Hedley v Kiwi Co-Operative Dairies Limited HC Palmerston North CP24/99

[2001] NZHC 1325

IN THE HIGH COURT OF NEW ZEALAND
PALMERSTON NORTH REGISTRY CP24/99

BETWEEN WILLIAM JAMES CALDWELL HEDLEY and PAULINE HOWITT HEDLEY and OTHERS
Plaintiffs

AND KIWI CO-OPERATIVE DAIRIES LIMITED
First Defendant

AND CRAIG NORGATE
Second Defendant

AND JOHN YOUNG
Third Defendant

AND IAN SILVER and DAVID CULLWICK
Fourth Defendants

AND PETER JENSEN
Fifth Defendant

AND PAUL SIMON GUY BAILEY and OTHERS
Sixth Defendants

Hearing: 18-21 June, 25-29 June, 2-5 July, 9-13 July, 16-20 July, 23-26 July, 30-31 July, 1-2 August, 6-8 August 2001

Counsel: B P Henry and R E Colley for the Plaintiffs
J E Hodder and J C Holden and V A Pearson for the First, Second, Third and Sixth Defendants
A A Lusk QC, G W Hall and T Johnstone for the Fourth Defendants
P J Crombie for the Fifth Defendant

Judgment: 21 December 2001

JUDGMENT OF GODDARD J

Solicitors:
Innes Dean, Palmerston North, for the Plaintiffs
Chapman Tripp Sheffield Young, Wellington, for the First, Second, Third and Sixth Defendants
Buddle Findlay, Auckland, for the Fourth Defendants
Cooney Lees & Morgan, Tauranga, for the Fifth Defendant

INDEX

BACKGROUND
Introduction
Chronology

THE CAUSES OF ACTION

THE SPECIAL NATURE OF CO-OPERATIVE DAIRY COMPANIES

DETERMINING FACTORS
Validity of 27 September 1996 EGM
Reliance
Deceit
EY Jensen Report
Causation and Loss

JURISDICTION TO HOLD THE SECOND EGM ON 27 SEPTEMBER 1996: FIRST CAUSE OF ACTION
The Legislative Scheme
Conclusion

RELIANCE: ALL CAUSES OF ACTION
Introduction
The Suit Against Kiwi
Is Proof of Actual Reliance by Individual Plaintiffs Necessary?
The Evidence of Actual Reliance by the Plaintiffs
The Voting Numbers Required to Change the Vote From “No” to “Yes”
The Anti Merger Information Also Available to Shareholders
Conclusion

DECEIT: THE SECOND TO SEVENTH CAUSES OF ACTION
The Law Relating to Deceit
Was There a Real Risk of Supply Loss?
Were the Tui Shareholders Deceived About the Risk of Supply Loss?
Conclusion re Deceit as to Supply Loss
Was the Merger Model “Audited”?
Was the Agreement to Pay the 60c Differential a Deceit on the Tui
Shareholders?
The Mainland Transaction

THE EY JENSEN REPORT
Introduction
“Normalisation” of Accounts: Comparison of Tui and Kiwi
Change of Accounting Polices in the Future
Did the Review Report Provide a Positive Assurance?
Benefit of Timing Adjustment
Was the Report Independent and Were the Terms of Reference Subtly Changed by the Review Team?
Was the Report Based on Current Information and Up-to-date Assumptions?
Mr Jensen
The Issue of Supply Loss in the EY Jensen Report
Conclusion

CAUSATION AND LOSS
Have the Benefits of the Merger Come to Pass - Or Have the Tui Shareholders Suffered a Loss?

FAIR TRADING ACT 1986 CLAIMS

CROSS CLAIMS

CONCLUSION I

CONCLUSION II

CONCLUSION III

JUDGMENT

COSTS

BACKGROUND

Introduction

[1] This case concerns the merger of two dairy co-operative companies in 1996. The plaintiffs were shareholders in the company then known as Tui Milk Products Limited (“Tui”), a Palmerston North based dairy co-operative covering the Manawatu and Wairarapa regions. On 27 September 1996, at an Extraordinary General Meeting (“EGM”), a majority of the Tui shareholders voted in favour of a special resolution to merge Tui with Kiwi Co-operative Dairies Limited (“Kiwi”), a Hawera based dairy co-operative.

[2] The role of the various parties at the time of the merger was briefly as follows. The named plaintiffs, Mr and Mrs Hedley, were shareholders in Tui. They represent 288 of the 1,300 supplying shareholders of Tui. The second defendant, Mr Craig Norgate, was Chief Executive Officer (“CEO”) of Kiwi at the time of the merger. The third defendant, Mr John Young, was Chairman of the board of directors of Kiwi at the time of merger. The fourth defendants were partners in the accountancy firm of Ernst & Young (“EY”). They were engaged to assist the fifth defendant, Mr Peter Jensen, to conduct an independent review of the proposed merger and report to the Tui shareholders on whether the merger was fair and in their best interests. Mr Jensen was former deputy Chair of the New Zealand Dairy Board (“NZDB”) and a dairy farmer with over 40 years experience. The sixth defendants were the Chair and board of directors of Tui. Of these, 11 were elected dairy farmer representatives and supplying shareholders of Tui and the twelfth, Mr Murray Gough, was an appointed commercial director with an interest in a Tui supplying farm.

[3] The issue at trial was not whether the merger was in the best interests of the Tui shareholders but whether the payment of a differential of 60c per kg of milk solids in return for shares in Kiwi was fair in all the circumstances, and whether the majority of Tui shareholders who ultimately voted in favour of the merger were misled by misrepresentations made by the first, second, third and sixth defendants (the Tui/Kiwi defendants) and by negligent misstatements by EY and Mr Jensen in their independent review report.

[4] Underlying the plaintiffs’ claim is their concern that as at 16 June 1996 the merger negotiations between Tui and Kiwi seemed at an end, yet three weeks later an agreement to merge the two companies was suddenly announced. In the plaintiffs’ view something unexplained must have happened to turn the situation around in so short a time. Of further and major concern to the plaintiffs was the fact that after the resolution to approve the merger failed to attract the requisite 75% vote at an EGM held for that purpose on 20 August 1996, the Tui board called a second EGM on 27 September 1996, at which the same resolution was put and the requisite majority vote obtained. The plaintiffs’ contend that the holding of that second EGM was illegal and the requisite majority obtained by means of deceit on the part of the Tui/Kiwi defendants and negligence on the part of the EY/Jensen defendants.

[5] Compounding the plaintiffs’ concern was an announcement made immediately after the merger that Kiwi was also merging with Mainland Products Ltd (“Mainland”) of Dunedin. It transpired that, on 18 September 1996, Kiwi had entered into an agreement to merge with Mainland conditional on the merger with Tui taking place.

Chronology

[6] It is necessary to commence the judgment by traversing the history of events leading up to the merger on 27 September 1996 with some degree of particularity in order to gain an understanding of why the merger came about and whether the cost to Tui of merging was fair in all the circumstances.

[7] The background was one of politics and growth in the New Zealand dairy industry, involving numerous mergers between various dairy companies and intensified by increasing competition in the domestic milk market following deregulation of that market in 1993.

[8] Merger was very much the direction of the industry and by 1995 there was much discussion of an eventual outcome of only two or three large New Zealand dairy companies. This climate engendered a feeling amongst some Tui directors and many of its shareholders that Tui would be better off as part of a larger company if it was to maximise its payout to shareholders.

[9] Prior to deregulation in 1993 Tui (and its predecessors) had made significant profits in the local milk market which had helped boost its payouts. Following deregulation its local market margins came under increasing pressure from competition and it became increasingly difficult for Tui Foods Ltd (Tui’s marketing company) to maintain local market profitability.

[10] Kiwi had merged with Moa Nui Dairy Company (“Moa Nui’’) in 1992, bringing the total number of Kiwi suppliers to 2,626 (1,000 from Moa Nui). By comparison, Tui had only around 1,300 suppliers. Following the merger with Moa Nui, Kiwi set about expanding on its site at Hawera, known as Whareroa, which gave it huge advantages in terms of both scale and efficiency.

[11] Kiwi then began buying into the local market milk operations, by introducing small but increasing amounts of milk at low prices. This had a destabilising effect on the regions into which it ventured and put pressure on Tui to sell its milk at comparable prices in order to compete. Any reduction in local market earnings had a potentially significant effect for Tui in terms of payout, but had comparatively little effect for Kiwi’s payout, given its far greater volume of milk overall.

[12] Supplier encroachment was also an issue. In 1994 Kiwi accepted supply applications from six farmers in Whangaehu, an area in Tui’s traditional territory slightly south of Kiwi’s boundary. This motivated the Tui directors to consider initiating “dialogue” with Kiwi in June 1994.

[13] Kiwi’s own position in the increasingly competitive environment was by no means secure either. Whilst it had bettered Tui’s payout during the period 1990/1991, it had lagged behind its most feared competitor, the New Zealand Dairy Group (“NZDG”), in the years 1994/1995.

[14] This caused the Kiwi directors and executives to analyse why NZDG had achieved superior results. They identified significant local market profits as the key factor. This pointed to the need for Kiwi to secure greater winter milk supply and milk growth generally if it were to match NZDG’s results. Tui’s traditional supply areas were the obvious source of increased milk supply and consideration was therefore given to sending Kiwi milk tankers further into Tui territory. Other tactics to weaken Tui’s position were also pursued.

[15] In early February 1995 Tui learned that Kiwi was making moves to entice Tui shareholders to become Kiwi suppliers. It seemed that a group of Tui winter milk suppliers in Horowhenua were planning to meet with representatives of Kiwi. Mr Ross-Taylor expressed his displeasure about this to Mr Young and moved to counter such encroachment by sending the following letter dated 7 February 1995 to all Tui shareholders.

“Dear Shareholder

Currently there appears to be a degree of confusion amongst some shareholders regarding an apparent move by the Kiwi company to entice Tui shareholders to join Kiwi. The situation is being fostered by an intense telephone campaign amongst some of our suppliers.

The purpose of this letter is to inform all shareholders of the developments as quickly as possible.

A meeting was held last week between a number of Tui’s winter milk contract holders and representatives of the Kiwi company. Our winter milk contract holders were fearful that their own company was preparing to drastically reduce their contract prices and, of course, were considering their alternatives should that have been the case.

Tui is currently midway through the consultation process in setting its winter milk contract price for 1996. As part of the process it has been assessing and challenging what are assumed to be key influences in the marketplace in the future. However, in doing so, figures which are not Tui’s intended contract price for 1996 have been floated amongst winter milk contract holders as the contract price.

