specified types of disputes.

The surplus

[19]   The surplus has been increasing. It increased from $50 million as at 31 March 2010 to $146 million as at 31 March 2024. In the same period, the Funding Ratio increased from 122.6 per cent to 199.4 per cent. Both are forecasted to continue to increase.

[20]   A consequence of the surplus, and of the Funding Ratio exceeding 115 per cent, is that Fletcher Building is not required to make contributions to the Plan. It has not made any contributions since 2011, and, based on forecasts, it is not expected to make any further contributions for the remaining life of the Plan.

11     Clause 5.2.

12     Clause 7.5.

[21]   It is not possible to identify a single cause of the surplus. But one material factor is a “top-up” contribution of $47 million made by Fletcher Building in 2009/2010. That payment was triggered by the Plan’s Funding Ratio falling below 115 per cent at the time of the Global Financial Crisis.

[22]   In Wrightson Ltd v Fletcher Challenge Nominees Ltd, the Privy Council considered the nature of the surplus in a scheme like the Plan.13 The case in fact involved this Plan, but under a prior and superseded trust deed. In its judgment the Privy Council said that “[i]n a … scheme like the present, any surplus arising on a final dissolution is generally regarded as the consequence of past overfunding by the employer”.14 And also, “[t]he members have no proprietary interests in the scheme funds; they are merely security for the payment of benefits to them.”15

The Agreement

[23]   The Agreement has two main components. It provides for an increase to benefits of the Defined Benefit Members and for amendments to be made to the Trust Deed.

[24]   The increase in member benefits is dealt with in cl 5 of the Agreement. Under this clause, provided the Funding Ratio exceeds 140 per cent, Fletcher Building commits that it will consent to the Trustee exercising its discretion under cl 15.5 of the Trust Deed to augment the benefits by paying one additional month per year (which represents an 8.33 per cent increase). As already explained, the Funding Ratio is forecasted to comfortably exceed 140 per cent every year.

[25]   Under the original version of the Agreement, Fletcher Building’s consent under cl 5 was for a period of 20 years. However, in response to the submissions filed by the four members (discussed below), the company agreed to remove the 20-year limit. This is why the Agreement was varied on 12 August 2024.

13     Wrightson Ltd v Fletcher Challenge Nominees Ltd [2001] UKPC 23, [2002] 2 NZLR 1.

14 At [23].

15 At [28].

[26]   The Agreement provides for the amendments to the Trust Deed. The amendments are all for Fletcher Building’s benefit.

[27]   As I have explained, benefits under the Plan may only be increased (beyond the prescribed annual minimum of 1.75 per cent) with the prior written consent of Fletcher Building. This is the effect of cl 15.5 of the Trust Deed as things stand now, before amendment. Under the amendments, a second proviso is removed from cl 15.5. This amendment merely improves clarity and does not change the essential meaning of the clause.

[28]   The amendments also remove the Trustee’s ability, in the event the Plan becomes a closed plan, to, without Fletcher Building’s consent, augment benefits to members and amend the Trust Deed in a way that would undermine or prejudice the company’s reversionary interest. Prior written consent is required.16

[29]   This might be significant if an early dissolution of the Plan was a reasonable possibility. However, the possibility of an early dissolution seems remote. It seems most unlikely that the Trustee could instigate an early dissolution. And it would not be in Fletcher Building’s interests to try to trigger one because of the unilateral powers to augment benefits and amend the Trust Deed it would give the Trustee if it chose to carry on the Plan as a closed plan.

[30]   There are amendments to both cls 5.8 and 5.9. These clauses specify what is to happen in a dissolution to any remaining balance after benefits are paid to members under cl 5.6. Under the amended cl 5.8, it remains the case that the Trustee, with the prior written consent of the FMA, is to refund the balance to Fletcher Building. However, under the amended clause, when the FMA considers whether to provide its consent, it expressly must do so under s 171 of the Act.17 This is not a significant change because it merely confirms the position that already exists under s 171.

