[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 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.
[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 $lm 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:
| Dairy | 1995/96 | 1994/95 | 1993/94 | 1992/93 | 1991/92 | |||||
| Company | Base @ 360.00 | Base @ 300.00 | Base @ 290.00 | Base @ 325.00 | 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 ("HEMP") but was careful not to mention that to Till. 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 I 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, 10c; 20c; 20c; 10c: 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 | 1996/97 | 1997/98 | 1998/99 | 1999/2000 |
| (c/kg milksolids) | ||||
| Kiwi | 48 | 48 | 50 | 54 |
| Tui | 35 | 37 | 40 | 42 |
| Merged | 50 | 50 | 55 | 58 |
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 | 1995/96 | 1996/97 | 1997/98 | 1998/99 |
| Source Retention | To Deduction from Payout Reserves | |||
| 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) cash flows - 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 II 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 I 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.
[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 plaintiffs 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:
| 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 | 5.23 c |
| Average over 3 years = 4.71cents | |||
| EXTRAORDINARY PROFIT | |||
| Effect of Deferred Lease | 3.73c | 3.71c | 3.52c |
| Premium ($4.763 million per annum) | |||
| 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 MI 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. 35
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 still 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.
[99] Mr Hagen said the real issue in assessing the merger between Tui and Kiwi was not bound by Tui's "worth" but by the future projected benefits from a merged company and any cost involved in securing those benefits. For that reason EY's brief did not require stand-alone valuations of Tui and Kiwi or a valuation of the merged entity , but required an analysis of the benefits to Tui suppliers from the merger and a comparison with any costs to them of obtaining those benefits. An analysis of the two companies' historical results could only have relevance to predicting future outcomes. Mr Hagen would have expected BY to review the reasons for historical payout differences, to clarify likely future performance and outcomes, and the future benefits to be derived by the two sets of suppliers and he said BY essentially did this by conducting a forward-looking analysis which compared expected future payout on the same basis for each alternative.
[100] I will come back to this issue in due course.
[ 101] Having introduced the issues, traversed the relevant events, outlined the causes of action, explained the nature of shareholding in a co-operative dairy company and why a separate valuation of Tui shares was not required in 1996, I turn to identify the determining factors in this case
[102] Notwithstanding the myriad of factors put forward at trial and the apparent complexity of the pleadings, five basic factors are determinative of the issues in this case:
Whether there was jurisdiction to hold the second EGM on 27 September 1996.
Whether there is proof of reliance by the plaintiffs on any pro-merger campaign conducted by the Tui/Kiwi defendants and/or proof of reliance on the EY Jensen report, resulting in the critical increase in pro-merger votes at the second EGM on 27 September 1996.
Whether, if it is proved that the plaintiffs did rely on any pro-merger campaign conducted by the Tui/Kiwi defendants, there is evidence of material deceit by those defendants in their conduct, and which caused a sufficient number of shareholders to vote in favour of the special resolution on 27 September 1996. Whether, if it is proved that the plaintiffs did rely on the EY Jensen report, there is evidence that the report contained negligent misstatements and these caused a sufficient number of shareholders to vote in favour of the special resolution on 27 September 1996.
Whether, if it is proved there was any material deceit by the Tui/Kiwi defendants and/or negligent misstatements by EY and Mr Jensen in their report, these caused the plaintiffs to suffer any loss.
JURISDICTION TO HOLD THE SECOND EGM ON 27 SEPTEMBER 1996: FIRST CAUSE OF ACTION[103] The issue of whether there was jurisdiction to hold the second EGM on 27 September 1996 is fundamental to the whole proceeding. If the plaintiffs were to succeed on this issue it would be unnecessary to determine the remaining 10 causes of action. The Legislative Scheme
[104] The starting point for determining whether the vote of 27 September 1996 was valid is the governing legislation. The relevant Act was the Co-operative Dairy Companies Act 1949 (repealed by the Co-operative Companies Act 1996) and, in particular, s 24A of the Act.
[105] Section 24A provided the procedural mechanism for effecting a merger between two co-operative dairy companies, conditional on the approval of both companies' supplying shareholders. Essentially the mechanism was that of liquidation, although not a liquidation in the usual sense. Section 24A was introduced in 1970 to facilitate mergers and to recognise the nominal value of shares in co-operative dairy companies. It was a unique provision without statutory equivalent at the time, or since. Mergers since its repeal (including the mega merger ofKiwi and NZDG into GlobalCo) have been subject to a different legal regime and have been accomplished by other mechanisms
[106] Under s 24A, merging companies could agree to adjust the value they brought to a merger by a number of means. For example: by way of shares plus cash; by way of redeemable shares; or by way of a differential. In each case the purpose was to equalise the ascertainable difference in value leading to payout for future years.
[107] Section 24A(3) provided a set of procedural steps to be undertaken where the boards of directors of two co-operative dairy companies agreed a proposal to merge. These procedural steps were:
(a) The transferor company forwards to each member of the company a detailed statement of the proposed transfer, sale or other arrangement, and calls a meeting of all members by giving not less than 14 clear days' notice of each member specifying the time, place, and the object of the meeting which shall be to vote on the proposed transfer, sale, or other arrangement; and (b) A resolution is passed at the meeting, by a majority of the members entitled to vote at the meeting, that the proposed transfer, sale, or other arrangement proceed in accordance with the proposal or in such amended form as may be resolved; and (c) The transferor company notifies the transferee company of the resolution passed in accordance with paragraph (b) of this subsection in its proposed or amended form; and (d) The transferee company forwards to each of its members a copy of the detailed statement mentioned in paragraph (a) of this subsection in such amended form as may be resolved in accordance with paragraph (b) of this subsection, and calls a meeting of all members of the transferee company by giving not less than 14 clear days' notice to each member specifying the time, place, and the object of the meeting which shall be to vote on the proposed transfer, sale or other arrangement; and (e) An extraordinary resolution is passed at the meeting called in accordance with paragraph (d) of this subsection that the proposed transfer, sale, or other arrangement proceed in accordance with the terms of the resolution passed by the members of the transferor company in accordance with paragraph (b) of this subsection; and (f) The transferee company notifies the transferor company of the extraordinary resolution passed in accordance with paragraph (e) of this subsection; and (g) Within one month of the passing of the extraordinary resolution mentioned in paragraph (e) of this subsection, the transferor company, by giving not less than 14 clear days' notice to each member of the company, calls a meeting of all members at which the resolution passed by the transferor company in accordance with paragraph (b) of this subsection is confirmed by extraordinary resolution.
[108] The introduction to subsection 24A(3) expressly provided that no merger was binding on any member of the transferor company unless each of the above procedural steps had been undertaken. In the present case the transferor company was Tui and the transferee company Kiwi.
[109] Subsection 24A(4) was an exit clause. It expressly provided for any member of the transferor company (Tui) who did not vote in favour of the extraordinary resolution referred to in s 24A(3)(g) above to notify his intention not to supply the transferee company (Kiwi) and require the company to purchase his or her shares for the amount paid up prior to liquidation.
[110] The point at issue in the first cause of action is the plaintiffs' contention that s 24A(3)(g) permitted the calling of only one meeting of members of the transferor company and not more than one meeting. Mr Henry submitted that the word "a" in the context of "a meeting of all members" meant one meeting only and could not be used to justify more than one meeting, relying upon the decisions in Combridge v Harrison 64 LJMC 175; Re Low [1981] I QB 147 and Re Whitely, Bishop of London v Whitely [1910] 1 Ch 600. None of those decisions are particularly helpful however.
[ 111] A second issue raised by the plaintiffs is whether the reference to "members" in s 24A(3) of the Act referred to supplying shareholders only or to all members of a dairy co-operative, including non-supplying or dry shareholders. Mr Henry submitted that the term "members" was not restricted to supplying shareholders only and that votes on an extraordinary resolution in s 24A(3)(g) were not weighted to the size of each supplying shareholders' supply.
[112] A third issue related to the timing of the second EGM on 27 September 1996. Mr Henry submitted that "calls " in s 24A(3)(g) meant the holding of a meeting within the month expressly provided for, not merely the giving of notice within that month of a meeting to be held. It is convenient to deal with this third issue first. In my view the timing in s 24A(3)(g) relates to the giving of notice of a meeting "within one month after the passing of the extraordinary resolution". The word " calls " does not refer to the date on which the meeting, of which notice has been given, must be held. The only timeframe relevant to the meeting called is that it must be held not less than 14 days from the giving of notice.
[113] In relation to the first issue, whether s 24A(3)(g) provided for only one meeting to be called at which a vote on a special resolution to merge two companies could be put, it is artificial to separate out the words " a meeting" from the words "... at which the resolution ...is confirmed extraordinary resolution ". The word "a" should not be singled out and given a meaning isolated from the remainder of the subsection. So long as the transferor company calls" ...a meeting of all members at which the resolution [earlier passed] is confirmed by extraordinary resolution ..." and notice of that is given within the requisite one month timeframe, the statutory requirement will be satisfied.
[114] Mr Henry argued such an interpretation was a "nonsense", submitting that Parliament could not have intended that a sufficient minority be ignored by the holding of repeated meetings within specified timeframe of a month until a resolution was passed. He said Parliament could not have intended directors to continue to force meeting after meeting in order to "brow beat" those who had voted against a resolution. Further, that Parliament could not have intended to create obligations on the directors which put them in a position where they were unable to accept the failure of an extraordinary resolution.
[115] I am unable to place the interpretation for which Mr Henry contended on the legislative provisions. It is clear from a reading of s 24A(3) that Parliament has put in place a careful series of procedural steps within a temporal framework requiring a 75% majority at each voting stage and expressly providing in s 24A(4) for any defeated minority of the transferor company to withdraw their supply and be paid out. The whole tenor and emphasis of s 24A(3) is to ensure that no member of a transferor company is bound by a merger "unless" each and every one of the procedural steps expressly provided for has been undertaken. The emphasis in s 24A(3)(g) is imparted by the word "unless". No merger is binding unless all of the requisite majority votes are obtained and within the timeframes specified. Thus there is no licence to "brow beat" in the subsection. Nor is there any compulsion to call more than one meeting. Nor is there a prohibition on the calling of more than one meeting, so long as notice of the meeting is given within one month of the earlier passing of the resolution and the period of notice is not less than 14 days.
[116] That leaves the issue of whether the word "member" in s 24A(3) equates to the term " supplying shareholder " in the definition section of the Act. The definition of "supplying shareholder" in the Act is a shareholder who had been continuously supplying the company during the current financial year. There is no definition of the term "member " in the Act. Section 9 of the Act provides that only supplying shareholders were entitled to vote at any meeting of the company or on any postal ballot.