A meeting will be held with our winter milk contract holders later this week, the prime purpose of which is to continue the consultation process and particularly to ensure that the figures which are being bandied about are kept in context. Tui has always been able to reward winter milk contract holders favourably compared with those of other companies and intended this to always be the case.

There is, we understand, at least one other meeting scheduled between Kiwi and our shareholders.

A review of Tui’s performance over the past few years in every aspect of its business has demonstrated a comparative improvement over other companies and sets the scene for a secure future that we can all be proud of and look forward to.

We regret the anxiety which might have been caused to shareholders by second hand reports of what has been happening and trust this communication serves to clarify the situation and to assure you that your Directors are addressing the matter.”

[16] Notwithstanding Mr Ross-Taylor’s efforts, two meetings did take place between the Horowhenua winter milk suppliers and Kiwi representatives in late February.

[17] Newspaper articles were also beginning to appear at this time, forecasting an aggressive takeover of Tui by Kiwi. At a meeting of Kiwi shareholders on 7 March 1995, Mr Young referred to these articles and advised that they were prompted by enquiries Kiwi had been receiving from farmers with winter milk herds in both Horowhenua and Manawatu.

[18] At a director’s planning meeting on 9 May 1995, Mr Young advised the board that current opportunities for Kiwi to generate milk growth were limited and it was very vulnerable to NZDG. That led the board to resolve to accept six of the Tui Horowhenua winter milk suppliers who had enquired about moving to Kiwi, so as to ensure continuing growth and adequate supplies of winter milk.

[19] The ‘defection’ of these six Horowhenua suppliers ‘rattled’ the Tui board of directors. Compounding the situation was the loss of an increasing number of new farm conversions to Kiwi, largely due to the higher cost of entry to Tui supply compared with Kiwi. Tui had increased its premium for supply to $2 per share in March 1995 (whilst the cost of entry to Kiwi remained at $1 per share). Tui was forced to reduce its entry premium to $1 per share in order to remain competitive.

[20] At one stage Tui had considered the possibility of a merger with NZDG. Both Mr Ross-Taylor and Mr Gough had made informal approaches to NZDG about this possibility, but NZDG was not interested in merging with Tui. The Tui directors therefore began to focus on a possible merger with Kiwi. The minutes of a board meeting on 1 June 1995 record the following discussion on earlier and future efforts to initiate dialogue with Kiwi about a possible merger:

“. . . There is the need to confirm to shareholders their future is secure with Tui and that there is no need to panic. Also to acknowledge that having been through a successful merger [Tui and Manawatu Dairy Company in 1989] would always consider future benefits. Opportunities would be sought to initiate dialogue with Kiwi at a senior level, possibly in a less formal manner. A previous offer to meet with them less than three months ago was not taken up. A further attempt is to be made by Mr A. Ross-Taylor for himself and Mr B.C. Garrity to meet.”

[21] Meanwhile the Kiwi board had initiatives of its own under consideration. These included a bid for the Rennet Company and for NZDB’s Chesdale licence. In addition, Kiwi was looking to acquire an interest in Mainland as a further strategy to minimise NZDG dominance in the local market. The possibility of a merger with Tui was also on the Kiwi agenda for discussion. The minutes of a board meeting on 14 July 1995 record the following discussion on possible strategies by which Kiwi could achieve a merger with Tui:

“[A possible merger with Tui] can be achieved by having a deliberate strategy to make the Tui operations inefficient. A number of options were discussed at this point outlining how this could be achieved.”

[22] At a Kiwi board meeting the following month Mr Norgate spoke on alternative strategies for acquiring an interest in Mainland or developing Kiwi’s marketing company, Kiwi Supreme, to counter NZDG’s dominance in the local market. The minutes record:

“. . . Mainland had been identified as a possible means of achieving this strategy and a decision was required on whether to purchase Mainland or develop Kiwi Supreme to counter New Zealand Dairy Group.

. . . It was pointed out that the alternative of developing Kiwi Supreme could be at least as expensive and would be less effective in combating New Zealand Dairy Group in the short term.

It was considered essential that a decision was made on the purchase of Mainland . . .

. . . revisit the proposal after giving full consideration to the various options and quietly progress and obtain an understanding of Mainland.”

[23] At a Tui board meeting on 15 August 1995, shareholders in Ward 1 expressed dissatisfaction over Tui’s performance in the 1994/1995 year and asked why Tui was not retaining its position in the dairy industry.

[24] On 14 September 1995, Mr Young addressed the Kiwi shareholders at their annual general meeting. Drawing the following comparison with Tui he said:

“. . . Tui must be extremely disappointed with their performance as they had only improved 3 cents kg compared to Kiwi despite a significant increase in milk flows, which would suggest major problems in the years ahead as their recent capital expenditure programme impacted on them. This was one of the reasons why [Kiwi] was seeing increasing interest from farmers in the Manawatu wishing to join the Kiwi Company.”

[25] At a meeting of the Kiwi board two months later, discussion centred on a strategy for rapid milk growth and a “full merger with Tui”.

[26] By the beginning of 1996 Tui’s financial position, although sound, was becoming increasingly vulnerable. Local market competition was seriously damaging its position, with the result that profits in Tui Foods Ltd fell from $1.5m in 1993/1994 to a loss of nearly $1m in 1994/1995 and then to a loss of around $2m in 1995/1996. Mr Gough said the Tararua brand was not strong and local market profitability could not be maintained in the prevailing climate of intense competition. Tui’s payout continued to lag behind Kiwi’s and NZDG’s, as it had during the entire period 1990/1991-1995/1996. The figures in the table below, taken from Tui’s annual report for 1996/1997, are illustrative:

PAYOUT AT FARMGATE

Cents/kg Milksolids
Dairy Company	1995/1996 Base @ 360.00		1994/95 Base @ 300.00		1993/94 Base @ 290.00		1992/93 Base @ 325.00		1991/92 Base @ 298.00
Payout	Margin	Payout	Margin	Payout	Margin	Payout	Margin	Payout	Margin
Kiwi	408	48	340	40	339	49	376	51	351	53
NZDG	410	50	350	50	339	49	372	47	343	45
Tui	384	24	334	34	330	40	367	42	338	40

[27] Tui was also in the invidious position of having committed a significant amount of money to the expansion of its cheese and speciality powder facilities, rendering constant or improved supplies of milk absolutely critical. Any loss of supply following such a major commitment of capital would have a disastrous impact on payout and on its overall viability. Mr Bailey said the reality was that Tui needed to increase its supply in order to justify those capital expenditures - not lose supply. Ongoing capital expansion was vital. He summed up the situation in early 1996 as follows:

“Tui was, broadly speaking, in good financial shape . . . The major areas of vulnerability of the company related to supply. . . . Tui had already committed itself to major capital expansion. Further, Tui Foods was performing poorly in the deregulated environment. Tui was not in a position to increase its debt any further. In effect, faced with loss of supply, Tui had no “fighting fund”, nor the financial capacity to “weather the storm”.”

[28] At a meeting on 26 January 1996, the Tui board discussed Tui’s performance, its strategic direction and possible opportunities for the future. It was agreed that merger with another company or investment from outside parties should be investigated. Kiwi was seen as the most natural merger partner for reasons of geography and similar product mix.

[29] On the basis of these discussions Mr Ross-Taylor approached Mr Young at an industry forum in Waitangi in January 1996 to explore the possibility of the two companies “working together in the future”. A subsequent meeting between representatives of the companies was arranged. Mr Young reported back to the Kiwi board on 20 February and it was agreed that the chief executive officers of both companies should do some financial work on a potential merger. The minutes record as follows:

“. . . at the Chairmen’s Forum the Chairman of Tui had asked for a meeting with representatives of Kiwi prior to the meeting of the two Boards. This meeting had been arranged with the Kiwi representatives being Messrs Young, Bayliss and Norgate and the Tui representatives being Messrs Ross-Taylor, Gough and Murdoch.

A full and frank discussion was held with Mr Gough outlining his views on the development of the Industry and he believed that Tui had no future and that they had to look at their options and one option was to merge with either Dairy Group or Kiwi. In the discussion the Kiwi representatives had stated that they considered that the Commerce Commission may restrict Tui’s application to join with NZDG and the response had been that they could sell off Tui Milk Products and they had already received an approach from Australian interests. The general indication had been that it would be preferable to merge with Kiwi before the difference in payout was too great and before they have to pay a large entry fee.

It was left to Messrs Norgate and Murdoch to put the numbers together.”

[30] Following this, a number of meetings took place between Tui and Kiwi representatives at which the possibility of merger was discussed. Kiwi was, at this point, also negotiating to purchase Hawkes Bay Milk Producers (“HBMP”) but was careful not to mention that to Tui. It did however advise Tui that it had recently purchased Timaru Milk Producers (“Timaru”).

[31] Kiwi made an initial merger offer to Tui based on payment of a 90c differential by the Tui shareholders. This offer was immediately rejected by the Tui directors. Mr Young reported back to the Kiwi board on 16 and 17 April 1996 as follows:

“Tui had indicated that they expected to be 10-15 cents above base and considered that they needed to be part of a larger Company to gain the benefits from the structural package. A copy of the Moa merger terms had been given to them as a guide with an indication that 90 cents kg milksolids from Tui would be payable.

This had caused concern as the Tui Chairman had been advising his shareholders that a merger would be at no cost and it had been impressed upon the delegation that the Kiwi Shareholders would not accept such a proposal.

. . .

The preliminary results of the merger study disclosed a total operating benefit of 6.6 cents kg milksolids, but after initial interest costs and deprecation had been deducted only a 1 cent advantage would be available in the first year, after the capital programme was complete, and it would therefore be necessary for a risk payment to protect the Kiwi Shareholders until the full benefits could be attained.

The Chief Executive advised that further detailed work had to be undertaken and that study would be audited by Peak Marwick.”

[32] In late April a merger model was prepared based on projections supplied by both Kiwi and Tui executives. KPMG were retained to substantiate and review the model, and reported back to the Kiwi board on 30 April 1996 advising that the model had been properly compiled and that the assumptions in it were not unreasonable. The projections confirmed a benefit to suppliers from a merger.

[33] Mr Bailey said that the Tui directors fully understood the merger model and its contents. The model brought together two companies similar to Manawatu and Tui, both of which had successfully merged six years earlier.