[31]   I should mention that there is a clause in the Agreement that is relevant to cl 5.8 of the Trust Deed.   Clause 7.1 of the  Agreement places an obligation on the Trustee

16     Amended cls 5.3(a) and 5.4.

17     See also amended cl 3.37.

upon dissolution to, in good faith and in consultation with Fletcher Building, seek the consent of the FMA to refund any surplus to Fletcher Building under cl 5.8.

[32]   Of all the changes the amendments make the most important is to cl 5.9. As things stand now, if the FMA does not provide its prior written consent to the funds being refunded to Fletcher Building, the Trustee can use the funds to augment the benefits of members and it does not need to obtain Fletcher Building’s consent before doing so. However, under the amended cl 5.9, if the FMA does not provide its prior written consent to the funds being refunded to Fletcher Building, the Trustee must apply to the High Court for directions as to how to deal with the funds.

[33]   Finally, the dispute resolution clause is amended so that it specifies that it does not apply to disputes relating to any refusal by Fletcher Building to consent to any augmentation of benefits to members.18

Section 140(1)(b) of the Act

[34]   In deciding whether to give the Court’s consent under s 140(1)(b), I must determine whether the amendments are “in the interests of” the members.

[35]   There do not appear to be any cases decided under this section that I can refer to for guidance on the approach I should take.

The submissions of the four members

[36]The four members raise three concerns in their submissions.

[37]   First, as I have explained, they objected to the 20-year limit on the increase to benefits. As this was agreed to when the Agreement was varied, this issue has fallen away.

[38]   Second, they question the fairness and reasonableness of the allocation of the surplus between Fletcher Building and the members. They point out that the one extra month of benefit amounts to a cost of only around $1 million a year. They say this is

18     Amended cl 7.5.

not fair and reasonable when one considers that the surplus is $146 million. Moreover, the cost of the extra month will fall as the number of members reduces. Meanwhile the surplus is forecasted to continue to grow. The four members have calculated that the overall cost of the extra month will be less than 10 per cent of the surplus.

[39]   In this context, the four members also place reliance on discussions they understand to have taken place with the FMA. They say that when Fletcher Building took over as sponsor of the Plan in 2001, the FMA (at the time it must actually have been the Securities Commission) considered that on dissolution of the Plan, it expected that any surplus would be split two-thirds to members and one-third to Fletcher Building. They say further that they understand that, when the Trustee sought informal comment about this around two years ago, the FMA’s view had not changed.

[40]   They also say their understanding of what has been agreed between the Trustee and Fletcher Building is that it removes all future possibility of further augmentation of benefits regardless of inflation and other factors.

[41]   Third, the four members are concerned that the one extra month of benefit is not included in the amendments to the Trust Deed. They believe this creates an unacceptable level of security about whether the extra benefit will actually be provided. They also question why whether the extra benefit should be paid remains a matter for the Trustee’s discretion each year. They consider that the extra month should be automatically payable each year (provided the Funding Ratio exceeds   140 per cent).

[42]   When the four members raised this with the Trustee, they were advised that, during the negotiation of the Agreement, Fletcher Building’s general counsel made it clear that it was important from the company’s point of view that the Trustee retained a discretion each year to decide whether to provide the extra month of benefit. No clear explanation has been provided as to why Fletcher Building takes this view.

[43]   The four members’ concerns about this are heightened because of what they referred to as the current governance and financial issues with Fletcher Building and the rumours of takeover or separation of the business. They note that the company has

the power to change the Trustee. They say that the management of Fletcher Building, the sponsor of the Plan and the current Trustee could all change.

[44]   Having made these requests, the four members ask that the Court rule on whether the extra month of benefit resulted in a fair and reasonable sharing of the surplus. They also ask that the Court impose a condition to ensure that the Trustee can make further applications for increase in benefits should the economic conditions warrant it and that Fletcher Building must give favourable consideration to such applications. Finally, they ask the Court to ensure certainty of the additional one-month payment by stipulating that it must be included in the amendments to the Trust Deed.