[117] The First Schedule to the Act and Tui's Articles of Association provide interpretative insight. The First Schedule to the Act contains model articles of association for co-operative dairy companies. The model articles provide, inter alia, for "Votes of Members", The model articles were incorporated by Tui in its own Articles of Association, the interpretation section of which includes the following relevant definitions:
"Member" or "shareholder" means the holder for the time being of a share of the Company. "Standard of shareholding" or "share standard" means the number of kilograms of milkfat in milk or cream or the number of litres or kilograms weight of milk from time to time fixed in accordance with these Articles in respect of which the supplier thereof is required to hold one share in the Company. "Supplying shareholder" has the same meaning as the Co-operative Dairy Companies Act 1949: 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.
[118] The Tui Articles expressly provide for "Votes of Members " as follows:
66 Votes may be given personally or by proxy. 68 On a show of hands, every supplying shareholder present in person shall have one vote. 69 Upon a poll every supplying shareholder present in person or by proxy shall be entitled to [vote on a weighted basis according to the number of shares held] 70 Upon the holding of a postal ballot, every supplying shareholder shall be entitled to the number of votes as set out in [article 69]. 71 All other members shall be entitled to be present at all meetings, but shall not be entitled to any vote in respect of the shares held by them, whether on a show of hands, or upon a poll, or otherwise.
[119] Article 69 includes a table setting out the weighting accorded to size of shareholding. For example, the holder of 6,600 shares is entitled to two votes, and the holder of 33,000 shares is entitled to 20 votes. Thus the difference in voting power of a small shareholder and a shareholder in the category of Mr Williams has real significance. The size of a shareholding will also clearly be a critical factor in analysing any degree of risk from supply loss.
[120] I am satisfied from an analysis of the Act, the model articles in the First Schedule to the Act and Tui's own Articles of Association that, although the terms "members" and "shareholders" are used interchangeably in the Act and "members" is the term used in s 24A(3), only supplying shareholders were entitled to vote at meetings. Whether on any occasion votes were taken on a weighted basis would depend on whether they were taken by a show of hands, by poll, or by ballot. Whether the voting was by show of hands or by poll at the EGMs on 20 August and 27 September 1996 has some relevance to the issue of reliance and I will deal with this in more detail when analysing the voting numbers required to achieve the requisite 75% majority at the 27 September 1996 EGM.
Conclusion
[121] As a matter of interpretation I am satisfied that the second EGM on 27 September 1996 was validly held. Even if it were not, the Court would be obliged to take notice of the fact that the plaintiffs' anti-merger group made a conscious decision to participate in that meeting and vote, notwithstanding a legal opinion advising that they could seek an injunction to stop the meeting. A further matter of note is that after the special resolution received a positive vote at the meeting none of the plaintiffs sought to exercise their express rights under the exit provisions in s 24A(4). Rather, each plaintiff elected to become a supplying shareholder in the merged company and to enjoy the fruits of merger. It is clear that the plaintiffs do not wish to turn the clock back on the merger: rather, they seek compensation for having been required to pay a 60c differential to merge, when they say they should have received a differential to merge because Tui' s net tangible assets ("NTA") were of greater value than Kiwi's.
[122] The first cause of action against Kiwi and the chairman and directors of the Tui board cannot succeed.
RELIANCE: ALL REMAINING CAUSES OF ACTION
Introduction
[123] Having found there was jurisdiction to hold the second EGM on 27 September 1996, the next critical issue is that of reliance. Proof of reliance is fundamental to all of the remaining causes of action: counts 2- 7 alleging deceit by the Tui/Kiwi defendants in tort and in the course of trade; and counts 8-11 alleging breach of duty of care by EY and Mr Jensen in discharging their contractual terms of engagement. It is logical to deal with the issue of reliance at this point because even if there were cogent evidence of deceit by the Tui/Kiwi defendants or negligent misstatement by EY or Mr Jensen, the plaintiffs must still prove that they relied on such deceit or negligent misstatement when casting their votes on 27 September 1996.
[124] Within the overarching issue of reliance there are a number of aspects which require consideration. The immediate question that arises is whether proof of actual reliance by individual plaintiffs is necessary. If it is, the evidence of the voting pattern does little to assist the plaintiffs' case. If it is not, and the plaintiffs as a class are able to rely on the representative plaintiff, Mr Hedley, his evidence does not support their case at all, as he did not rely on any representations by the defendants or on the EY Jensen report. Another relevant aspect is the nature and body of information that was available to voting shareholders and whether the inference can be drawn that any plaintiff relied on any particular documents or statements and whether those documents were pro or anti the merger.
[125] Timeframes are also relevant. The bulk of the deceit allegations contained in the second cause of action are confined to the period 20 August to 27 September 1996. So too are the allegations of negligent misstatement levelled against EY and Mr Jensen. The deceit allegations in the third and fourth causes of action concerning the "audit" of the merger model relate to the period before the first EGM on 20 August 1996. The representations as to supply loss in the fifth and sixth causes of action span the period July to 27 September 1996. The seventh cause of action is in a category of its own. It does not allege reliance on a deceitful misrepresentation but deceitful concealment of a material transaction: namely, the conditional merger with Mainland. It is pleaded against Kiwi and Mr Young. Kiwi is however in a different position from the other defendants for reasons which it is convenient to now state.
The Suit Against Kiwi
[126] Even without the issue of reliance, it is impossible for the plaintiffs to succeed in their suit against Kiwi. As analysis of the pleadings makes clear, the plaintiffs seek the tort measure of damages for loss against all of the defendants -the loss being the alleged difference between the price of the 60c differential paid to merge with Kiwi and the fair value of the shareholding received in Kiwi. For obvious reasons, the plaintiffs have not sued in contract for damages for a promised benefit they have not received. (That does not of course mean that the contractual terms within which Messrs Silver, Cullwick and Mr Jensen were engaged to conduct their independent review do not define or delimit their tortious duty of care in carrying out that review.)
[127] Kiwi however is sued as a representor which also became a party to the merger contract. It cannot therefore be sued in tort for damages arising from any material misrepresentations it made in respect of that contract: see Shing v Ashcroft [1987] 2 NZLR 154 (CA), a case concerning negligent misrepresentation and pre- contract negotiations, where the Court of Appeal held (at 1570158):
In pre-contract negotiations there may be, ...a misrepresentation of fact. If material and made negligently, this may at common law entail liability in tort upon the maker of the statement. In New Zealand, by s 6 of the Contractual Remedies Act 1979 an action for damages for negligence is nevertheless barred against the maker if he is a party to the contract. The other party, if induced by the statement to enter into the contract, is entitled to damages from the party to the contract by or on behalf of whom the misrepresentation has been made, as if the representation were a term of the contract that has been broken.
[128] The same principle is equally applicable to deceitful misrepresentations in pre-contract negotiations. In Walsh v Kerr [1989] 1 NZLR 490,493 (CA), the Court of Appeal stated:
...it is important to bear in mind that in New Zealand damages for a misrepresentation inducing a contract are now, by s 6 of the Contractual Remedies Act, recoverable only on the footing of breach of contract. ...We are not sure that the profession generally appreciate the effect of the Contractual Remedies Act on damages for misrepresentation.
[129] The suit against Kiwi in the second, third, fifth and seventh causes of action must therefore fail on the basis that Kiwi, as a party to the merger contract, cannot be sued in tort in relation to any pre-contractual representations it made. The remaining two causes of action in which Kiwi features, the fourth and sixth causes of action, allege tortious deceit pleaded as misleading and deceptive conduct in the course of trade. These will be dealt with later under the heading Fair Trading Act Claims.
[130] Before moving away from the issue of Kiwi's special position as a party to the merger contract, it is appropriate to also briefly consider the position of the remaining Tui/Kiwi defendants in relation to tortious deceit. Although s 6 Contractual Remedies Act 1979 does not preclude a common law action against an agent in deceit or in tort (Mandersan v Vialich (1992) 5 TCLR 124 (HC)) or against company officers and employees of a contracting party (Tak and Ca Inc v AEL Carp Ltd (1995) 5 NZBLC 103, 887 (HC)), it is of some relevance that all of the remaining Tui/Kiwi defendants, except Mr Norgate, were in a position close to being actual parties to the contract. Each of them had a personal interest in the merger and its outcome. Mr Young was a shareholder in Kiwi, and 11 of the 12 Tui directors were shareholders in Tui, the other party to the merger. The twelfth Tui director, Mr Gough, had an interest in a Tui supplying farm. Although, as noted, s 6 Contractual Remedies Act does not preclude their being sued in tort for deceit, their respective shareholdings in Kiwi and Tui and their real and personal interest in the merger outcome has relevance when considering any possible motive they could have had to deceive themselves.
Is Proof of Actual Reliance by the Individual Plaintiffs Necessary?
[131] Mr Hedley successfully applied to have himself appointed as representative plaintiff in this proceeding on the basis that all of the plaintiffs had the same causes of action "arising as shareholders of the company" and "the damage claimed is that of the shareholder". In his affidavit in support, Mr Hedley said the proceedings arose out the conduct of the defendants "to obtain sufficient voters (be they plaintiffs or not) to change their vote so the special resolution would pass" [emphasis added].
[132] The appointment of Mr Hedley as representative plaintiff has however created a problem for the plaintiffs in relation to reliance, as he has categorically disavowed relying on any representations made by the Tui/Kiwi defendants or the conclusions of the EY Jensen report. The plaintiffs have therefore put themselves in the position of having to rely on the evidence of the other shareholders who were witnesses at the trial, or on inferences that a percentage of unidentified shareholders, whose votes and reasons for voting are unknown, must have voted in reliance on misrepresentations by the Tui/Kiwi defendants or on the conclusions in the EY Jensen report.
[ 133 ] Mr Henry argued that Mr Hedley was entitled to bring a representative claim, based on the theory that other shareholders had relied on Tui/Kiwi representations and the EY Jensen report, even though he had not himself relied on any representations or on the report. Mr Henry reasoned that Mr Hedley could do this because he was in an "interdependent relationship" with the voting shareholders as a class. In support of this reasoning, he referred to the principles in Anns v London Borough of Merton [1978] AC 728 (HC). Attempting to apply those principles to the issues of reliance in this case, particularly as regards to the EY Jensen report, Mr Henry pointed to the following "facts": that the report was commissioned to persuade the Tui shareholders to vote for the merger on 27 September 1996; that the supplying shareholders as a class had been charged as a class to decide if they would vote in favour of the merger; and that the class by its collective decision in passing the special resolution on 27 September had relied on the EY Jensen report and thus bound the class as a whole. If the EY Jensen report had contained negligent misstatements, the class as a whole had suffered damage. By analogy, Mr Henry's reasoning must have been intended to apply to representations by the Tui/Kiwi defendants also.
[134] Mr Henry further submitted that there was no basis for the Court to limit the class by requiring proof of individual reliance by the supplying shareholders. He submitted that it was sufficient if all of the shareholders knew the basic features of the EY Jensen report. On the basis of such knowledge the "decision" to vote for the merger was not an individual decision but a collective decision which affected all of the shareholders, even those who had not relied on the report.