[34] Throughout this time the risk of potential supply loss remained of overriding concern to the Tui board. Any further supply loss would have a significant impact on Tui’s payout, as well as serious implications for its financial viability and its ability to meet its NZDB contracts. Supply loss would also have a seriously deleterious effect on Tui’s position in any future merger negotiations. The knowledge that Kiwi had now acquired HBMP as well as Timaru only served to heighten concern. The acquisition of HBMP meant that Kiwi now had a physical presence in Tui’s catchment area and its milk tankers would be passing back through Tui territory empty after delivering to Hastings. Kiwi would doubtless seek to fill those tankers with supply from Tui’s catchment area. The most likely source of such supply was conversion farms, as conversion farmers had no existing loyalties and would inevitably be attracted to Kiwi’s higher payout. All of the Tui directors were keenly aware of the risks they were facing and cognisant of their fiduciary duty to their shareholders. Mr Bailey put the directors’ position in the following way:

“Put simply, after years of striving to build value in every facet of the business and creating wealth for our farmers, we could not take such risks.”

[35] However, despite strenuous negotiating efforts, merger discussions with Kiwi stalled over the issue of price. Mr Gough described the situation as follows:

“The initial offer by Kiwi was 90 cents, and this was quickly rejected by Tui. When it became clear that Kiwi was unwilling to budge on the eventual 60 cent figure, the negotiation discussions broke down. The fact that the Moa-Nui Co-operative Dairies Limited suppliers had paid a significant entry fee [to join Kiwi] was a major factor, and Kiwi’s negotiators believed that if the Tui differential was less than 60 cents, they would not obtain the support of the former Moa-Nui shareholders, and thus obtain 75 percent support of Kiwi shareholders, as required by section 24A of the Co-operative Dairy Companies Act 1949.

The 60 cent differential put forward as a final offer by Kiwi was obviously [also] unattractive to directors and Tui shareholders when compared to having no differential.”

[36] Meanwhile, Mr Young was briefing his directors on the merger negotiations to date, seeking their feedback as to the level of payment Kiwi required from Tui for a merger to be agreed. The minutes of a board meeting on 13 May record as follows:

“Mr Young went over the meetings held with the Tui Company and advised that in response to the Kiwi Company’s offer which required a merger payment of 90 cents kg milksolids, the Tui Company had offered 20 cents kg milksolids and had been informed that the Kiwi Board would not accept such a proposal.

At the meeting held on the morning of 13 May the Tui Directors reported that they considered the Company’s requirement was too high and had stated that they considered their Company would be within 10 cents of Kiwi in the 1996/97 season. Considerable discussion had ensued with the Kiwi delegation advising that the Kiwi Company would amend its offer to 60 cents kg milksolids with the preferred payment option being 30 cents in the 1995/96 season and a further 30 cents in 1996/97 and had suggested that the Tui Directors focus on how this payment should be made. The Kiwi delegation had retired from the meeting and when discussion resumed, Tui offered 40 cents with no recovery in the 1995/96 year and the payment to be made over three years, namely 20 cents in 1996/97 and 10 cents in 1997/98 and 1998/99. They also requested that the Company consider changes to other areas of the merger proposal - . . .

The Tui Directors had been informed that the Company would not accept their offer of 40 cents and the meeting had adjourned.

Mr Young reported that he felt that there was a need [for] urgency in regard to finalising whether a merger should proceed and if not it was necessary for the Company to plan how additional supply could be obtained and how best to grow the Company bearing in mind the strategic planning sessions of May and December.

Individual Directors spoke giving their views on the payment level required, with there being general agreement that the Company could not go below 60 cents kg milksolids and outlining the various reasons why the payment was considered necessary.

Mr Norgate in response to a question from Board members, indicated that the analysis of the merger proposal indicated that the Tui shareholders achieved major advantages from the merger which would enable the Tui Directors to sell the requirement for the 60 cents kg milksolids to their shareholders.”

[37] The Minutes of a Tui board meeting held later that same day record mixed emotions around the board table and the feeling that although the 60c differential required by Kiwi was unacceptable, matters were at a stage where further effort had to be made to negotiate a more acceptable arrangement. In the meantime, Mr Ross-Taylor was requested to write to all Tui shareholders informing them of the situation and advising as follows:

“. . . your Directors have been working closely with Kiwi Directors and recently they had progressed to assessing the possibility of a merger. The issue has been to identify potential benefits for shareholders of both companies and, if then appropriate, to consider the financial basis upon which an amalgamation might be effected.

Your Board of Directors feels very strongly that no merger should proceed unless there are fair and ongoing benefits to the shareholders of both companies. In any event, it is apparent that markedly different views exist as to the basis on which a merger might be brought about. Given this, discussions on the matter have ceased.

Both companies can, and expect to, perform well as independent entities. Your company is in robust financial and operational health and our budgets for next season point to a very encouraging performance.

We can expect media speculation and rumour regarding any suggestion of merger discussions and they will often be generated from outside Tui boundaries. It is neither practical nor indeed, advisable, for Directors to provide continuous commentary of proceedings. You can rely on your Board to pursue initiatives which might advantage Tui’s shareholders and to inform you directly, as and if, opportunities become available.

Of course, for a merger to proceed, approval is required from 75% of the shareholders of each party. No commitment would be made by your Board without consultation, and approval of Tui’s shareholders.

In the meantime your Directors, management and staff are approaching the coming season with a high degree of confidence.”

[38] On the same day Mr Young wrote to Mr Ross-Taylor, confirming Kiwi’s “bottom line” as the payment of a 60c differential by Tui shareholders, with payment split over two years - 30c in 1995/1996 and 30c in 1996/1997. He noted that price remained the only significant issue between the parties and set out a careful and detailed analysis of Kiwi’s position to explain why payment of a 60c differential was required to ensure that the benefits of the merger would be shared equitably. He emphasised the historical payout differences between the companies, the burden on Kiwi shareholders of funding equity for capital investment, and the significant risks to Kiwi in the short to medium term. Importantly, that one-third of Kiwi’s suppliers had come from Moa Nui and they had been required to pay a 70c differential in one lump sum to merge with Kiwi. On that basis Mr Young said it would be difficult for Kiwi directors to convince their shareholders to merge without payment of a 60c differential by the Tui shareholders. He concluded with the following analysis of the risks and benefits of merger to both companies:

“60c/kg milksolids only represent 20c/kg over the merged company. Once the averaging effect of the first year is deducted, it gives very little security to Kiwi shareholders given the position they are in and the risks they would be asked to take.

In contrast Tui’s shareholders would be presented with a forecast payout position of:

1996/97 50c/kg

1997/98 50c/kg

1998/99 55c/kg

2001/02 64c/kg

Even deducting 20c/kg for the first three years gives them as competitive a payment as they have had in the past before sharing fully in the benefits of the merged company.

Alistair in terms of the balance of effort your Directors need only to sell the merger. The enlarged Kiwi Board has the unenviable task of making it work. For these reasons we see our position as prudent and clearly in the best interests of all shareholders in the merged Company.”

[39] At a Kiwi board meeting on 21 May 1996, discussion centred on the large number of enquiries Kiwi had been receiving, both from individual Tui suppliers and from two supplier representatives since the breakdown in merger negotiations. The company secretary, Mrs Hikuroa, advised the directors that in the vicinity of 250 enquiries had been received by Kiwi. The board resolved to ease the conditions of entry for any Tui shareholder who wished to transfer to Kiwi. This decision was made because the directors did not want any Tui shareholder who transferred pre-merger to be in a worse position than any who came with a merger, in the event a merger did take place during the 1996/1997 season.

[40] Mr Young said his view at the time was that a merger of the two companies was inevitable, particularly following Kiwi’s merger with HBMP. He said Kiwi considered that a merger was preferable to accepting Tui suppliers individually, but if a merger did not eventuate Kiwi was definitely interested in taking over individual Tui suppliers. This for two reasons - first, the extra milk would lower overheads and, second, shares in NZDB were allotted on a milksolids basis.

[41] On 23 May 1996, Mr Garrity, the deputy Chair of Tui, sent urgent faxes to Messrs Gough, Murdoch and Bailey calling for a return to the negotiating table “quick smart”. These faxes were prompted by information he had received about two suppliers in South Wairarapa who had received offers from Kiwi to switch their supply.

[42] At the next Tui board meeting on 28 May 1996, the stalled merger negotiations and Tui’s precarious position in relation to further potential supply loss dominated the agenda. Although no follow up had been received from Kiwi, information had filtered through of a number of Tui suppliers “making application to Kiwi”. Also that the terms of entry to Kiwi were being eased to accommodate suppliers. The minutes record Mr Murdoch stressing the need for Tui to secure its supply base and referring to the unfortunate payout comparisons between Tui and Kiwi. There was also discussion about a response to Mr Young’s letter of 16 May. The board resolved to seek a meeting with Kiwi as soon as possible in order to progress the merger discussions. The overriding concern was actual and future supply loss to Kiwi, fuelled by Kiwi’s clear intention to continue increasing its milk volumes. Other options for maintaining supplier loyalty were also considered. One subsequently floated but rejected outright by the supplier representatives was a two year loyalty agreement.

[43] On 29 May 1996 Mr Ross-Taylor sent a formal response from the Tui board to Mr Young’s letter of 16 May. The essence of Tui’s philosophy at this point is encapsulated in the following passages:

“In respect of any merger proposal, critical to any advocacy by my Board to our shareholders would be a good level of confidence regarding future benefits. Historical evidence on surplus available for payout, and payout itself - more so when compared on a common basis - does not of itself point to any significant step up in payout for Tui suppliers entering into a merger.

A greater level of confidence on our part as to the prospects of your company achieving its “base case” projections would have us prepared to contemplate a total payment somewhat greater than 40c. It occurs to me that one way to achieve this - in the absence of full budget disclosure, future projections and comprehensive due diligence - would be to construct a differential/payment arrangement that evidences your own confidence in the projections.

For example - and to use your own forecast payout figures of 50c; 50c; 55c; 64c; for 96/97 and subsequent years: Assuming also a phased differential such as put forward by yourself in the course of our last meeting, l0c; 20c; 20c; l0c: In order to engender the necessary confidence level, what might be proposed is a commitment to the payout above NZDB base, to Tui suppliers, being not less than 30c; 30c; 35c and 45c in the respective seasons - force majeure and other material SCM adjustments allowed for.

The foregoing is merely example - it does not signify any agreement that a 60c payment is appropriate - it is put forward to demonstrate a payment construct that goes at least some way to alleviate the prevailing concerns about confidence in the various projections. I again stress that confidence in those projections is necessary in order for us both to promote any proposal to our respective shareholders with certainty of outcome.