Decision

[45]   The amendments have been negotiated as part of an overall agreement between the Trustee and Fletcher Building. In deciding whether to give my approval, I therefore need to consider the whole nature and effect of what has been agreed, rather than each amendment as a standalone item. The options available to me are to approve all the amendments or disapprove all of them. If I choose to disapprove the amendments, I can of course make it clear why I do so. However, I cannot approve some of the amendments and not others. Nor can I approve the amendments, subject to conditions or stipulations, as suggested by the four members. Accordingly, the question that I ask myself is whether, overall, what has been agreed by the Trustee and Fletcher Building is in the interests of the members.

[46]   Receiving the extra benefit is plainly in the interests of the members. But the question is whether the advantage of the extra benefit is sufficient to outweigh the disadvantage of the amendments, which, as I have said, are all to Fletcher Building’s benefit.

[47]   As I have explained, the four members do not think that the additional one month of benefit that has been agreed is sufficient. They do not think it would result in the members receiving a fair and reasonable share of the surplus.

[48]   In part their view is influenced by the advice they received from the FMA. But I do not think that much weight can be put on this. The advice was apparently informal. There are no details of who provided the advice and in what precise circumstances. As I have explained, the FMA were served with the application and have chosen to take no steps.

[49]   The best way to determine whether consenting to the amendments is in the interests of the members is to consider what might occur if I do not give the Court’s consent. The best option in this scenario would be for the Trustee to try to resume negotiations with Fletcher Building. The Trustee doing nothing would not be a good option for the members. The more time that passed, the more members would die without receiving any further benefit. Because of their age profile, their numbers would drop relatively quickly. Fletcher Building would not have received the benefit of the amendments, but this would not have advantaged the members in any way. In reality, the only benefit of the rights that the Trustee gives away in the amendments is as a negotiating chip with Fletcher Building. Retaining those rights might improve the position of the members when dissolution finally occurs, but, as all or most of them will have died when this time arrives, the benefit of this is really only theoretical.

[50]   For this reason, I will assume that in the scenario where I do not give consent the Trustee would endeavour to resume negotiations. The evidence is that the negotiations that resulted in the Agreement were initiated by the Trustee and were protracted. Mr McDonald suggested they took around ten years. The Trustee is independent of Fletcher Building and can be assumed to have pressed to get the best deal it could from the company. From this I think it can be inferred that, if I do not give consent, there must be a good chance the Trustee would not be able to negotiate more favourable terms with Fletcher Building and therefore that members would not receive any additional benefit at all. Another possibility is that the Trustee reaches a more favourable agreement, but it takes a long time and, in the meantime, significantly more members die and do not receive the resulting benefit.

[51]   This suggests that not giving consent would be a real gamble. It could result in a better outcome, but it could also result in the members, or a significant number of them, receiving no additional benefit at all. The particular situations of the four

members may be such that this is a reasonable gamble to make. But in my view, it is not in the interests of members in general to gamble in this way. Even though the additional one month of benefit is not as generous as might have been hoped, it is in the members’ interests to choose the certainty of the additional benefit that has already been agreed.

[52]   I have just referred to the certainty of the additional one month of benefit, but, as I have explained, the four members have cast doubt on the assurance that the additional benefit will actually be received. They say the certainty of the additional benefit is undermined because it is not included in the amendments to the Trust Deed and because the Trustee is left with a discretion to decide each year whether to pay the additional benefit. In my view the fact that the Trustee retains a discretion is not a significant factor. As Mr Niccol (a director of the Trustee) said, in circumstances where the Funding Ratio exceeds 140 per cent, which actuarial advice indicates is likely to be every year, it would be “inconceivable” that the Trustee, acting consistently with its duties, would not exercise the discretion to pay the additional month’s benefit. I accept that the fact that the additional benefit is not included in the Trust Deed might increase the risk that the additional benefit will not be paid. But in my view any increase in the risk is not so significant that it means that it is not in the interests of members to consent to the amendments.

Result

[53]   I grant the application and give the Court’s consent under s 140(1)(b) of the Financial Markets Conduct Act 2013 to the amendment of the Fletcher Building Retirement Plan Trust Deed.

Blanchard J