[135] Mr Henry did however make the further submission that members of a class who as "individuals" made investment decisions, necessarily limited the class by the need for individual reliance in such decision-making. He argued that this was not the case here however, referring to the House of Lords decision in Caparo Industries PIc v Dickman [1990] 2 AC 605. In Caparo their Lordships, after comprehensively reviewing the elements of duty of care in the context of a statutory audit of a public company, observed (at 620-621):
The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it.
[136] In the present case there is no contest that the Tui directors were under a duty to act in the shareholders' best interests and no contest that EY owed a duty to exercise reasonable care, diligence and skill in the preparation of their report, or that Mr Jensen was under a similar obligation to take care. Nor was it in dispute that statements made by the Tui/Kiwi defendants were intended to influence and be acted upon by shareholders or that the conclusions in the EY Jensen report would not have influenced some shareholders to vote in favour of the merger. The question to be asked however is whether proof of individual reliance on alleged misrepresentations or misstatement is necessary in the circumstances of this particular case. As their Lordships stated in the above passage, not only is the provider of advice or information required to anticipate that those for whom it is intended win rely on it, the question also arises as to whether the intended recipient "did in the event rely on it", As their Lordships also observed in Caparo at 635:
The damage which may be occasioned by the spoken or written word is not inherent. It lies always in the reliance by somebody upon the accuracy of that which the word communicates and the loss or damage consequential on that person having adopted a course of action upon the faith of it. In general, it may be said that when any serious statement, whether it takes the form of a statement of fact or of advice, is published or communicated, it is foreseeable that the person who reads or receives it is likely to accept it as accurate and to act accordingly. [emphasis added]
[137] As Mr Lusk pointed out, the decision in Anns v Merton has been overruled on a number of occasions: see, for example, Murphy v Brentwood District Council [1991] 1 AC 398 (HL); Invercargill City Council v Hamlin [1996] 1 NZLR 513 (PC); and Yuen Kun Yeu v AG of HongKong [1988] AC 175 (PC).
[138] Of direct assistance in assessing whether proof of individual reliance is necessary in this case are two comparatively recent decisions of the Court of Appeal, both delivered by Blanchard J. In the first, Brownie Wills v Shrimpton [1998] 2 NZLR 320 (CA), the Court considered whether solicitors for a company owed a duty of care to one of the directors who was not a client of their firm, in circumstances where that director had signed a guarantee of indebtedness for the company in the presence of the solicitors. At 324 Blanchard J said:
A plaintiff who sues in tort alleging economic loss arising from negligent advice given to the plaintiff by the defendant, including a failure to give advice, needs to prove actual reliance upon the defendant's advice or that the absence of advice from the defendant led the plaintiff to believe it was safe to proceed. Of greater importance in this case, the plaintiff must also show that it was reasonably foreseeable in the circumstances that the plaintiff would rely on the defendant as adviser in the way and to the extent that he did; and that it was accordingly reasonable for the plaintiff to do so. Whether that was so in turn depends upon whether the reliance was induced by the conduct of the defendant in assuming or appearing to assume responsibility for advising the plaintiff.
[139] The second decision is Boyd Knight v Purdue [1999] 2 NZLR 278 (CA). In that case the Court of Appeal found that even where a class is represented by a representative plaintiff, if actual reliance is a necessary element of the tort pleaded, reliance must be shown by each individual represented person. Such reliance must be actual reliance on the representations in issue and not general reliance on a state of affairs. Implicit in the Boyd Knight judgment is a finding that the particular class of plaintiffs were not entitled to rely on the evidence of the representative plaintiff. At 294 Blanchard J said:
[The appointment of a representative plaintiff] was intended to obviate the need for separate evidence from each member of the class. That course appears to have been adopted for the very reason that the plaintiffs were intending to prove only reliance of a general kind upon the audit report. But, contrary to the view taken by the Judge, I am unable to see how a representative could possibly give evidence on behalf of other investors about how each relied upon the financial statements. Some might have thoroughly considered them, some only skimmed them and some might not have bothered to read them at all.
[ 140] As the Court of Appeal found in Boyd Knight, I am also of the view that the present plaintiffs are not, as a class, entitled to rely on the evidence of Mr Hedley as their representative plaintiff. In a case where deceit is alleged, and in a situation where the vote of each shareholder counted, the plaintiffs cannot simply assert a general reliance on information disseminated to all of them as a class but must adduce cogent evidence that they relied upon particular information in voting for the merger on 27 September 1996. I am particularly persuaded to this view because the voting at the 27 September EGM was clearly on a poll and individual votes were weighted according to the size of a shareholders' supply. The situation of a shareholder with the voting power of Mr Williams therefore has to be considered. Given his clear and firm evidence as to the influences that caused him to vote in favour of the merger, it would be a travesty if the Court were to now hold that the vote he (and others) cast five years ago should simply be swept aside.
[141] The decision to vote for or against the special resolution to merge was eminently a decision to be made by individual shareholders and not in the nature of a class decision made on the basis of a general reliance on one particular and identified piece of information. Thus, as in Boyd Knight, it is not possible for a representative plaintiff in this case to give evidence on behalf of 288 other shareholders, as to how each relied upon particular representations and/or the EY Jensen report.
The Evidence of Actual Reliance by the Plaintiffs
[142] Having determined that proof of individual reliance is required in this case, the suit of those plaintiffs who did not give evidence must necessarily founder. That brings me to an examination of the evidence of those shareholders who did give evidence at trial. Mr Hedley's evidence was that he was entirely unimpressed and unconvinced by any pro-merger information disseminated by the Tui/Kiwi defendants and thought the EY Jensen report "rubbish". He voted against the proposal to merge on 16 July and also against the merger resolution at both the 20 August and 27 September EGMs. I will refer to his views again shortly when discussing the nature and extent of the merger information available to voters throughout the period.
[143] Of the other shareholders who gave evidence, only Mr Schaef spoke of changing his vote from "no" to "yes" in material reliance on a pleaded representation -that being the references to supply loss in the EY Jensen report. The only other plaintiff who gave evidence of changing his vote from "no" to "yes" was Mr Gore, who said he did so in substantial reliance on an approach from his ward director, Mr Brown, and because of significant concerns about the polarisation of Tui shareholders.
[144] Evidence as to what effect the EY Jensen report may have had on others who did not give evidence is hearsay and has little weight. In any event Mr Monaghan thought the EY Jensen report did not have much influence on voting at all. He said: When the Ernst & Young/Jensen report was published, I read the whole report. I thought it was quite readable, but not at all surprising in its conclusions. While Tui suppliers in my areas would certainly have taken notice of the Ernst & Young/Jensen report's conclusions, I believe that they would have voted primarily because directors such as Paul Bailey, with his extensive dairy industry experience, and Murray Gough, with his particular commercial experience, were highly respected, and their views were very influential.
[145] In summary, the evidence establishes that only Mr Schaef changed his vote from "no" to "yes" in material reliance on a pleaded representation, namely the supply loss issue in Parts 6 and 9 of the EY Jensen report. Leaving aside for the moment the question of whether Parts 6 and 9 of that report contained any negligent misstatement, it is impossible to say what critical effect Mr Schaefs change in vote had on the percentage increase necessary to obtain a 75% majority vote at the 27 September meeting, but it is outside the realms of possibility that he alone could have made the critical difference. No evidence was given as to the particular weighting accorded to Mr Schaefs vote. For the sake of completeness however, an examination of the voting pattern at the three EGMs follows, to see if this gives rise to any inference about the "change" in vote at the 27 September EGM which Mr Hedley said was caused by "sufficient voters (be they plaintiffs or not)" relying on misrepresentations by the Tui/Kiwi defendants and misstatements in the EY Jensen report.
The Voting Numbers Required to Change the Vote from "No" to 'Yes"
[146] In attempting to analyse what, if anything, the voting pattern reveals, it is appropriate to begin with the 16 July EGM at which the proposal to merge was first put and approved. [147] On the basis of Mr Hodder's calculations, this meeting was attended by some 1,000 shareholders and resulted in a 74.34% vote in favour of the merger. The meeting lasted for over four hours, during the course of which presentations were made for and against the merger. Mr Ross-Taylor spoke on the issue of supply loss, referring to 250 applications having been made by suppliers wanting to switch to Kiwi.
[148] The 20 August 1996 EGM was attended by 950 shareholders. The minutes of the meeting record that it lasted some three and a half hours and resulted in a 67.01% vote in favour of the merger, just 7.99% short of the 75% majority required. There is no record as to whether the vote at this meeting was by a show of hands or poll.
[149] The minutes of the 27 September EGM record that: approximately 1,000 shareholders attended the meeting, the conduct of the meeting was identified, the admission of valid proxies was noted "these totalling 417 and carrying 4,734 votes", and that the result of the poll was 10,400 votes for the resolution and 2,582 against. The resolution was declared as passed by a percentage of 80.11 %. From this record, it is clear that the vote at the 27 September meeting was taken on a poll and therefore was on a weighted basis.
[150] On the question of actual numbers required to change the vote from "no" at the 20 August EGM to "yes" at the 27 September EGM, various calculations were made by counsel and theories advanced. Mr Henry relied on a handwritten document which he thought was probably a "Tui analysis of the 20 August 1996 vote". Based on that handwritten note, Mr Gillespie, who made a submission on behalf of the plaintiffs, had analysed the voting numbers at the 20 August meeting as follows:
..of the 1216 entitled to vote, 192 or 15.8% did not vote, 650 voted for the merger and 374 voted against the merger. This means 63.5% of those voting supported the merger and 36.5% voted against the merger. Those voting for the merger represented 53% of all Tui shareholders.
[151] On analysis it seems that the voting margin between the two meetings could be taken as just under 8%. Therefore an effective vote change of only some 4% was needed to obtain the requisite majority of 75% at the 27 September meeting. The handwritten note referred to by Mr Gillespie is of no real assistance on the numbers issue and its authorship is unclear. It is impossible to draw any inference from the numbers alone as to what influenced the critical 4-8% shift in vote at the 27 September meeting. What the evidence does establish is a greater shareholder turnout at the 27 September meeting and that a greater number of proxies were held. It also establishes that voting was on a weighted basis, whereas it may simply have been on a show of hands at the 20 August meeting.
[152] The percentage movement in approving the merger over three meetings can be summarised as follows: at the 16 July EGM the vote was 74.34% in favour of the merger resolution; at the 20 August EGM 67.02% voted to pass the merger resolution; and at the 27 September EGM 80.11% voted to pass the merger resolution. The evidence indicates that the waxing and waning of support for the merger followed intensive lobbying by both the anti-merger and pro-merger groups and their obtaining multiple proxies. Mr Hedley's evidence was that intensive lobbying by the anti-merger group achieved the critical drop in support between the 16 July and 20 August EGM. This makes it likely that the lobbying campaign conducted by the pro-merger shareholders and directors between the 20 August and 27 September EGMs, coupled with the increased number of shareholders who voted at the 27 September EGM, and the increase in the number of proxies, ensured that the relatively small percentage of additional votes to ensure the requisite 75% majority was obtained.