Total payment, phasing/differentials and confidence in the projections are the issues and it behoves us to consider carefully how they might be best addressed to progress matters.

Your thoughts as to the extent to which the approach, as exemplified, might effectively do just that, would be appreciated.”

[44] Mr Young responded to this as follows:

“I would agree that our model of rationalisation does understate the potential benefits, which I think is a prudent approach. We are certainly interested in your comment of a “lower cost lower risk and yet greater benefit” option that you suggest. It may be worthwhile our respective groups meeting on that issue to progress if thought fit, any initiative in that area.

The example you enclose of Kiwi underwriting a margin above base for Tui shareholders is certainly a challenge worthy of review and I will encourage our team to pursue this as one possible option that may mitigate the cost of rationalisation.”

[45] On 6 June the Kiwi and Tui negotiating teams met for renewed discussions. Agreement was reached in principle on a merger, subject to the approval of the Kiwi board. The differences as to price were resolved by Kiwi agreeing to spread payment of the 60c differential over four years; guaranteeing Tui shareholders a minimum payout above NZDB base over that four year period, and agreeing to a claw-back of the differential if profits were better than expected.

[46] On 7 June the Tui board announced to the shareholders that a merger accord with Kiwi had been reached.

[47] On 11 June Mr Ross-Taylor wrote to shareholders advising the details of the merger and outlining the benefits identified. He advised shareholders that they would receive more detail over the following weeks and invited them to contact him or the other Tui directors for more information in the interim.

[48] On 18 June the Tui board approved the merger terms in principle, and on 26 June the merger agreement was signed by both companies. The merger was to take effect from 1 June 1996 and final payouts for the 1995/1996 season were to be calculated in accordance with the accounts for each company. The consideration for the merger was stated as follows:

“. . . as at the Merger Date Tui supplying Shareholders will in consideration for receiving a shareholding in Kiwi receive payouts in accordance with the accounts and payout provisions of [the merger proposal].”

[49] After the merger agreement was signed, an intense debate developed between Tui shareholders who were opposed to the merger and the Tui directors and shareholders who were in favour of the merger. There were numerous supplier meetings held throughout Tui’s area, both of a formal and informal nature. The issues debated were widely reported by the print media and on radio. Information documents were circulated by the two factions and numerous approaches made to individual shareholders. As the debate and its intensity is of some importance to the issues, I will refer to it again in more detail later.

[50] On 27 June a document entitled Information Memorandum was sent to all Tui shareholders under cover of a letter from Mr Ross-Taylor. That document explained the key aspects of the merger proposal and the important points for shareholders to consider in assessing the merits of the proposed merger. Mr Ross-Taylor referred to the information published in the media and from other sources, and advised shareholders that the only information guaranteed to have the mandate of the Tui board was that published by Tui or given by himself at meetings. The following passages in the Information Memorandum were the subject of close scrutiny at the hearing of this case:

“Returns From A Merged Company

The principle advantages identified for both companies arising from a merger are as follows:

• The benefits of processing more milk through Tui’s Longburn milk and foods plant, with the rationalisation of other local market processing plants.

• The benefits of scale by processing more milk through Kiwi’s Hawera site.

• Reduced resource costs for energy and effluent disposal.

• Reduction in overhead costs.

• A more stable planning environment in terms of supply growth, the domestic market and future capital expenditure requirements.

Despite some benefits being partially offset by additional milk collection costs, these advantages translate into projected higher payout performances from a merged company than from either Tui or Kiwi as ‘stand-alone’ companies.

Without taking into account any differentials, Tui suppliers will benefit more than Kiwi suppliers from the proposed merger.

The following table details forecast surpluses on a common basis as assessed by Tui and Kiwi. Calculated returns from the merged company were determined by adding the modelled benefits from a merger to Kiwi’s estimates of its future surplus.

The merger payout details were calculated by Kiwi using a model which has been the subject of an independent audit, the results of which have been disclosed to Tui. The figures assume no changes to dairy industry standard cost models.

Season (c/kg milksolids)	1996/97	1997/98	1998/99	1999/2000
Kiwi	48	48	50	54
Tui	35	37	40	42
Merged	50	50	55	58

The merged company is projected to earn a cumulative surplus of 59 cents/kg milksolids more than Tui’s stand-alone position over the next four seasons.

Differential

Because it is projected Tui shareholders stand to gain most benefit from the proposed merger, a differential spread over four years has been determined as being appropriate. The proposed contribution up to a maximum of 60 cents/kg milksolids will be met by Tui shareholders over four years, as follows:

Season	1996/96	1996/97	1997/98	1998/99
Source	Retention To Reserves	Deduction from Payout
c/kg milksolids	10	20	20	10

. . .

On what basis was the 60 cent differential established?

The Tui Board would have wished to present a proposal with a lower differential. However, the outcome was the result of negotiation and can be justified using normal commercial investment criteria.

It is projected that Tui shareholders will enjoy a larger improvement in long-term payout prospects as a result of the merger than their Kiwi counterparts. The 60 cent differential, supported by spread payments, underwriting and performance clauses, is considered by your Board to be fair and equitable given the projected long-term improvement in income stream for Tui shareholders.

Shareholder who are still concerned are asked to discuss this issue with their financial advisors.

. . .

Why should I trust Kiwi and its performance projections?

. . .

The following factors should be considered:

- Kiwi’s projected ‘stand-alone’ surpluses for the next three to five years are aligned to the surpluses that Tui staff had already modelled as being achievable by Kiwi. Much of the required information has been generated from industry cost surveys and other comparisons.

- The model used to project the benefits of the merger had input from Tui and was audited independently.

- By the time the Tui EGM is held to consider the merger proposal. Tui directors will be better appraised of Kiwi’s financial position.

. . .

Has Tui wasted approximately $150 million in investments over the past few years?

No. Firstly, Tui shareholders have already benefited to some extent in terms of returns from this investment in recent years. Secondly, the merger proposal has been made to improve long-term future income streams for all shareholders. Tui’s existing assets will simply become part of the wider company, incorporating Kiwi’s assets. While there may be some rationalisation as a result of the merger, any decision will be made in the best interests of the merged company - and, ultimately, to enhance shareholder returns.”

[51] Due diligence enquiries and discussion between the boards Tui and Kiwi continued during this period. On 9 July 1996 Mr Young wrote to Mr Ross-Taylor on two issues. The first was of a further milk powder unit (to be known as Powder 5) to accommodate and take advantage of the increased milk supply the merger would bring. The second was the ongoing issue of supply loss from Tui to Kiwi. The essence of those issues is contained in the following passages:

“Powder Investment

As previously outlined if the benefits of the merger are to be achieved it will be necessary to move extremely quickly to rationalise manufacturing configurations. For a major powder project to be commissioned in time for the 1997/98 season commitments need to be made now. Such commitment involves cancellation fees of up to $2m prior to August 9th. Given the fact that the benefits of such a commitment will accrue proportionately to all shareholders of the merged Company you are asked to agree to your proportionate share of the cancellation fees should the merger not proceed due to your own shareholders not passing the required resolutions.

This request is entirely consistent with that adopted in the Moa Nui merger and indeed with good faith. To demonstrate our own good faith on the matter we are prepared to wait until July 17th (i.e. after your first merger meeting) for your confirmation on this point.

Acceptance of Supply

As you are aware we have been inundated with requests from Tui Shareholders to supply Kiwi, particularly in the event that the merger does not proceed. Of most concern is that their 1996/97 season supply will commence prior to the outcome of the merger being resolved. Clearly it is in the best interests of Tui and the merged Company if these suppliers commence supplying Tui and vote with other Tui suppliers for the merger. However, should the merger not proceed due to your own shareholders not passing the required resolutions then we seek your consent to accept the supply accordingly. Given that the first of these suppliers are due to commence supply next week we would ask for such consent by Thursday 11th.”

[52] On 16 July 1996 a Tui EGM was held for the purpose of approving the merger agreement. During the meeting which lasted some four hours Mr Ross-Taylor addressed shareholders and told them that Kiwi had 250 applications from Tui suppliers to move to Kiwi. At the end of the meeting a majority of 74.34% of shareholders voted to approve the merger in principle.

[53] At a board meeting the next day the Tui directors resolved not to accede to Kiwi’s request in Mr Young’s letter of 9 July, to commit to a contribution of cancellation fees on Powder 5 if the merger did not proceed, or to agree to release shareholders who sought to supply Kiwi in the event the merger did not proceed. One other item of interest appears in the minutes of that meeting. They record that the only Tui director who had not supported the merger proposal had changed his stance and “. . . now supported the merger proposal as being the best option available”.

[54] On 1 August Kiwi held its EGM and the requisite majority of Kiwi shareholders voted in favour of the merger proposal.

[55] Tui then notified its shareholders of an EGM to be held on 20 August to vote on a special resolution to approve the merger. About 950 Tui shareholders (of the 1,300 with entitlement to vote) attended the meeting which lasted approximately 3 1/2 hours. A detailed presentation was made by Mr Ross-Taylor, prior to the vote being put, in which he utilised overhead slides covering all of the possible issues. Issues included differences in the accounting policies of each company, the risk of supply loss on future income streams, and options to a merger. The resolution failed to attract the requisite 75% majority vote, although a 67.01% majority of the shareholders present voted in favour of the merger. The failure of the resolution produced a “stunned silence”, broken when Tui’s immediate past Chair, Mr Whitelock, stood and spoke to the gathering. He proposed that the board of directors pursue the matter further, as a matter of urgency, and obtain an independent overview. His proposal was carried with acclamation. Mr Whitelock said in evidence that he believed most of the shareholders present at the meeting realised “the company was deeply divided on the merger issue, and was in real trouble”.

[56] Later that same night Mr Gough summarised his own thoughts on the matter in a memorandum to Messrs Ross-Taylor and Murdoch. The salient parts of his memorandum are as follows:

“A significant majority of our suppliers are in favour of the merger on the terms put to them. More than 20% didn’t vote - they are much more likely to be in favour than opposed (anyone opposed would have known they needed to record their vote to have any chance of stopping the merger and would have made sure that they voted).

At least some of those who voted against will not have expected to be successful and will be considering reality for the first time. There will also be a considerable backlash on these people from the majority who will be increasingly concerned about the situation they now face - and unhappy that a minority can effectively lock them into a stand-alone situation.

. . .

Kiwi needs the merger and may be willing to sweeten the terms a little . . . Probably the easiest issue they can move on is the timetable for the 60 cents . . . There may be more scope for improved terms than we suspect. We should seek Kiwi’s ideas - they have the same interest as we do in achieving a successful outcome.