[153] Mr Lusk accepted that the conclusion in the EY Jensen report would have influenced some suppliers to vote in favour of the merger at the 27 September meeting. But, as he pointed out, it is impossible to draw the inference that the EY Jensen report of itself led to the critical increase in number of pro-merger votes at the 27 September EGM. The voting pattern throughout demonstrated that a substantial majority of shareholders were always in favour of the merger and the reality was that issues such as risk of supply loss and the fear of being left behind had dominated thinking.
The Anti-Merger Information Also Available to Shareholders
[154] Finally (and for the sake of completeness) it is relevant to note that there was a considerable body of anti-merger information also available to Tui shareholders throughout the relevant period. The addition of this anti-merger information to the pool of information available to voting shareholders renders the need for proof of individual reliance on particular representations or the pro-merger report more acute. As their Lordships observed in the passage from Caparo at 635 (quoted above), the damage which "may be occasioned" by information is "not inherent" but occurs when somebody relies on that information and acts in consequence upon it.
[155] Mr Hedley described in fulsome detail the campaign that had been mounted from the outset by the Tui anti-merger lobby group. He contended that the group was disadvantaged by a comparative lack of resources but there is no doubt that the campaign they mounted was both vigorous and effective. The group circulated anti- merger letters to shareholders between 7 June and 20 August, a number of examples of which were produced in Court.
[156] Mr Hedley said the anti-merger lobby group became large enough and sufficiently co-ordinated to mount a serious challenge to the case being put by Tui and Kiwi and its members made numerous direct approaches to Tui suppliers in order to obtain as many "no" votes as possible. He himself canvassed hard for "no" votes or for proxies in lieu. At meetings and on a one-to-one basis, he strongly advised shareholders that the merger was a "bad deal"; that the 60c differential was not a "fair price" and not justified; that loss of supply was not a reality; that Tui's position in the domestic market was buoyant; that Kiwi desperately wanted Tui's domestic market; and that Kiwi also wanted Tui's assets with which to pay its debts.
[157] When the Tui shareholders were notified that a second EGM was to be held on 27 September so that the special resolution could again be put to the vote, Mr Hedley and his anti-merger group took legal advice on the possibility of obtaining an injunction. However, as they did not wish to incur legal fees or give an undertaking as to damages, they determined on the option of again trying to win the vote by lobbying. Accordingly they renewed their anti-merger efforts, lobbying shareholders on a one-to-one basis, attending meetings to speak against the merger, and collecting proxy votes.
[158] Mr Hedley summarised in evidence the information which he thought Tui shareholders had when casting their votes at the EGMs on 20 August and 27 September 1996:
Cross-Examined By Mr Hodder
Can we assume you voted against the merger on each occasion it was put up to Tui shareholders in 1996? Yes. On each occasion were you sufficiently informed to vote? Yes, urn sorry . We would have liked more information but I was informed enough to make my decision. And the other 1,200 or so shareholders that voted, were they informed enough to make their decision? I believe if they had had the right information they could have made a better decision. What was the information that you had that they did not? The different accounting policies of the two companies. And where did you get that information from? Federated Fanners. Wasn't that information translated into the circulars that the anti-merger group put out? It was. So they had that information? Yes. But unless shareholders were familiar with that information, it was very hard to understand. Do you mean that if they got more circulars they would have understood better? It needed explaining to them. Is that not what your circulars were designed to do? [Tried] to do, but fanners on a one-to-one basis can understand it. Didn't you make the same points, either you personally or your group, at various meetings of Tui shareholders throughout the process? Yes. But they still didn't understand it? We were only dairy fanners. You understood it, but they didn't? I understood it and some others understood it. So does that mean that only those who voted against it understood it? I can't tell if some of the ones that voted for it understood it. If they understood it why do you say they voted for it, that is, if they understood the analysis that persuaded you to vote against, why did they still vote for the merger? I said I don't know those ones voting for it, whether they did understand or not, they may have understood, I do not know.
[159] In quoting only from Mr Hedley, I am not overlooking the evidence of strenuous efforts also made by other shareholders to disseminate anti-merger information. I refer particularly to the evidence given by Mr Fuohy of efforts made by a Pahiatua group of accountants, and the evidence given by Mrs Millard. The overall effect of their evidence and that of Mr Hedley is to demonstrate that a considerable body of information was available to shareholders, both pro and anti the merger. In the absence of proof of individual reliance on any particular piece of information, it is impossible to draw any reasonable inference of general reliance on anyone piece of information.
Conclusion
[160] To summarise, I am satisfied that the nature of the decision made by the voting shareholders in this case requires proof of individual reliance on identified representations or statements which the plaintiffs alleged deceived and misled them into voting "yes" to the merger at the 27 September EGM. I find there is no such evidence of any individual reliance on particular representations or statements, except by Mr Schaef. It cannot be assumed that Mr Schaef s vote alone could have caused the critical 4% vote change required. It is not open to the plaintiffs to rely on a representative plaintiff and even if they were able to, Mr Hedley has disavowed any reliance on any pro-merger representation or on the EY Jensen report. [161] Neither does the voting pattern assist the plaintiffs' case. Furthermore, the amount of pro and anti-merger information available throughout the relevant period, coupled with the active lobbying campaigns, makes it impossible to discern what any individual plaintiff -apart from Mr Schaef- actually relied upon. [162] In the course of considering the fundamental issue of reliance, I have found that the plaintiffs' suit against Kiwi in tort in the second, third, fifth and seventh causes of action must fail in any case, as Kiwi was a representor who became a party to the merger contract.
[163] As I stated at the commencement of this part of the judgment, the issue of proof of reliance is fundamental to all of the causes of action, apart from the first cause of action for which it has no relevance. That necessity to prove reliance applies to the Fair Trading Act claims as well, as causation cannot be established without proof of material reliance. [164] Although my finding that the plaintiffs have not proved individual reliance, apart from Mr Schaef, effectively disposes of the case as a whole, the serious nature of the allegations of deceit and professional negligence and the effect of those allegations on the defendants' professional and personal reputations, necessitates that I go on and determine the remaining issues.
The Law Relating to Deceit
[165] The standard of proof required for allegations of deceit in a civil case is proof on the balance of probabilities. However, as allegations of deceit are very serious, the evidence required to prove them must be cogent and compelling.
Was There a Real Risk of Supply Loss?
[166] Central to the four deceit causes of action in this case (mirrored in the Fair Trading Act causes of action) is the issue of supply loss: was supply loss a real risk or merely a deceitful myth? In addition to the supply loss issue, there are other deceits alleged relating to the holding of the second EGM on 27 September 1996 (which I have dealt with); whether the merger model was "audited"; whether the merger projections justified a 60c differential; whether the alleged misstatements in the EY Jensen report had their origins in deceit; and whether non-disclosure of the Mainland transaction amounted to deceit. All of these alleged deceits are said to be part of "the plan" pleaded in the second cause of action and which occupies the bulk of the statement of claim.
[167] As is clear from the chronology of relevant events (traversed in paragraphs [6] to [68] above) supply loss began to be an issue for Tui and its directors as early as 1994 when Kiwi accepted the first supply applications from Tui farmers (Whangehu district). The potential for such encroachment had begun in 1993 when the domestic market was deregulated. Following deregulation Kiwi aggressively pursued an expansion programme in terms of milk growth and sought an increasing share of the domestic market. This is evident from the minutes of various Kiwi meetings and from the evidence of Mrs Bradnock, the National Sales Manager for Kiwi Supreme in 1996. Mrs Bradnock's specific brief was to "destabilise Tui's foothold in the domestic market".
[168] May/June 1995 saw the defection of the six Horowhenua winter milk suppliers, followed by the loss of an increasing number of new farm conversions in Tui' s traditional area. The 1996 purchase of both Timaru and HEMP by Kiwi heightened Tui ' s concern about the potential for further supply loss.
[169] In Mr Gough's opinion a supply loss in the order of 10-15% would have been critical for Tui and more than the company could sustain whilst maintaining an acceptable payout. Any supply loss had the potential to compound. Mr Gough said of the situation:
It was highly likely that the prospect of the falling payout and a destabilised company would then encourage an accelerated flight of suppliers. Kiwi would be able to "cherry pick" suppliers where the transport and volume factors favoured them, leaving the remaining rump of Tui shareholders even further disadvantaged. Directors had to consider this as an entirely likely scenario and weigh up the merger terms accordingly.
[170] Mr Gough also spoke frankly of the critical importance of Tui not only maintaining its supply base but also continuing to expand through growth from existing suppliers and from farm conversions. He acknowledged that Tui was at a disadvantage in terms of economies of manufacturing scale for export and that its local market profit had fallen in 1994/1995. Mr Gough said it was clear that Tui ' s payout differential with Kiwi would inexorably increase, leading to inevitable shareholder dissatisfaction and thus to further defections. There was and could be no definitive data as to when and how quickly such losses would occur. It was however significant that there was "never any discussion of Tui winning supply from Kiwi" - always the opposite.
[171] Across the border, the Kiwi directors and executive were keenly aware of the advantages of expanding into Tui ' s territory .However they also saw the clear commercial logic of a merger with Tui as opposed to simply indulging in a supply war. A negotiated merger was their "very strong preference" but if the merger did not eventuate, Mr Norgate said Kiwi "could and would have taken as many Tui suppliers as it made commercial sense to do" -at least from the 1997/1998 season on.
[172] Mr Whitelock (the immediate past Chairman of Tui) thought the great majority of Tui shareholders were conscious of the risk that Tui's lower payout margin would increase in the years ahead and could become much worse (and very quickly so) if any real number of Tui shareholders transferred to Kiwi. He had no doubt there was a very real and imminent threat of supply loss, at least by mid 1996.
[173] Mr Hedley did not believe that supply loss was a serious threat in mid 1996, because suppliers were locked in for the 1996/1997 season and would fmd the cost of transferring to Kiwi prohibitive. He also thought that Kiwi did not have sufficient capacity to process any increased supply, even if Tui suppliers did wish to defect however. As Mr Lusk submitted, the supposed "safeguard" of suppliers being locked in for the 1996/1997 season was very short term -and in reality only "a finger in the dyke".
[174] The Commerce Commission, when considering whether to approve the Tui/Kiwi merger in 1996, considered the issue of supply loss. In its report dated 15 August the Commission referred to anecdotal evidence suggesting that "a difference between the payouts of Kiwi and NZDG in 1994/1995 of IOc was enough to raise the possibility of suppliers switching". The Commission also analysed the difference in payout levels that would render a transfer to Kiwi a viable option for Tui suppliers, and concluded that the benefits of transferring would outweigh the costs within a period of five years or even less. As to the effect on Tui of such supply loss, the Commission said:
The ability of even a few suppliers to switch can have a drastic effect on the co-operative they leave, because of the flow-on effects on the production efficiencies of the co-operative, and the eventual reduction in payout for the remaining suppliers.