. . .

The immediate objective should be to give shareholders one last chance to accept or reject a merger . . .

An independent report would persuade some of the opponents and may well of itself achieve the extra votes needed.

. . .

A timetable for an independent report and for a further EGM (to have a second “first” vote) could be as short as four weeks - the shortest practical time should be the objective.”

[57] Kiwi was not however prepared to “sweeten the terms”. No amount of discussion could persuade its board to reconsider, as the terms and conditions already agreed had been negotiated at length over a period of some months.

[58] The Tui board took prompt legal advice as to the legality of holding a further EGM and putting the merger resolution again. Advice received confirmed that, provided notice was issued prior to the end of August, such a meeting could be held once more within the ambit of s 24A of the Co-operative Dairy Companies Act 1949 (“the Act”). On the basis of the level of shareholder support at the 20 August EGM (67%), the Tui board decided to act on that advice and notified shareholders that a further meeting would be held on 27 September 1996. Shareholders were also advised that an independent review of the merger proposal was being commissioned, the details of which would be circulated for discussion prior to the second EGM.

[59] On 3 September 1996 Mr Ross-Taylor wrote to the Tui shareholders advising that Mr Peter Jensen would be conducting the independent review in conjunction with EY. The purpose of the review would be to establish whether or not the merger proposal was fair and in the best interests of Tui shareholders. Following this announcement, Mr Jensen met with a number of shareholders and supply representatives before finalising the terms of reference for the review. These were as follows:

“Terms of Reference

To review and report on the proposed merger between Tui Milk Products and Kiwi Co-operative Dairies.

The review is to establish whether or not the proposal is fair and in the best interests of Tui shareholders.

It is expected that the review will require:

- Assessment of the stand alone projections of Tui and Kiwi respectively.

- Assessment of the merger model upon which the proposal was based.

- Assessment of the merger proposal with specific regard for the retention, differentials, clawback and minimum payment provisions.

Calculation of the net present value of the projected (net) cashflows - merger versus stand alone.

Consideration of alternatives for Tui, namely

- stand alone

- other industry partners/linkages

- outside equity

Investigation of such other issues as might be considered relevant and material to shareholders consideration of the proposal, e.g.

- timing of transaction

- single site risks

- water and effluent issues”

[60] On 11 September, Kiwi, under cover of a letter from Mr Young, published a document entitled “Proposed Operating Scenario for the Merged Company”. It was sent to all Tui shareholders. In a section headed “Financial Strength” reference was made to the merger model and to the “excellent payout levels” that might be expected from a merger of Kiwi and Tui. The financial section concluded with the following statement:

“[The merger] study was audited by an international accounting firm but in response to requests from shareholders and in conjunction with other information, it is being subjected to further independent review. We are confident that this review will confirm the above projections and the ability of the merger to deliver significant and sustainable financial benefits to shareholders.”

[61] On 12 September 1996 a further document was published entitled “Merger Update - A Summary of Benefits”. This was sent to all Tui shareholders by a “Tui Shareholders’ Merger Support Group”. This document was the inspiration and creation of Mr Williams, a substantial shareholder in both Tui and Kiwi, who was firmly of the view that the Tui/Kiwi merger must proceed and was concerned that Tui shareholders were not receiving sufficient simple and easily assimilated information about the benefits of merger. Prior to publishing the “Merger Update” Mr Williams initiated a meeting with Messrs Ross-Taylor and Murdoch and obtained their agreement for his company (Agricultural Investments Limited) to work for Tui in a public/shareholder relations role in the lead up to the second vote. The Merger Update was the result of his liasing with both the Tui and Kiwi directors and executives and obtaining the assistance of a communications strategist. Its key message was that merger would bring a 45c/kg of milk solids advantage to Tui suppliers over the next five years - not a cost of 60c/kg of milk solids.

[62] An initial draft of the EY Jensen report was sent to Mr Murdoch for comment on 12 September. Further drafts were sent on 14 and 15 September and circulated to Kiwi and Tui executives for comment.

[63] By 16 September 1996 the EY Jensen report was completed in draft and the Tui directors were given an overview briefing at a board meeting on even date. The minutes record the following:

“Review of merger model undertaken
Due diligence aspect - normal approach adopted by the industry has been applied in these negotiations
Tax implications are unclear
The number of applications from Tui shareholders to supply Kiwi has not yet been able to be categorically substantiated

The merger proposal has been found to be fair and in the best interests of Tui shareholders.

Review was undertaken of other options, particularly a merging with New Zealand Dairy Group. No synergies of milk processing would be captured, also the cost of the entry was likely to be higher than the 60c.

The intention is to have the report finalised and posted to shareholders as soon as possible and to hold four shareholder information meetings prior to the EGM.”

[64] On 17 September the EY Jensen report was issued to all Tui shareholders under cover of a letter signed by all three reviewers, stating inter alia:

“Our report has been prepared in accordance with the terms of reference of our appointment and is based on the information provided to us by the two companies, discussions we have had with the executives of the two companies and the reasonableness reviews we have carried out.”

[65] Sections 1-8 of the report were prepared by Messrs Silver and Cullwick, the EY partners. Sections 9 and 10 were prepared by Mr Jensen, and section 11 by all three jointly. Sections 6 and 9 of the report dealt with the controversial supply loss issue. I will refer to the report itself in more detail later under a separate heading.

[66] On 18 September 1996 Mr Ross-Taylor wrote to all Tui shareholders, emphasising the report’s conclusion that the merger proposal was fair and in the best interests of Tui shareholders, and advising that the review team would present the report and answer questions at information meetings in Woodville, Levin, Featherston and Palmerston North prior to the EGM on 27 September 1996.

[67] On 23 September 1996, the Tui directors in Ward 1 and 2 wrote to their shareholders endorsing the EY Jensen report and its recommendation that the merger proposal was fair and in the best interests of Tui shareholders and urging shareholders to vote in favour of the merger on 27 September.

[68] At the EGM on 27 September 1996 an 80.11% majority voted to approve the merger of Tui and Kiwi.

CAUSES OF ACTION

[69] The 61 page statement of claim contains 11 causes of action, spanning 142 paragraphs. Because of the length and complexity of the pleadings, it is necessary to analyse and review each cause of action in some detail. Also because of a degree of duplication in relation to some issues.

First Cause of Action

[70] The first cause of action centres on the second EGM held on 27 September 1996, at which an estimated majority of 80.11% of Tui shareholders approved the merger. The claim, brought against Kiwi and against the Chairman and directors of the Tui board, is founded in conversion and alleges breach of statutory duty and inferentially (at least) deceit on the part of those defendants in agreeing to hold the further EGM of 27 September 1996. It is pleaded that the meeting was invalidly convened and the vote approving the merger a nullity. In consequence the merger of Tui’s assets, the cancellation of the plaintiffs’ Tui shares, the issue of Kiwi shares in substitution, and the deduction of the 60c differential are alleged to have constituted conversion of the plaintiffs’ property.

Second Cause of Action

[71] The second cause of action pleads deceitful conduct by the Tui/Kiwi defendants between the first EGM on 20 August 1996 and the holding of the second EGM on 27 September 1996. This cause of action centres on a “plan” agreed by a “group” comprising Mr Young in his role as Chairman of the Kiwi board, Mr Norgate as CEO of Kiwi, Mr Watters as financial advisor to Tui, Mr Ross-Taylor as Chairman of the Tui board, Mr Murdoch as CEO of Tui and Mr Lynn Williams of Agricultural Investments Ltd. The aim of the alleged “plan” was to obtain a “yes” vote at the 27 September 1996 meeting. The bulk of the claims against the Tui/Kiwi defendants are encompassed in this cause of action, which is founded in deceit. The same deceit allegations are reflected in the fourth and sixth causes of action, which plead breaches of the Fair Trading Act 1986. It is said that the strategy of the “agreed plan” included the establishment of a pro-merger group and the obtaining of a “positive review of the merger proposal” which could be presented to the Tui shareholders to persuade them that the merger was fair and in their best interests. The pleading alleges that all members of the Tui board assisted in this plan for the purpose of ensuring that the special resolution was passed on 27 September 1996. Further, that in furtherance of the plan, the Merger Update document was prepared by and on behalf of the group but its true authorship concealed from the Tui shareholders. Further, that the Merger Update contained false statements which Kiwi. Mr Norgate and Mr Young knew to be false and which the Tui directors knew were false or were reckless as to that matter. Further, that Mr Norgate published to all Tui shareholders The Proposed Operating Scenario for the Merged Company. This document is said to have perpetuated alleged misrepresentations in earlier documents, in particular, the Information Memorandum issued by Mr Ross-Taylor on 27 June 1996, prepared in reliance on payout projections calculated by Tui and based on the merger model independently ‘audited’ by KPMG. It is also alleged that Kiwi, Mr Young and Mr Norgate knew that the representations in Mr Norgate’s Proposed Operating Scenario of 11 September 1996 were false and that the Tui directors knew or ought to have known they were false.

[72] The pleading also alleges that an independent review of the merger by EY and Mr Jensen was sought as part of the “plan” with instructions given for an advance draft of the report to be provided to the “group”, so that the “group” could manipulate the information ultimately to be published in the report. Further, that the terms of reference were deceptively changed from those originally published to the Tui shareholders. A further particular deceit alleged is the subsequent publication of letters by some Tui ward directors in which they endorsed the positive recommendation of the EY Jensen report so as to encourage a vote in favour of the special resolution at the 27 September 1996 meeting. A further particular of deceit pleaded is that Kiwi, Mr Young, Mr Norgate and the Tui board of directors, together with other members of the “group’”, attempted to prevent opposition to their various published misrepresentations by silencing any criticism by threat of defamation proceedings.

[73] In summary, it is said that the consequences of the agreed plan of deceit brought about a wrongful belief by the plaintiffs in the following material matters:

(i) that the meeting of 27 September 1996 was lawful;

(ii) that the merged company’s projected performance when compared to the Tui standalone performance justified the payment by Tui shareholders of a 60c per Kg milksolids differential;

(iii) that the merger model, with its projected results for the merged company, Tui standalone and Kiwi standalone was audited by an independent international firm of accountants;

(iv) that the independent audit confirmed the benefits of the proposed merger;

(v) that the report of EY and Mr Jensen was prepared in accordance with the terms of reference as published;

(vi) that the report of EY and Mr Jensen provided an unqualified conclusion that the merger agreement was “fair and in the best interests of Tui shareholders”;

(vii) that the historical payouts of Kiwi and Tui showed an average differential in favour of Kiwi of at least 10 cents per kg of milksolids per annum.

[74] Underpinning the whole of the second cause of action is an alleged failure to provide a set of accounts adjusted to show a true comparison between the two companies.

Third Cause of Action

[75] The third cause of action centres on alleged deceit as to audit of the merger model.

[76] This cause of action incorporates the plaintiff’s belief that when Tui and Kiwi payouts were compared on the basis of historical data and using the same accounting principles, no significant difference existed between the levels of payout. The statement of claim sets out a comparison of historic earnings using the same accounting policies as follows:

Earnings Before Interest, Tax, Depreciation & Payout to Suppliers
TUI	1996	1995	1994
Profit before Tax	6814	1820	3241
Add back:
Interest	6057	5240	3736
Depreciation	13137	12953	12461
Payout to Suppliers	296498	250246	227706
Subtotal	322506	270259	247144
000kg milksolids	76027	73320	67228
PROFIT PER KILO	424.20c	368.6c	367.6c
KIWI	1996	1995	1994
Profit before Tax	(189)	47	1214
Add back: Interest	6999	8108	10005
Depreciation	22068	32278	34569
Minority Int.	(68)	(86)	(41)
Payout to Suppliers	520771	436720	458379
Subtotal	549581	476617	504126
000kg milksolids	127640	128421	135215
PROFIT PER KILO	430.57	371.14c	372.83c
DIFFERENCE	6.37c	2.54c	5.23c
Average over 3 years =	4.71 cents
EXTRAORDINARY PROFIT
Effect of Deferred Lease Premium ($4.763 million per annum)	3.73c	3.71c	3.52c
Net	2.64c	(1.17c)	1.71c
Average over last 3 years =	1.06cents
The above does not take into account items identified by Coopers & Lybrand including volume measurement and payout timing which would have further effect of between 2.8 cents and 3.3 cents per annum reduction in the purported variance. If these items were taken into account Tui would have actually been more profitable than Kiwi in the 3 year period.

[77] The essence of the third cause of action is that Kiwi and Mr Young falsely represented to the Tui directors that the original financial model upon which the terms of the merger were predicated had been audited by an independent firm of accountants, namely KPMG. This, it is pleaded, led to the Tui board of directors accepting the merger agreement in reliance upon the KPMG audit of the merger model, with its projected results for the merged company, for Tui standalone and for Kiwi standalone. The plaintiffs’ plead that, had an “audit” of the merger model been carried out, the assumptions would have been checked, Tui and Kiwi payouts compared on the same accounting basis, and the benefits expected from the merger confirmed. In reality, however, KPMG simply “checked the maths but not the assumptions of the model”. The false representations in the merger model were then incorporated by reference into the Information Memorandum of 27 June 1996, published by Mr Ross-Taylor for the purpose of deceiving the Tui shareholders into believing:

(a) that KPMG had confirmed the payouts and other outcomes of the merger model as being achievable; and

(b) that the merger model was not solely the work of Kiwi and its executives but had been certified to be accurate by an independent internationally reputable firm of accountants.

[78] The central issue in this cause of action is the appropriate interpretation and application of the term “audit”‘ and whether such an audit should have extended to the Tui standalone projections.

[79] As a result of the deceit alleged, the plaintiffs’ say the Tui shareholders voted to approve the merger on 27 September 1996. As a consequence they suffered the losses claimed.

[80] The specific allegations of deceit against Kiwi and Mr Young are that Kiwi would not allow the Tui directors to see the merger model but falsely represented to those directors that the original financial model upon which the terms of the merger were predicated had been independently “audited” by KPMG.

Fourth Cause of Action

[81] This cause of action repeats the allegations in the third cause of action as breaches of the Fair Trading Act.

Fifth Cause of Action

[82] This cause of action is brought against Kiwi, Mr Young and Mr Norgate and alleges deceit as to loss of supply. The essence of the claim is that representations made by these parties in July - namely, that Kiwi had 200-300 “applications” from Tui shareholders to supply Kiwi in 1996/1997 or 1997/1998 season - were knowingly false. Furthermore, that they allowed these false representations to be incorporated in the EY/Jensen report of 16 September 1996 as an assumption that, in the event the merger failed, Tui would lose 30% of its milk supply, resulting in the advice that without supply Tui shares had no value and accordingly the merger agreement was fair and in the best interests of Tui shareholders.

Sixth Cause of Action

[83] The allegations of deceit as to loss of supply in the fifth cause of action are repeated in the sixth cause of action, but pleaded as breaches of the Fair Trading Act.

Seventh Cause of Action

[84] This cause of action alleges deceit by Kiwi through concealment and lack of disclosure of a material transaction; namely, the fact that the Kiwi board had entered into an agreement to acquire an interest in Mainland conditional on the Tui/Kiwi merger being approved by the Tui shareholders at the EGM on 27 September 1996. The plaintiffs’ claim that the Mainland transaction was relevant to their vote on 27 September because, if disclosed, it would have revealed to Tui shareholders that:

(i) the assets of Tui had value, in particular, the Tararua brand name and the business of Tui Foods Limited.

(ii) Tui had other commercial options not assessed by Ernst & Young.

Eighth Cause of Action

[85] In this cause of action the plaintiffs allege breach of duty of care by EY and Mr Jensen in failing to provide an “independent” report to the Tui shareholders advising whether (or not) the merger was fair and in their best interests. The particulars of this alleged breach of duty of care are numerous. First, that EY and Mr Jensen failed to “normalise” the accounts of Tui and Kiwi so as to be able to compare the value each was bringing to the merger transaction. Second, that they failed to analyse the 60c differential on the basis of such normalised accounts and adjusted budgets, so as to ensure the starting point for their analysis was realistic. Third, that they failed to assess the potential of the domestic market share enjoyed by Tui under the Tararua brand. Fourth, that they failed to consider also the possibility or likelihood that the Tui directors would change Tui’s accounting practices in the future if the merger did not proceed. Fifth, that they failed to ensure they had current information and up-to-date assumptions on which to consider the Tui standalone projections. Finally, that they failed to investigate the Kiwi standalone projections for the 1996/1997 year (as opposed to the 1997/1998 year), which projections were the key to the differential calculations

[86] Further allegations are made that the report was not independent of the defendants’ influence, and that the terms of reference were subtly changed by EY and Mr Jensen so as to enable them to provide an unqualified conclusion to their review report and to the Executive Summary to the report.

Ninth Cause of Action

[87] This cause of action alleges breach of duty of care in relation to the Executive Summary under cover of which the independent report by EY and Mr Jensen was released. Essentially, this cause of action replicates the allegations made in the Eighth Cause of Action about the report itself.

Tenth Cause of Action

[88] This cause of action alleges breach of duty of care by EY and Mr Jensen in the preparation of the independent report. Essentially this cause of action incorporates all of the allegations made in the Eighth and Ninth Causes of Action, effectively subsuming those causes of action.

[89] Mr Henry accepted that if the plaintiffs’ were unsuccessful against the fourth and fifth defendants on this cause of action, they could not succeed on the Eighth and Ninth Causes of Action, nor on the Eleventh Cause of Action.

Eleventh Cause of Action

[90] This cause of action mirrors the allegations in the Eighth, Ninth and Tenth Causes of Action. It alleges that the breaches of duty of care set out in those causes of action, also constitute breaches under the Fair Trading Act.

Damage and Loss Claimed

[91] On the basis of the deceit and the breaches of statutory duty, duty of care and the Fair Trading Act pleaded in the 11 causes of action, the representative plaintiffs calculate loss in value of the shares they held in Tui as at 1 June 1996 in the sum of $46,415.00. They claim further loss in the sum of $42,778.92 for the differential of 60c in milksolid payout for the years 1996-1999. The total sum therefore claimed is $89,193.92. This sum is applicable to the case of each of the 288 plaintiffs. It is unnecessary to reproduce the plaintiffs’ tables calculating the net tangible asset values of both companies but they feature significant adjustments in relation to revaluation of land and buildings, a value attributable to the Tararua brand name, and revaluation of the Tui vats.

THE SPECIAL NATURE OF CO-OPERATIVE DAIRY COMPANIES

[92] Before embarking upon an analysis of the facts in this case, it is important to examine the special nature of co-operative dairy companies. The defendants’ expert witnesses emphasised the fundamental importance of correctly understanding the true nature of co-operatives and the interest that arises from a co-operative shareholding. Expert evidence on the topic was given by Mr Davies, a chartered accountant and senior partner in Deloitte Touche Toumatsu (“Deloittes”) and by Mr Hagen, also a chartered accountant and the current Chairman of Deloittes. I will refer in more detail to the qualifications of each later in the judgment.

[93] Mr Davies explained that although dairy companies have shares and share capital like listed companies their shareholders’ rights are quite different. He succinctly summarised the distinguishing characteristics as follows:

“A person acquires shares in a dairy company, not by buying them on the Stock Exchange, but by acquiring them from the dairy company itself. Generally speaking, any person supplying milk to a dairy company must hold a certain number of its shares, the number depending on the quantity of milk that person is supplying to the company. Dairy company shares are not an investment that a person purchases, but are subscribed to by dairy farmers to gain the right to supply a certain quantity of milk to that company. They are more akin to a licence or a contractual supply arrangement than an investment in shares.

A listed company shareholder can sell his shares to any willing purchaser for the market price at that time, a price which will probably be influenced not only by the net tangible assets (NTA) of the company concerned, but also by the market’s general feel for its prospects and future dividends. A dairy company shareholder, on the other hand, can only sell dairy company shares back to the dairy company for the capital originally contributed by that shareholder, and may have to wait some years for payment to be made. If the NTA of the dairy company has risen during the period a particular shareholder held shares in the company, that does not give the shareholder a right to participate in that increased value. Generally, the shareholder will receive only the capital originally subscribed.

The return to a listed company shareholder is the dividend stream paid by the company out of its profits, and the increase (hopefully) in the market value of the shares. In the case of a dairy company shareholder the return is the payout by the dairy company, which is usually (but not necessarily) closely linked to the profit earned by the dairy company. There is no return from an increase in the value of the shares, because, as explained above, there is no mechanism for the shares to be sold other than to the company and for the capital originally subscribed.”

[94] Mr Hagen also confirmed the essential nature of a dairy co-operative shareholding. He said that in many ways a co-operative is similar to a professional services practice, like a substantial law or accounting firm, where payment for services is related to input and on withdrawal a partner takes out only the capital contributed. He said that upon leaving a dairy co-operative, suppliers are similarly entitled only to receive the capital that they have contributed - or that is attributed to them. In the case of Tui, some suppliers who left the co-operative were paid only 33% of the nominal value of their shares. Shares held by farmers were not held as “investments” in the usual sense of that word but more as a “right to supply milk” to the co-operative for further processing and sale. Essentially, a predetermined level of shareholding was the prerequisite to supply of milk by a farmer.