[175] Of most persuasive evidential value however were the graphic descriptions given by Messrs Williams and Monaghan of the situation of pending supply loss for Tui. Their evidence brought a stark reality to the picture, of a magnitude to dispell any merely mythological or speculative aspect. Mr Williams, as a substantial stakeholder in both Tui and Kiwi, had taken an active interest in both companies for a number of years as well as in the development of the dairy industry generally. By 1996 he believed that Tui "had lost the race" and a merger with Kiwi was inevitable. That is why he sought an active role in discussing and encouraging merger negotiations between the two companies. At the same time he took the prudent step of putting into place alternative arrangements to transfer his considerable interests in Tui to Kiwi in the event that a merger did not happen. The alternative strategy he sought to effect is evidenced in a letter he wrote to Kiwi on 23 April 1996, applying to transfer the supply of 970,000 kg of milksolids from two large units in Tui's supply area owned by his companies.
[176] As I earlier noted, following the failure of the special resolution on 20 August EGM, Mr Williams set about actively assisting the pro-merger campaign, as he felt it vital for Tui shareholders to understand the reality and benefits of a merger. To further the campaign he helped prepare the Merger Update document. At the same time he remained acutely conscious of the necessity of insuring that his interests were in the vanguard of suppliers who would inevitably defect if the special resolution failed for a second time. He therefore had a fallback position which he described as follows:
If there [had] been a "no" vote in September, [our] fallback position was to attempt to negotiate with Kiwi using the clout that I hope our size gave us. However, I was aware that our best chance would be if we could arrange something which would not expose Kiwi to a claim of favouritism. For this reason I would have gathered up enough suppliers for Kiwi to do a deal with, but the terms would be ones I would expect Kiwi could have offered to other suppliers. Given the size of [our] interests, which represented around I, 100,000 kg of milk solids annually (equivalent to 15 average suppliers), I would have expected other suppliers to have followed our lead and also gone to Kiwi. My concern would have been to be amongst the first suppliers applying to change supply because I would have expected there to be more suppliers wishing to move than Kiwi was capable of taking. ...Although the potential supply loss for the 1996/97 season was very small because of the constitutional issues, in my view, after then there would have been a tidal wave of suppliers wishing to change to Kiwi -far more suppliers than Kiwi could have taken immediately.
[177] Mr Monaghan, a Tui suppliers' representative, also believed there was a significant risk of supply loss in 1996. He was pessimistic about Tui's ability to maintain a competitive edge and had become convinced that it was vital for the merger to proceed. He was aware, from discussions with other supplier representatives and a number of Tui shareholders, that there was considerable anxiety about the risk of being "left behind" in the event the merger did not proceed. He said a number of Tui suppliers remembered the Kiwi/Moa Nui merger in 1992 where ". ..one group of suppliers got through the gate first and others had to follow on fairly unfavourable terms". That memory was creating anxiety, as none of the shareholders wished to be part of a "rump" left behind.
[178] Following discussions with a number of Tui shareholders about the merger and about the best course to adopt if it did not proceed, Mr Monaghan and another supplier representative advised Mr Bailey that if the merger did not proceed they would wish to "join up with Kiwi, and that well over 100 other suppliers were likely to do the same". A number of suppliers in Mr Monaghan' s area actually wrote to Kiwi indicating that if the merger did not proceed they wished to switch supply on the same terms as those contained in the merger document. Mr Monaghan' s evidence on the issue is encapsulated in the following passage from his evidence. He said:
I am aware that Kiwi had not made any offers to individual suppliers while the merger negotiations were carried on. However, I had formed the view that if the merger did not proceed, I would try and organise as large a group of suppliers as possible and negotiate the best possible terms to switch to Kiwi. Given my family connections with Tui, I had a great deal of loyalty to the Tui company, but I simply could not see it surviving in the medium term, and saw it as in my family's and district's best interests to take advantage of the opportunity of joining one of New Zealand's top performing dairy companies with all the inherent advantages the merger would offer including, economies of scale, cheap energy, superior waste water disposal, industry voice, cost model advantages, rationalisation of local market activities, increased on-farm equity and long term security with a higher payout.
[179] The evidence given by Messrs Williams and Monaghan alone clearly establishes that the risk of supply loss in the event that the special resolution again failed was a real risk and likely to be of a magnitude that would threaten Tui' s very survival. The flow-on effect of such potential supply loss would have rendered any post 27 September supply war very short lived or totally unnecessary .
Were the Tui Shareholders Deceived About the Risk of Supply Loss?
[180] Having found there was a real risk of supply loss if the merger did not proceed, there was no deceit of the Tui shareholders about the potential for such supply loss. In fairness to Kiwi, Mr Norgate and Mr Young however, the specific allegations of deceit made under this head need to be definitively dispelled. [181] The plaintiffs' case against Mr Norgate and Mr Young is that they falsely communicated to Mr Ross- Taylor and the Tui board that Kiwi was being inundated with requests from Tui shareholders to switch supply. It is alleged that these false communications caused Mr Ross- Taylor and the Tui directors to in turn convey false messages to the Tui shareholders. It is alleged that these falsehoods also infected Parts 6 and 9 of the BY Jensen report and caused the authors of that report to conclude that Tui's assets had no value because of potential supply loss if the merger did not proceed.
[182] A great deal of the hearing was devoted to proving these allegations, through documentary records and through evidence given by the plaintiffs and others, as to what was said by Mr Young and Mr Ross- Taylor on certain occasions. Trenchant criticism was also directed at Mrs Pam Hikuroa in relation to statements she made, and the veracity of her evidence at trial was questioned.
[183] As is usually the case, once the sequence of events is traversed and the evidence examined in its chronological context, a clear picture emerges.
[184] In May 1996 Mrs Pam Hikuroa, the company secretary of Kiwi, advised the Kiwi board that some 250 enquiries had been received from Tui suppliers wishing to switch supply to Kiwi. As referred to in paragraph [39] above, the minutes record that the board resolved to ease the conditions of entry for any Tui shareholder who wished to transferpre-merger.
[185] The next relevant reference is contained in a Kiwi internal memorandum, written by the manager of Kiwi's merger team, Mr Geoff Wilson, on 28 June. The reference is to enquiries being received from Tui shareholders. It finishes with a request for Mrs Hikuroa to arrange a meeting between a group of Tui shareholders and Mr Young. The reference is as follows:
Tui Shareholders
Had many calls, with high proportion declining to identify themselves. Constant theme of not against merger but concerned what happens if it does not go through (eg more expensive later). A group named "Market Milk Committee" want to meet with John Young and will come to Hawera to do so. They simply want information they don't believe they've been accurately given, and believe things could be much more positive than portrayed. Pam, can you arrange this?
[186] By this date the merger agreement had been signed by the directors of both companies and the Information Memorandum sent to all Tui shareholders for their consideration. A special EGM to approve the merger proposal was scheduled for 16 July 199.6.
[187] On 4 July 1996 Mr Norgate wrote the following letter of reassurance to Mr Murdoch:
Further to our discussion this morning I am happy to confirm that we have not been actively canvassing for supply in the Tui area, however, as you are aware we have had an overwhelming number of approaches from Tui Shareholders concerned that the merger may not proceed.
[188] On 9 July 1996, Mr Young wrote to Mr Ross-Taylor on the topic of Powder 5 and also on the issue of Kiwi accepting Tui suppliers in the event the merger did not proceed. The relevant passages of that letter have already been set out in paragraph [51] above but it is appropriate to here repeat the passage relating to supply loss:
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.
[189] On 10 July 1996, Mr Ross-Taylor wrote to Mr Young, responding on the issue of supply loss:
Acceptance of Supply
Again I will raise this issue with my Board at its meeting next week, and respond. My initial thoughts are that Tui Directors may find themselves in breach of fiduciary duties in acceding to this request, knowing that such a situation would be detrimental to Tui in the event a merger did not proceed for any reason However, it would be useful if you could confirm the number of applicants you hold in the event the merger did not proceed or the information you have already verbally given that "applications to supply Kiwi in 96/97 or 97/98 represent 200-300 Tui shareholders". We have presented information at the Ward meetings identifying the widening of payout gap between the companies given switching of supply. I wish to be able to confirm that information to the meeting on 16 July and using specific/confirmed application numbers (even through to 97/98) would be useful presentationally. In the meantime I intend to discuss other issues with you by telephone.
[190] The next day, 11 July 1996, Mr Young spoke to a group of Tui shareholders at Long burn and referred to the interest that Tui suppliers were showing in switching to Kiwi. No record exists of what was said at the meeting but Mr Young's speech prompted a Mrs Susan Bruce to write to the Tui company secretary, Mr Mollett, asking for sworn evidence from Mr Young and Mr Ross- Taylor verifying how many written applications Kiwi had received from Tui shareholders, and disclosing names the and addresses of those shareholders. Her request was subsequently declined.
[191] As we know from the evidence given at trial, Mr Williams had by 11 July written his letter of enquiry about switching supply to Kiwi and Mr Monaghan and another Tui supplier representative had made enquiries on behalf of suppliers in their areas. Mr Young said in evidence that he personally had received approaches from two Tui representatives, Mr Wilson (Rangatikei) and Mr Monaghan (Eketahuna). Between them they represented some 40-110 Tui suppliers.
[192] On 15 July 1996, Mr Ross-Taylor wrote to Mr Young about the EGM to be held the following day, concluding as follows:
...I request your confirmation that supply applications representing 250- 300 Tui suppliers have been received by Kiwi. The ability to confirm these points at tomorrow's EGM will be useful.
[193] Mr Young replied the same day confirming as follows:
With regard to applications to supply the Kiwi Company, I can confirm groups of farmers exceeding 250 suppliers have indicated that they wish to supply this Company. However, Alistair, I reiterate that in spite of the insistence of these suppliers to join Kiwi's supply base, it is not a desirable way of capturing the benefits that could ultimately help all the dairy fanners in the Southern North Island.
[194] This response by Mr Young caused considerable suspicion on the part of the plaintiffs. I find it perfectly plain in its terminology however. Mr Young does not categorically state that Kiwi was in receipt of 250 formal applications from Tui suppliers -or that Kiwi was intending to accept those applications. Rather, he simply confirms Kiwi's desire to take over the Tui suppliers via a negotiated merger rather than through a supply war.
[195] At the EGM on 16 July 1996, Mr Ross- Taylor addressed the Tui shareholders at length; inter alia, referring to 250 applications having been made by suppliers wanting to switch to Kiwi. There was considerable dispute over the exact words he used. No verbatim record exists of the meeting but Mr Mollett took notes in which he summarised Mr Ross-Taylor's advice to the shareholders on potential supply loss as follows:
K have confirmed in writing in receipt of applic 150 referred to area in Pah K prefer T s/h support merger
[196] Mrs Millard appears also to have made notes of what was said at the meeting. On the supply loss issue she wrote the following question and noted down a summary of Mr Ross-Taylor's answer to it:
You have told us that we could lose 200-300 suppliers this season prior to I August 1996, if this merger does not proceed ...? ...Regarding loss of suppliers -started at 400 -John Young assured the Chaiffilan Kiwi had had 250 enquires Alistair later admitted to an individual 4 had signed.
[197] It was the plaintiffs' contention that Mr Ross-Taylor had overstated the supply loss situation at the meeting and had conveyed the impression that Kiwi was holding 250 formal applications which it was likely to approve if the merger did not succeed. Mr McCarthy's evidence was that Mr Ross-Taylor said "mark my words 250 suppliers will go". Mr Hedley's evidence was that Mr Ross-Taylor said that he had an undertaking from Mr Young that Kiwi had 250 Tui suppliers who had applied to move to Kiwi, and further said "John Young would not lie".
[198] On the basis of Mrs Millard's notes, whether made at that meeting or the 20 August meeting, it seems that any necessary distinction between formal signed applications on the one hand, and enquiries (written or otherwise) on the other hand, was clarified by the question and answer she recorded -and this well before the 27 September vote was cast.
[199] After the meeting Mrs Millard wrote an article entitled Driven by Fear, the purpose of which was to convey to Tui suppliers that supply loss was not a risk that had "reality in any commercial analysis". She did recognise however that supply loss was a reality in terms of fear .
[200] On 23 July Mr Mollett replied to Mrs Bruce's letter of II July, declining to provide the sworn evidence she required, and saying:
We would however advise that Tui is in receipt of a letter from Kiwi Co- operative Dairies Limited advising that it has received enquiries from in excess of 250 Tui suppliers expressing a desire to supply them. This confirms the statement made by Mr A Ross- Taylor at the Extraordinary General Meeting on 16 July 1996.
Conclusion re Deceit as to Supply Loss
[20 I] The real question of whether there was a real risk of potential supply loss did not turn on a mere semantic struggle over whether Mr Young really meant formal applications which Kiwi had accepted when he referred to "applications" in his letter of 15 July; or whether Mr Ross- Taylor used the term "enquiries" or the term "applications" when he addressed the Tui shareholders at the meeting on 16 July. The important aspect is what the evidence actually established. What it established is that, by the time of the 16 July meeting a huge potential for supply loss existed if the merger did not proceed. On the basis of that evidence it cannot be said that either Mr Norgate or Mr Young falsified or over dramatised the situation in their communications with Mr Ross- Taylor and the Tui board, or that Mr Ross- Taylor misleadingly embellished the content of these communications when advising the Tui shareholders on the issue. The testimony of Mrs Hikuroa, Mr Williams, Mr Monaghan and even the testimony of some of the plaintiffs' witnesses lends credence to Mr Young's statement that, by 9 July, Kiwi had been "inundated" with applications or enquiries from Tui suppliers about switching supply. The evidence of those witnesses was corroborated by the production in evidence of a number of signed application forms and letters of inquiry .
[202] It is clear that Kiwi's policy at this time was to preserve the situation by holding off accepting Tui suppliers who enquired about switching supply, until it was known whether the merger would proceed. If Kiwi had not adopted this holding policy, the floodgates may well have been opened well before the special resolution was put to the first vote on 20 August. In that case, a merger would have become quite unnecessary. In Messrs Young and Norgate's opinion however that outcome would not have ultimately benefited the Tui and Kiwi shareholders to the same extent as a managed merger.
[203] After the merger, Mrs Hikuroa disposed of her enquiry file together with other (by then) redundant pre-merger documentation. She did this in about October or November 1996. Mr Henry suggested that Mrs Hikuroa's evidence was not capable of belief and suggested that her file record of enquiries and applications had never existed. I reject that suggestion entirely. I was impressed with Mrs Hikuroa as a witness and found nothing in her demeanour or in the content of her evidence to cast doubt on her credibility or reliability .
[204] In conclusion I am satisfied that a real risk of supply loss existed, as the communications and correspondence between Messrs Young, Norgate and the Tui directors and shareholders accurately reflected. I am also satisfied that Mr Ross- Taylor did not mislead the Tui shareholders when he spoke on the issue of potential supply loss at the 16 July meeting, as verified by the record of the meeting made by Mrs Millard. It follows, from my findings on this issue, that Parts 6 and 9 of the BY Jensen report dealing with supply loss were not infected by any false information relating to potential supply loss in the event the merger did not proceed. I will refer to this aspect of the supply loss issue in more detail when dealing with the BY Jensen report in the next part of the judgment.
Was the Merger Model " Audited"?
[205] The allegations of deceit under this head relate to the KPMG "audit/appraisal" letter of 30 April 1996 and are pleaded in the second and third causes of action.
[206] The essence of the allegations is that the KPMG letter was misrepresented to the Tui directors by Kiwi by the use of the term "audit" and this affected Tui's acceptance of the 26 June 1996 merger terms. The term "audit" is said to have represented to the Tui directors that an international firm of accountants (KPMG) had confirmed that the payouts and other outcomes of the merger model were achievable; that the assumptions upon which the merger model was based were certified to be accurate; and that the projected payouts and other outcomes were independently assessed and approved.
[207] However, as already noted in paragraph [33], Mr Bailey's evidence was that the Tui directors were not under any misapprehension about the merger model or its contents. He said they fully understood it, particularly in light of their previous experience of Tui's merger with Manawatu in 1990. [208] Mr Monaghan, as a supplier's representative, was not misled either. His evidence as to whether the merger model had been "audited" by KPMG was:
I understand that the plaintiffs claim that Tui shareholders were misled by the reference to the merger model having been audited by an international firm of accountants. I recall reading references to the merger model having been audited. I knew that Kiwi was not disclosing this model at the time, because the merger had not been agreed. I also knew that the merger model was an attempt to make projections based on various assumptions, but was not a guarantee that any particular results would in fact be achieved. I believed that the review by an independent and reputable accounting firm demonstrated that the merger was realistic and credible. I am sure that this view was shared by most Tui shareholders with whom I discussed the merger.
[209] Nor did Mr Gough believe the Tui shareholders were misled by the use of the term "audit". His evidence on its use in relation to future projections was: I don't believe the [Tui] shareholders believed the future could be checked for accuracy.
[210] In contrast Professor Pratt's view was that the use of the term "audit" by Kiwi and Mr Young to describe the merger model, and the subsequent incorporation of that term in the Information Memorandum by Mr Ross- Taylor on behalf of the Tui board, equated to a "positive assurance" about the forecasted benefits and was not simply limited in its meaning to a checking of the assumptions.
[211] I find nothing in this point however, which is semantic rather than substantive. The evidence clearly establishes that the use of the term "audit", in the context in which it was used, misled nobody in any material way. Although the plaintiffs submitted that KPMG had objected to the use of the term "audit" to describe their letter of report, their objection appears to have related to the use of the report in relation to the attainability of forecasts. Mr Hagen thought the use of the term in context was quite appropriate. Likewise, Mr Davies.
Was the Agreement to Pay the 60c Differential a Deceit on the Tui Shareholders?
[212] The plaintiffs are unable to accept that the requirement to pay a 60c differential properly reflected the value which they say Tui brought to the merger, compared with that which Kiwi brought to the merger. They accept that the Kiwi 75 directors wanted the best deal for their shareholders and set out to negotiate that, but do not accept that the Tui directors negotiated the best deal for their shareholders.
[213] The plaintiffs believe the 60c differential was not fair because it took no account of Tui's assets (freehold land, two factories, milk vats and Tararua brand) or its share of the domestic milk market. Of critical importance, they say, is the failure to assess the historical payout differences between Tui and Kiwi by normalising the accounting policies for each company and also the failure to assess the value of the Tararua brand. Compounding the unfairness of the 60c differential, they say are further failures by EY to assess on the basis of latest budget figures or to adjust for mechanical deficiencies. Mr Henry also pointed to a difference of 1.9c on an ongoing basis between Tui and Kiwi accounting policies identified by Mr Hagen, and to the general consensus that a timing adjustment on payout of 1-2c should have been required.
[214] In determining whether the payment of a 60c differential was fair, it is important to analyse the basis upon which the Tui directors agreed that a differential of 60c should be paid in this case. To begin at the end, the short answer is that a 60c differential became the bargaining pivot on which the entire merger deal was destined to succeed or fail. Thus it was not the result of mere mathematical calculation. As Mr Gough said:
It is important to realise that the 60 cent differential was a negotiated figure, rather than one that was arithmetically achieved. It represented a balance between what Kiwi could sell to its shareholders and what Tui directors and shareholders might consider acceptable. Both companies had to get a 75 percent majority shareholder vote.
[215] Both Mr Hagen and Mr Davies supported Mr Gough' s view on this.
[216] Before proceeding to detail their evidence on the question of the 60c differential, it is convenient to first briefly describe the relevant background and experience that both Messrs Hagen and Davies brought to bear on this particular issue and on other related issues in the proceeding.
[217] Mr Hagen is a practising chartered accountant who has advised the dairy industry for a period of some 30 years. He is currently Chairman of Deloitte Touche Tohmatsu and a fellow and past president of the Institute of Chartered Accountants of New Zealand, past Chairman of the Financial Reporting Standards Board, Chairman of the Accounting Standards Review Board, and a former member of the Market Surveillance Panel of the New Zealand Stock Exchange. He has specialised in providing corporate finance advice on acquisitions and divestments, on the valuation of shares, businesses and intangible assets, has undertaken financial investigations and provided litigation support services. Of particular relevance to this case is the fact that he was the Deloitte's partner ultimately responsible for the audit of NZDG, New Zealand's largest dairy company before the GlobalCo merger.
[218] Mr Davies is also a practising chartered accountant and a senior partner in Deloitte Touche Tohmatsu. He has a well established track record as an expert on accounting issues, including merger negotiations, fraud investigations, audit assessment and statutory management. This short list of his many achievements includes only a few of the areas in which he has given expert advice during a lengthy practising career. Significantly, both he and Mr Hagen have been personally involved in a number of major mergers and in the negotiations leading to those.
[219] Mr Hagen said that the determination of a differential and the amount of a differential are matters of "commercial negotiation ". In any normal commercial transaction the size of the differential struck will be the result of "rational negotiations between the directors". Such negotiations will be affected by the strengths and weaknesses of each party , s position. In the present case, the differential was effectively 50c, as 10c went to reserves. Bearing in mind all of the relevant and competing factors, Mr Hagen thought a differential of 60c justifiable in this case. His opinion was that, even after taking into account a differential of 60c, the merger was clearly in the best interests of the Tui shareholders, given that the proposed merger payouts were forecasted to be higher than the proposed Tui stand- alone payouts.