[95] The unique nature of co-operative companies and the distinction between them and companies listed on the Stock Exchange was considered by the Commerce Commission in its report on the Tui/Kiwi merger dated 15 August 1996. Inter alia, the Commerce Commission noted that dairy co-operatives issued shares to suppliers based on the amount of milk solids supplied; and that when suppliers left a co-operative they were entitled to receive reimbursement for the amount of capital they have contributed to the co-operative. The Commission also noted that co-operatives may delay payment to departing shareholders for up to five years. It further noted that Tui had paid some departing suppliers only 33% of the nominal value of their shares.

[96] Mr Hedley in his evidence gave the impression that the plaintiffs may not necessarily have understood the true nature of their shareholding in Tui as a co-operative dairy company. This seemed apparent, for instance, from the following cross-examination of Mr Hedley:

“Cross-Examined by Mr Hodder

At the time of the merger how many shares in Tui did you have? I believe I did 67,000 or thereabouts of milk solids, I would have needed shares in the order of for every 1.5kg of milk solid I would need a share. Whatever that multiplies out to that was my shareholding, or thereabouts.

There is no dividend payable on those shares was there? There can be a dividend paid on those shares.

To your knowledge, has Tui ever paid a dividend on its shares? To my knowledge I do not think they have but that did not stop them from doing it in the future.

Would you agree that a share in Tui was quite different in nature from a share in Telecom? No. They still showed what you had invested in the company but it also gave you the right to supply.

One of the essential points about a share in Telecom is a regular dividend is it not? Yes, dividends are paid on a Telecom share.

You do not have to be a Telecom shareholder to deal with Telecom, correct? That is correct.

Would you agree, the main point in holding shares in Tui was to qualify you in providing milk for processing by Tui? That is one of the reasons.

What is the next most important reason? It can show you what you have invested in that company.

. . .

Is it correct that the economic benefit to you as a Tui shareholder is the payout you received for the milk you supplied each season? One of the benefits.

What were the other economic benefits you got from holding Tui shares? The increase in value of the Tui shares, or bonusing up.”

[97] An accurate understanding of the nature of dairy co-operative companies and of shareholding interests in those companies is important in this case because of its relevance to the issues of any comparative stand-alone value of Tui and Kiwi at the time of merger, to the fairness of the merger price and importantly to whether there was deceit or negligent misstatement by the defendants on these matters. The plaintiffs’ case is based on their belief that Tui’s worth was not correctly valued at the time of merger. This belief is manifest in the approach taken by their expert witnesses. Mrs Taylor, a chartered accountant, contended that Tui’s worth pre-merger should have been valued by using an earnings capitalisation (“EBITDA”) approach, as this was the method of valuation used by Arthur Anderson in their report prepared for the proposed NZDG/Kiwi (GlobalCo) merger (which eventuated in June 2001 in the week prior to trial of this case). Mr Gillespie, a chartered accountant and company director, also professed criticism of EY for not performing a valuation of Kiwi and Tui and of the merged company, again drawing attention to the fact that Arthur Anderson had carried out such a valuation exercise for the GlobalCo merger.

[98] However, for reasons explained by Mr Hagen (the Deloittes partner with ultimate responsibility for the audit of NZDG prior to the GlobalCo merger) the situations were not comparable. The mega merger that resulted in GlobalCo (now Fonterra) was the effective amalgamation of the only two substantial dairy co-operatives left in New Zealand. The legal environment under which the merged entity of GlobalCo was to operate was substantially different from the legal environment applicable to the Tui/Kiwi merger under the 1949 Act. Because the new legal environment would have an impact on the value of the shares of the companies to be merged (Kiwi and NZDG), Arthur Anderson were specifically required to assess the differences in their relative value and instructed to adopt a capitalised EBITDA approach for that purpose. For those reasons, Mr Hagen said, the view expressed by Mrs Taylor and Mr Gillespie, that Tui’s “worth” on a stand-alone basis should have been valued by EBITDA (or any other valuation methodology) was entirely misconceived. He also said that the special nature of co-operative companies rendered the net value of any assets, including brand names, of no relevance to an assessment of whether the merger was fair and in the best interests of suppliers.

[315] What is clear is that the negotiating process was very difficult and the Tui directors, and particularly Mr Ross-Taylor, were feeling embattled by the time the merger proposal was agreed to. Nevertheless the Tui directors did reach a unanimous decision that the merger must proceed and that the terms were fair and in the best interests of the shareholders. As Mr Gough put it, the decision to merge on the terms as negotiated was reached unanimously “albeit with reluctance rather than enthusiasm”.

[316] I am satisfied that throughout the period of negotiation, the Tui directors remained independent and were, at all times, acutely conscious of their fiduciary duty of care towards their shareholders. The Tui directors and their company were however at a crossroads. Mr Williams’ opinion was that capital decisions made by the Tui board three years before the merger had irreversibly damaged its competitive edge. The directors knew this and, as Mr Bailey said, were aware that the risk of Tui continuing as a stand-alone company was “too high a risk to take”. His attitude and that of the other directors in relation to the negotiations and the merger, were described by Mr Gough thus:

“All the Tui Board members were conscious of their obligations to shareholders and to the company. We were aware that it was our responsibility to achieve the best future for all shareholders. We believed we would be unable to maintain a competitive payout and that our supply base would be progressively eroded if we chose to remain independent. We believed that all shareholders (both Tui and Kiwi) would derive better returns from a merged company. In retrospect, I have no doubt that this has in fact been the case.”

[317] Assessing the evidence overall, I am satisfied that the Tui directors acted responsibly to their shareholders, by taking independent expert advice before agreeing to the merger proposal, and by fairly providing the shareholders with as much information and explanation as was necessary to enable a reasonable shareholder to understand the nature and implications of the proposed merger. The directors did not actively promote the merger until the board had unanimously resolved to agree to the merger terms. At that point it became the directors’ responsibility to inform the shareholders why their board believed the proposed merger was fair and in the best interests of the company and its individual shareholders. At that stage the directors’ duty was not to sit on their hands and say nothing at all in favour of the merger. They acted properly and I accept that they discharged their responsibilities to the shareholders and promoted only what they, as a board, believed was right.

CONCLUSION III

[318] The only issue in this case is price. Mr Hedley and the plaintiffs do not want to turn the clock back. There are few, if any, regrets about the merger itself. The ultimate advantages that it brought in the subsequent negotiations to achieve the GlobalCo merger were readily acknowledged.

[319] It is appropriate, before concluding, to acknowledge what the plaintiffs’ desires were in relation to the merger and this litigation. They wanted the best options for their farming businesses; they wanted all possible information from their directors about the advantages and disadvantages of a merger; they wanted assurances from their board and its advisors that the terms negotiated were justified; they wanted to have what they saw as the assets of Tui valued favourably, not unfavourably; they wanted a fair - “the best” - deal; and above all they did not want to pay a 60c (or any) differential.

[320] Having acknowledged what the plaintiffs wanted, it is important to restate what this case is not about. I deem it important, because at times the plaintiffs seemed to regard their case as in the nature of an appeal from the merger and its terms, rather than as a claim based on a conspiracy of deceit supported by professional negligence. It is important to state clearly that the Tui directors were not sued in respect of the deal they negotiated (in the sense of whether the merger was the best business option for the Tui shareholders), they were sued in deceit.

[321] By the same token, this case is not about different marketing strategies or differences in accounting policies or about business inefficiencies or even incompetence. Nor is it about any failure by the Tui directors to change Tui’s accounting policies, or to forecast change to future accounting policies in the event the merger failed. Nor is it about alleged failure to successfully renegotiate the merger terms after the special resolution failed on 20 August 1996.

[322] The plaintiffs did not impress me as understanding the true nature of their case however, as the following extract from the evidence of Mr Doull illustrates:

“Cross-Examined by Mr Hodder

Why are you one of the plaintiffs? Because I feel it is necessary to be one of the plaintiffs.

You voted for the merger in 1996? I did.

What do you know now that you did not know then? Because I voted for the merger does not mean I was 100% happy with the merger terms and I was suspicious that Tui was undervalued and this Court proceeding is a chance to find out why.

Do you understand the nature of the Court proceeding? To the best of my ability.

You understand that it says that the Tui directors, Mr Young and Mr Norgate engaged in a plan of deception of the Tui shareholders? That is not the reason why I am here.

You understand that the Court proceeding says that the Tui directors, Messrs Young and Norgate engaged in a plan of deception of the Tui shareholders? Yes I do.

You understand your basis of your claim is a plan of deception? Yes.

What is the basis for that? What do you know now that you did not know when you voted in favour of it in 1996? The fear of loss of supply was not eventuated and I voted for that reason because of fear of Tui being blown apart with a loss of supply. To my mind it did not eventuate and I was not happy with that.

Why do you think it did not eventuate? At the time we voted it was a possibility.

Yes? And it was in the [EY] report and I had no reason to disbelieve that.

I think you said the supply loss risk did not eventuate? The supply loss that was bandied around and the supply applications to Kiwi that were said to have been there did not happen.

Do you mean there was no loss of supply risk at the time you voted in 1996? No there was a huge risk of supply loss when I voted in 1996.

I know. Which is why you are here now? Because I think that I was not happy with paying the 60c odd differential - I felt as though Kiwi in the long run was under-valued and I would like to find out.

I don’t imagine any of the Tui shareholders were happy about the 60c differential, you agree with that? I agree with that.

That is hardly a reason to suggest there was a plan of deception by the Tui directors does it? By Kiwi directors.

Tui directors? The information we received sounded alright at the time but I believe that in reality that it might not be so. That is what we are here to find out.

Do you believe you were lied to in 1996? By our directors.

By your directors? I hope not. It is a possibility.

You know those directors? Some of them.

Which ones do you know well? I know Barry Garrity the best.

Think he is likely to be party to lies to the shareholders? Not Intentionally.

Lies are intentional? They are sometimes not lies, they do not have to be lies to mislead somebody.

We have two questions. Do you think you were lied to? Not Intentionally.

Do you think you were misled? Yes.

What about? About the real value and the livelihood of the Tui company. It seems to always be put down and undervalued in my opinion.

Anything else? When Kiwi dairy company changed legislation that enabled them to pick up suppliers, that is not a very comfortable way of going into a merger in my opinion.”