[220] Mr Davies' evidence was similar. He said:
The assessment of the appropriate differential is essentially a subjective matter . The differential, rather than being a mathematically calculated figure, is really a commercial, negotiated factor. Its size will reflect the perceived negotiating strengths of the two parties. It is likely to move according to how keen the parties are to strike a deal, and the consequences for the individual parties of reaching (or not reaching agreement), and the relative sizes of the companies involved. A bench mark may be provided by the differentials in similar deals struck recently. I would expect the factors influencing the Kiwi/Tui negotiations to include the relative payout forecasts for the merged group and for a stand alone Tui, the uncertain question of migration of Tui suppliers to Kiwi if the merger did not proceed and the flow-on consequences for Tui's payouts, and the costs of achieving and the sharing of gains arising from the merger. In this case the differential was what was ultimately agreed by the two boards and managements of Kiwi and Tui, people whom I would expect to be familiar with the commercial realities faced by the companies and their comparative bargaining strengths- ...The size of that differential is not something that an accounting expert can calculate, as it is a negotiated quantum deriving from commercial rather than purely financial considerations. It is best assessed by those persons involved in the negotiations, and who can reasonably be considered as acting in the best interests of their respective parties.
[221] Mr Davies also thought the differential of 60c agreed to in this case was justified, based on the historical fact that Kiwi shareholders had consistently received higher payouts than Tui shareholders, and more importantly because the payouts from the merged companies were forecast to be not only higher than Tui ' s historical payout, but higher than the Tui shareholders could expect if Tui continued as a stand-alone company. Of equal importance, Mr Davies said, was the fact that the gain for Kiwi shareholders was comparatively less than for Tui shareholders. Taking all these factors into account (which he had no reason to doubt), Mr Davies said it was clear that, if the Tui shareholders received the same level of payouts from the merger as the Kiwi shareholders, they would gain immediately from the efficiencies which the Kiwi shareholders had built up, but without having contributed commensurately. Some level of differential was therefore appropriate -". ..so that the benefits of merger were fairly spread in the first few years".
[222] Mr Hagen went on to consider what the alternatives for Tui might have been, had it not agreed to the 60c differential. He said that if, as the plaintiffs assert, the EY Jensen report should have concluded that a 60c differential was not justified, the Tui shareholders would have been faced with only two viable options. They could have rejected the merger proposal and continued as a stand-alone company. Or they could have accepted the proposal, notwithstanding the terms were less favourable than they might have wished. However, as he pointed out, there is now no means by which the Court can ascertain what the outcome might have been had the EY Jensen report concluded that a 60c differential was not justified. If it were to be assumed that the Tui suppliers would have voted against the merger in consequence of such a conclusion, Tui would have remained a stand-alone company. In that case the very best outcome the Tui suppliers could have expected would have been to receive the payouts forecasted under the Tui stand-alone model, based on the assumption in that model (which in Mr Hagen's view was wrong) that Tui would sustain a 4-4.5% annual growth in supply. Against that assumption, Mr Hagen said, the information about pending supply loss suggested that payouts would have reduced significantly.
[223] The plaintiffs sought to invoke a third option; namely, that the Tui board of directors could have reopened negotiations with Kiwi after the merger vote failed at the first EGM on 20 August. However, that assumption not only pre-supposes that such an option were truly open but ignores the evidence to the contrary .This came from Messrs Gough, Bailey, Young, Norgate and Ross- Taylor in their interrogatories and from the minutes of the Kiwi board meetings. Kiwi's immovable position by the time the merger agreement was signed on 26 June was that 60c was not a negotiable figure. That figure had already been the subject of significant negotiations over a lengthy period of time and constituted the absolute bottom line.
[224] Ms Taylor, an expert called by the plaintiffs, thought the differential was based on the historical payout differences between Tui and Kiwi, and the figure of 60c arrived at by reference to future benefits based on those historical differences. In her opinion it was necessary for those historical differences in payouts to have been reviewed and an analysis done to ascertain whether any real difference in payout was sustained following the merger. She said the levels of payout were not the real issue however -the real issue was the underlying cash flows generated by the assets. Expanding on that she said, as payout is influenced by accounting policies and that required the accounting policies of the two companies to be normalised if payout were to be used as a proxy for underlying cash flow. Such an exercise was essential if the 60c differential were to be verified as "fair".
[225] In similar vein, Professor Pratt, an academic called by the plaintiffs as an expert witness, concentrated on the historical performance of the two companies. He concluded that an analysis of past results on the basis of harmonised accounting policies would lead to the irrefutable conclusion that the 60c differential was not justified. I note however that Professor Pratt had not himself attempted to do such a normalisation exercise.
[226] Against that evidence given by Ms Taylor and Professor Pratt, Messrs Hagen and Davies said their preferred approach was a forward-looking analysis which concentrated on forward projections and not past performances. Mr Hagen said "fairness" meant assessing whether the 60c differential was appropriate, considering amongst other things the relative expected performance of each company. He emphasised that analysing past results is only relevant if it assists in clarifying likely future performance and outcomes. F or that reason he endorsed the pro-merger and EY Jensen analysis of future projected outcomes, including their conclusion that despite a 60c differential the proposal was still fair and in the best interests of Tui shareholders. He said that EY's analysis showed that, without the differential, the Tui shareholders were projected to be approximately 141 c per kilogram of milk ahead of their stand-alone position and even after the differential, approximately 90c ahead.
[227] I will refer again to the issue of normalisation of accounting policies when dealing with the EY Jensen report. Suffice at this point to say that, overall, I have no difficulty in accepting the evidence of Messrs Davies and Hagen as to why a differential was paid in this case. At the end of the day, the reality was that it constituted the pivot upon which the agreement to merge was reached. It was the commercial negotiating tool which facilitated a complex and major commercial transaction. Without it the merger would not have proceeded. It was, therefore, in the best interests of the Tui shareholders to pay a differential. As for the amount of the differential they paid, in light of the forward projections and the outcome since the merger (so far as that can be ascertained), a 60c differential could only be regarded as fair .
The Mainland Transaction
[228] This transaction concerns the seventh cause of action, brought against Kiwi and Mr Young. I have already dealt with the position of Kiwi. Essentially the plaintiffs claim that they were materially deceived by not being appraised of the fact that Kiwi and Mainland had entered into an agreement to merge their local market assets and activities, conditional on the Tui/Kiwi merger proceeding. The agreement was reached on 18 September 1996 after a month of "relatively heavy and fairly complex" negotiations. The transaction ultimately agreed was itself very complicated. It involved the NZDB selling its 33% shareholding in Mainland to two of the shareholders in Mainland; the concurrent sale by Mainland of the "Mainland" brand for markets other than domestic to the NZDB; and the concurrent purchase by Mainland of all Kiwi Dairies' relevant local market assets and activities. The latter were to include Tui's milk product sales and administration.
[229] Kiwi had first approached Mainland to merge their local market activities in about April 1996. Kiwi's purpose was to achieve savings and synergies in the domestic market and thus increase its competitiveness against NZDG's local market dominance.
[230] Ironically (but not surprisingly) the Tui directors had also explored an association with Mainland, this in late 1994. Mr Gough said the discussions were initially amicable but Mainland later "backed away from forming an association with Tui on any basis that would have been advantageous to Tui". By 1996 the prospect of a Tui/Mainland deal had evaporated.
[231] The discussions between Mainland and Kiwi were conducted on an entirely confidential basis for a number of reasons. A primary reason was the involvement of NZDB as a party to the agreement. Of this Mr Norgate said:
Cross-examined by Mr Henry
...With NZDG having the largest number of directors on the NZDB and being Kiwi's major competitor and the major competitor for Mainland, the quite strong advice was that to disclose [the agreement] prior to final approval would jeopardise it. ' Final approval being by the Tui shareholders? No, by the Dairy Board.
[232] Mr Norgate explained that the parties to the Mainland transaction firmly believed that if NZDG had the slightest indication of what they were proposing it would undermine their plans to the extent that the agreement would not proceed. That view was shared by the (then) Chairman of the Dairy Board. For that reason a confidentiality clause was agreed to, driven by the "reality of the NZDB situation".
[233] Mr Young and Mr McConnon also confirmed the need for confidentiality. Mr Young did however advise both Mr Ross- Taylor and the Kiwi board about the agreement with Mainland after it was reached. He gave that advice on a strictly confidential basis however.
[234] When asked, if he were a Tui shareholder, the Mainland transaction was not something that he would have wanted to know about before voting on 27 September Mr Norgate said:
Cross-examined by Mr Henry
...I would certainly want to know what reason there was for us not telling them. You would want to know about the transaction before you voted as a prudent voter wouldn't you? You would prefer to. You would want to know? Unless there was a good reason not to. Isn't it the shareholders decision to decide on the merger? Yes, but if disclosure of the transaction meant it would be severely jeopardised that would be a good reason not to know. ...The Mainland transaction in our view would have been a major plus for Tui shareholders in voting for the merger so it was not in our interests, in terms of the Tui merger, not to disclose it.
[235] Mr Norgate expressed the further view that knowledge of the Mainland transaction prior to the merger would not have "told the Tui shareholders that their domestic market, Tui Foods, was being sold for a substantial value to obtain the merger with Mainland".
[236] On that issue -the value of Tui Foods and its Tararua brand name -much evidence was given. Although interesting, it did not in the end prove relevant. The truth was, as Mr Gough said, that Tui' s local market business was not doing well despite the shareholders' understandable belief that it was doing well. Mr Gough thought the strength of the "no" vote on 20 August may have been influenced by a shareholder perception that Tui ' s local market activities were vibrant and therefore payment of a differential was not justified. The reality was however that the Tui directors were extremely concerned about the state of Tui' s local market business, but for obvious reasons were not conveying these concerns to their shareholders. Mr McConnon also confirmed that, at the time of the Tui/Kiwi/Mainland merger, the Tui Foods operation was running well below the level possible and was not providing shareholder value.
[237] I have earlier referred to Mr Hagen' s opinion that any value in a brand is in the future cash flows to be derived from that brand and not in the investments made in developing the brand. Mr Davies agreed with this view and further explained that the two main accounting regimes (the UK and the USA) do not allow internally generated brand recognition in financial statements and neither does the international standard. He said the main grounds for non-recognition are that brands cannot be distinguished from the cost of developing a business as a whole and it is difficult to establish a fair value due to the large measure of subjective assessment involved. There are also difficulties in establishing what future economic benefits attach to the brand itself, as opposed to other factors. Importantly, he said, to recognise an internally generated brand name as an intangible asset in financial statements involves taking up the brand as an asset and increasing reserves by a similar amount. This is, in effect, recognising in reserves today the profits that are hoped to be earned from the use of that asset in the future. There is, with a brand, generally no market for sale.
[238] For all of the above reasons, it must be assumed that whatever value the Tararua brand had was implicitly included in the overall assessment by the Tui and Kiwi directors as to whether the merger and its price were both fair and in the best interests of the Tui shareholders.