[323] Likewise, Mr Hedley’s view of the case against the Tui directors was based on nothing more than suspicion:.

“Cross-Examined by Mr Hodder

Do you know who initiated the merger discussions between Tui and Kiwi? . . . no.

Who did you think then initiated the merger discussions? I do not know.

Do you know now that it was a Tui initiative? Yes.

Did that surprise you? No.

Why do you think Tui approached Kiwi? Companies are approaching companies all the time, just normal.

Is it not because the Tui directors saw the best interests of Tui shareholders as being in a merger? I am not a Tui director so I cannot answer that.

. . .

Do you know now that Kiwi wanted a 90c differential in those negotiations? Yes.

And that Tui originally wanted no differential? Yes.

And you know now that negotiations broke down when Tui got up to 50c and Kiwi came down to 60c? I knew it was when Kiwi came down to 60c.

Do you know now that when those discussions broke down Tui began the exploration of the loyalty contract? Yes.

And you know now that when those talks broke down, Kiwi’s board moved to ease the terms on which Tui shareholders could switch to Kiwi? Yes.

Do you know that around that time Tui directors approached [NZDG] to see if a merger with them was an option to the merger with Kiwi? Yes.

And do you know now that [NZDG] said “no thank you”? Yes.

In your counsel’s opening . . . he said, in relation to the resumption of merger negotiations, “obviously something had changed to cause a 180 degree turn within three weeks”. Is that your view as well? Yes.

What do you think happened? I do not know.

Did you think that somebody had been corrupted in the process? Could have happened.

Is that why you asked interrogatories of the Tui directors enquiring what redundancy payments they received? I am not counsel who asked the question.

. . .

Are you aware Mr Ross-Taylor answered that question, that “any payment I received [was] in line with Tui’s longstanding retirement policy etc”? I have not seen the answer.

Did you know [a subpoena] has recently been served asking for details of contracts or payments made by Kiwi or any Kiwi subsidiary to Mr Ross-Taylor between April and December 1996? I know he has been served with a subpoena to deliver documents. . . . I know we are wanting that information.

Why? Because we want to know what he was paid.

Is that because you suspect he was paid sufficient to serve Kiwi’s interest rather than Tui’s? Yes.

If I tell you that his answer to the subpoena is the same as his answer to the interrogatories, are you satisfied? There are a lot of ways of hiding things.

So I take it from that you still suspect Kiwi paid someone some money to make, in effect, a bribe to make this merger happen? We cannot rule that out.

Does that mean the answer to my question is yes? Yes.

And the same reason lies behind the questions about the redundancy contract between Tui or Kiwi and Mr Murdoch, is that right? Yes.

So . . . you still suspect the possibility that Kiwi may have paid money to Mr Murdoch to bring about this merger? It is a possibility.”

[324] Neither of the above extracts of evidence come close to establishing any evidence of deceit. In fact Mr Doull does not even assert deceit. At best the evidence is of mere suspicion only and does not approximate to the pleadings.

[325] The following extract from Mr Russell’s evidence reflects the plaintiffs’ lack of understanding (perhaps reinforced by advice from their expert advisors), that any agreement to pay a differential will depend upon the relative bargaining strength of the parties, and the quantum of a differential will derive from commercial rather than purely financial considerations:

“Cross-Examined by Mr Hodder

Tell me about [the] Moa Nui [merger with Kiwi], why was that abysmal? I did not believe that to [be] a good deal for the ex Moa Nui suppliers as they too had to pay to become part of the Kiwi company.

U mean there was a differential? Correct.

So even if the former Moa Nui shareholders had done financially better, notwithstanding that differential, you would still say that was not a good or successful merger? I have always been of the belief, personally, that a merger is a merger and you combine assets of both companies at no cost to the suppliers and you move forward from there as a united group.

. . .

So am I right in thinking you would view a proper dairy company merger as one where both the old companies go in on equal terms? Correct.

And if they do not that it is not sort of the right way to do a merger? That is my personal belief.

Do you think that view would be shared by quite a few other former Tui shareholders? Correct.

Was there a feeling in 1996 that this looked more like a Kiwi takeover than a merger? Correct.

And that was not very attractive? Correct.

. . .

Questioned by the Bench

Did I understand your philosophy to be that a differential should never be paid in the situation of a merger of two companies under any circumstances?

That is my personal opinion. Can I elaborate? Because I believe as a supplier of one company we have already paid to build that company - the bricks, the mortar, the stainless steel etc - likewise, other suppliers have done the same with their company and I cannot for the life of me see why two companies cannot shake hands, join together and go forward for the betterment of myself and my fellow suppliers without having to pay excessive differentials.

Excessive differential is one thing? Differential full stop.

But you also believe in equality of position in a merger situation from what you said? Every should go forward equally and by that I mean we need to go forward in unison and everyone in the combined company needs to go forward together.

But forgive me if I am wrong and I am not an expert in dairy company mergers. isn’t the purpose of a differential to achieve equality of position as between the two companies proposing to merger their businesses? Correct and I firmly believe there was not an equality on this occasion and that is the issue, because of the differential. I firmly believe that Tui suppliers did not need to pay to become part of the new Kiwi company.

Do you still regret the merger? No.”

[326] The following extract from Mr McCarthy’s evidence highlights the plaintiffs’ inability to establish a motive for the Tui directors to deceive the shareholders:

“Questioned by the Bench

The tenor of your evidence appears to be that from the time the failed merger negotiations were revived, you say the Tui directors were determined that the merger would go through? Yes.

On terms unfavourable and unfair to the Tui shareholders? That is what I believe.

And thus contrary to good business sense and against the shareholders interests? Yes.

Perhaps if I put that in colloquial terms, you are effectively saying that the Tui directors knowingly and intentionally sold the shareholders down the river? Sold them short.

Can you tell me what you say motivated the Tui directors to act in a way contrary to the company’s interests, their own interests and commercial reputations, and contrary to the shareholders interests? No I cannot.

Can you think of any possible reason why they would do that? Perhaps they were unaware of the true position Tui was in prior to the merger. Perhaps the situation was worse than we were told. I do not know but they had [an] obligation and responsibility to know what position we were in and how we were likely to be able to compete with Kiwi for the long term. And I believe that their responsibility was to the Tui company in the first instance.

Do you accept that things can change in the commercial world and the market place sometimes quite rapidly? I do.

Do you still regret the Kiwi/Tui merger? I believe that if the merger had not proceeded we as suppliers would probably be better off than we have been in the last 4 years.

Can you put a figure on that for me? At least the differential. Many of the smaller companies that Tui had previously been out performing and consistently out performed, have caught up and paid out amounts over the Dairy Board base over the years of the Kiwi/Tui merger. Companies that we previously had been benchmarked against merged. Bay Milk was merged with Dairy Group at no cost to them and NZDG has competed with Kiwi on payout over those years.

In fairness those matters you tell me about are hindsight matters are they not? They are.

And you accept judgment calls have to be made as and when they need to be made and based on information they have at the time? I do.

Just [as] Tui shareholders had to make their judgment calls on how to vote on each occasion? Yes.

Anything else you want to say to me? With the vote that failed on 20 August. Our directors had an opportunity to maximise the advantages that our company had and go it alone, rather than pursue the merger. There was an opportunity there where no loss of supply could occur for that season. And no opportunity was made of that position.”

[327] The final extract, taken from Mr Hedley’s evidence. confirms the plaintiffs’ fundamental belief that, if the historical accounting differences had been normalised, no differential would have been agreed to and, if Tui’s future accounting policies had been changed, Tui would have flourished as a stand-alone company. Mr Hedley’s only explanation for such fundamental failures was a conspiracy of deceit:

“Cross-Examined by Mr Hodder:

The information that persuaded you that the merger was not in the interest of Tui shareholders was, I think if I have understood you, to do with Kiwi’s accounting policies, is that correct? That was one of the things.

What else? Kiwi had many so-called advantages, it does come down to their accounting policy and it did not appear to me that they were getting the benefits they should have with that accounting policy and those advantages. I looked at Kiwi instead of looking at Tui and looked at what Kiwi wanted and they wanted Tui Milk to make Kiwi bigger, they wanted a part of the domestic market which Tui had, they wanted the power which would come with the 25% of the industry - the power of veto - and they wanted Tui to pay their debts.

Are you seriously suggesting that Tui directors were not aware of all that? They should have been.

If they were, and I am sure the evidence will show that they were, then does it not simply come down to your opinion of the merits of the merger? I am only one person.

The difference is that you are here in court [saying] you are entitled to substantial damages and I am trying to establish whether all we are talking about is that you thought the merger was a bad thing and Tui directors thought it was a good thing? I am the representative plaintiff and there are roughly 280 other plaintiffs.

Is there more to your claim than the proposal that you thought the merger was a bad thing, and presumably so do your co-plaintiffs, and that the Tui directors and those who voted for it thought it was a good thing? Yes.

And that is that there was deceit on the part of the Tui directors? Yes.

And by the Chairman of Kiwi? Yes.

And by [the] Chief Executive of Kiwi? Yes.”

[328] As is clear from the above extracts of evidence, whilst the plaintiffs harboured suspicions they were unable to pinpoint any evidence of actual deceit on the part of the Tui directors. The suspicion they harboured even led some to approach the Serious Fraud Office following the merger, to ascertain whether any fraud was evident in the merger transaction. After a hearing involving some eight weeks of evidence. I am unable to disagree with the conclusion of the Director of the Serious Fraud Office, who advised the complainants as follows:

“We can not comment on the commercial viability of the merger or whether the offer was fair to the Tui shareholders. The role of the Serious Fraud Office is to investigate matters of serious or complex fraud. It is not its function to act as a public watchdog by intervening in company mergers where some of the parties may hold strong views regarding the efficacy of the merger.

. . . most of the material provided to us by the complainants together with the issues go to the commercial viability of the merger . . .

I . . . conclude that there are no grounds to justify an investigation into allegations of serious fraud. Neither is there evidence to suggest that any of the figures supplied to shareholders were false or that anyone has knowingly quoted or published any information which is demonstrably false.”

JUDGMENT

[329] There having been no deceit proved on the part of the Tui/Kiwi defendants or negligent misstatement on the part of Messrs Silver, Cullwick or Jensen, the plaintiffs’ case is dismissed.

COSTS

[330] The defendants having succeeded are entitled to the costs of defending this litigation. The parties expressly requested that any issue over costs be left for argument on a later date. In the event that costs cannot be agreed the parties have leave to apply in relation to costs.