[239] As for BY and Mr Jensen, there is nothing in the evidence to suggest that they were aware of the Mainland transaction prior to the special resolution being voted on for a second time on 27 September. Therefore any assertion that they should somehow have separately assessed the value of the Tararua brand for the purposes of their report, on the basis of that knowledge, has no foundation. In any case, I am totally unpersuaded that the Mainland transaction constitutes evidence that Tui did have other options to a merger with Kiwi, or negates the view that the value of the Tararua brand was not implicitly included in the overall assessment of whether the payment of a 60c differential was fair. Therefore it is likely to have had no impact on the conclusion of the BY Jensen report.
[240] There can be no finding of deceit on the basis of a failure to disclose knowledge of a matter in circumstances where those privy to the knowledge were under an obligation of confidentiality not to disclose. Furthermore, there is no evidence that the agreement to conclude the Mainland transaction, if the merger eventuated, meant that the Tararua brand had an intrinsic value that was not already being recognised in the negotiated merger price.
Introduction
[241] A number of the claims against the EY partners and Mr Jensen in the eighth to eleventh causes of action have already been adverted to in the course of this rather discursive judgment. A number of the findings I have made under previous headings have necessitated findings about the EY Jensen report also. A prime example is the ultimate issue of whether the 60c differential was a fair price for the Tui shareholders to pay for the merger. A further example is whether the Tararua brand should somehow have been separately valued -and whether an EBITDA approach should have been adopted in valuing Tui ' s NTA.
[242] Some issues I have partially dealt with, but left over for further comment in this part of the judgment. The first is the failure by EY to "normalise" the accounts of Tui and Kiwi, so as to be able to compare the value each was bringing to the merger transaction. The second is the issue of supply loss as it affected the EY Jensen report.
[243] In addition, some remaining issues require determination. They are the alleged failure by EY to consider the possibility or likelihood that the Tui directors would change Tui' s accounting practices in the future if the merger did not proceed; the alleged failure by EY to ensure they had all current information and the most up- to-date assumptions on which to consider the Tui stand-alone projections; the issue of whether the report was independent of the Tui/Kiwi defendants' influence; and whether the terms of reference were subtly changed by EY and Mr Jensen, so as to enable them to provide an unqualified conclusion to the report and its Executive Summary.
[244] A further issue surfaced in supplementary evidence in chief given by Professor Pratt; namely, a semantic debate as to whether the conclusion to the report provided an audit level of assurance, when the contents of the report did not amount to an audit.
[245] Other issues of a peripheral nature, such as the effect of winter milk premiums on payout, faded into irrelevance during the course of the trial and I do not propose to make findings in relation to them.
[246] As noted in paragraph [55] above, the inspiration for an independent overview came from Mr Whitelock, following the shock defeat of the special resolution by a voting minority at the 20 August EGM. I have already referred to the subsequent engagement of Mr Jensen in paragraph [59] above and set out the terms of reference there under. .It is however appropriate at this point to refer in more detail to Mr Jensen's background and experience, as this gives insight as to why he was approached and asked to undertake the exacting task of putting together an independent overview within a very tight timeframe.
[247] Mr Jensen is a dairy farmer with a considerable history in the dairy industry, including as a former Deputy Chairman of the NZDB. At the time of the independent review he was director of several dairy industry or dairy industry related companies. He did not, however, have any interest in either Tui or Kiwi and was thus independent of both companies. Although not a chartered accountant, he was eminently competent to deal with those parts of the report which he was asked to undertake. These were:
consideration of alternatives for Tui, namely -standalone, other industry partners/linkages outside equity; investigation of such other issues as might be considered relevant and material to shareholders consideration of the proposal eg. Timing of transaction, single site risks, water and effluent issues.
"Normalisation" of Accounts: Comparison of Tui and Kiwi
[248] The plaintiffs argued that the agreement to pay a 60c differential was preordained by failure on the part of the Tui directors, EY and Mr Jensen to compare the two companies on a common basis -"starting with actual performance with reasonable projections based on that actual performance". Ms Taylor and Professor Pratt both stated in evidence that, in order to properly compare Kiwi and Tui pre- merger, the starting point had to be normalisation of the payouts of each company. The following extract from Mr Henry's closing submissions encapsulates the plaintiffs point of view:
The Tui Board was well aware of the need to look at the accounts of Tui and Kiwi on a common basis before making any forward projections. They also understood that the greater Kiwi payout was due to timing changes and would even out over a period of time. The payout difference was not due to more efficient manufacture or the economy of scale or the Whareroa site, it was due to different accounting policies.
[249] Failure to normalise was also a fundamental sticking point for Mr Hedley. He expressed a firm view about the necessity to have compared the two companies on a "apples for apples" basis, particularly in relation to their accounting policies. He refuted the contention that economies of scale or other advantages provided the reasons why Kiwi's payout was consistently higher than Tui's during the period 1991-1995/1996. His evidence on the point was as follows:
...would you accept that those advantages [advantages of economies of scale, transport, effluent discharge, energy sources] were the kinds of reasons that Kiwi's cash payout was consistently better [than] Tui's cash payout? No. Why was Kiwi's cash payout consistently better than Tui's cash payout? Because of their accounting policies. What happens to a company that pays out more cash than it brings in? In the end it goes broke. Before that? Before that, unless it can take something on that will put more money into the system, before it goes broke. What happens, how does it survive? It puts more money into the system. By borrowing? It can borrow or it can take something over to put more money into the system. So is it your case that Kiwi was able to consistently better Tui ' s cash payouts because it borrowed or for some other reason? Because it had different accounting principles than others. It gave them a supposedly higher profit from the same amount of money. Is it your understanding that if Kiwi was consistently paying out more than it was really making as a profit, it would have to borrow to bridge the gap? Yes. Was that not one of the things you told Tui shareholders, whose proxies you were trying to win, that they should be concerned about the level of Kiwi's borrowings? Yes. What is the difference between debt and borrowings? Debt is what you owe. And what are borrowings? What you have actually borrowed at that particular time. Is there any substantial difference between debt and borrowings? Timing.
[250] In like vein, Mr Hedley thought Kiwi's higher payout simply a fiction of accounting policy and/or borrowings, rather than due to operating efficiencies. His evidence on that particular aspect was as follows:
Cross-examined by Mr Hodder
...there is no doubt that in 1995 and 1996 Kiwi was competing aggressively with Tui on most fronts, correct? Yes. ...under "Financial Highlights" and. .."Total Borrowings etc" ...as I read that it shows that between 1993 and 1996 Tui's total borrowings per kg of milk solid grew from 60c to $1.19? Yes. Do you think that is a useful analysis of the debt of a co-operative dairy company? At that date, point of time, that is what Tui owed. Is [it] a useful way of thinking about a dairy company's debt levels to take borrowings per kg of milk solids? Yes. If Kiwi was borrowing heavily to sustain its payout you would expect the comparable figure for Kiwi to be even higher? Because of Kiwi's accounting policy no. Well I appreciate you are not an accountant Mr Hedley but I am struggling to see how, if the cash payouts were due to accounting policies rather than actual profit, it would not be reflected in Kiwi's actual borrowings? That is a snapshot in time on one day. If you have different accounting policies that can change. Are you telling us that Tui ' s figures on that day could have been changed by accounting policies? Yes. Really, such as? All they had to do was not pay their debts until the day after . And do you think that is what Kiwi was doing? Yes.
[251] Mr Hedley also thought that any Tui supplier who seriously contemplated switching to Kiwi at the time of the merger debate was not acting in their own best interests and clearly did not understand the differences in the accounting policies of the two companies. His further evidence was:
...without loyalty contracts there was always going to be a risk of suppliers switching to Kiwi wasn't there? No, as long as they understood the different accounting policies between the two. If we consider for a moment the position of a conversion supplier, do you say that a conversion supplier in say the Manawatu should have gone with Tui rather than Kiwi because of Kiwi's accounting policies? Yes. Quite a few conversions went to Kiwi during that period, were they all mistaken as to their best interests? Yes. And others who applied to join Kiwi from the existing Tui suppliers were also, in your view, not acting in their best interests? No they were not acting in their best interest. Anyone who joined Kiwi was, in your view, not acting in their best interest because of Kiwi's accounting policy, correct? Yes. So was the risk of supply loss, in your view, confined to those who did not understand their best interests? Yes. So there are quite a few people among [the] Tui shareholders who did not understand their best interests? There were quite a few suppliers in Tui who did not understand the accounting policies used by each company. Including the larger well advised conversion farmers? Before making a decision they needed to understand the difference in accounting policies of the two companies so [that] the companies could be compared on an apples for apples basis.
[252] Of some curiosity however is the fact that, notwithstanding his views, Mr Hedley had himself seriously considered switching to Kiwi prior to the merger negotiations getting underway. His evidence on the point was as follows:
...did you make any enquiries of Kiwi before 1996 about switching your milk supply? Yes. When? Without knowing exactly, 1995. Just one enquiry? Several enquiries. Why? Because Tui had condemned my shed and were insisting that I build a new one. But you knew, did you not, that Kiwi's accounting policies were so bad that no-one knowing their own self interest would join them -correct? Yes. So faced with the choices, was it not a simple choice to build a new shed rather [than] do something as silly as join Kiwi? I made enquiries that is all I made.
[253] In May 1996, Coopers & Lybrand had conducted a review of the merger model for the Tui directors and reported that a number of different payout factors for Tui and Kiwi ought to be restated on a common basis. These differences concerned the treatment of a sale and lease-back transaction relating to farm vats which Kiwi had previously owned; recognition of a future taxation benefit to Kiwi' s revenue 1995/1996; Tui's more conservative depreciation policy; differences in farm gate milk measurement; differences in timing of advances against final payout; and Tui ' s higher premiums in the seasonal shoulders. Other matters also referred to were treatment of goodwill, and share premiums arising from acquisitions.
[254] Mr Henry submitted that the receipt of this advice from Coopers & Lybrand put the" Tui directors on notice that the information in the merger model was not sound. He said the Coopers & Lybrand report was critical, as it revealed the true financial strength of Tui compared to Kiwi, by emphasising that Kiwi had no financial earnings advantage. Normalisation of the different accounting methods of the two companies had therefore to be undertaken, as this was essential in compiling and comparing the future projections of each company on a stand-alone basis.
[255] It is clear that the advice given by Coopers & Lybrand was taken on board by the Tui directors and that they also made it known to the Tui shareholders. This is evidenced by the text of a detailed power point presentation made at a number of shareholder meetings.
[256] The plaintiffs' essential complaint against the Tui directors was that, armed with the knowledge of Tui and Kiwi's different accounting policies, the directors nevertheless chose to compare the projected performance of the merged company (using Kiwi's accounting policies) with Tui's stand-alone performance (using Tui's accounting policies). That approach was manifest in the Information Memorandum issued by Mr Ross-Taylor on behalf of the Tui board, in which he advised Tui shareholders that the merged company was predicted to earn an accumulated surplus of 59c/kg milksolids more than Tui's stand-alone projections over the next four seasons, and thus a 60c differential was justified.
[257] The specific complaint under this heading is that, when the EY team came to conduct the independent review they too were aware of the critical differences in accounting practices between the two companies and the review was carried out in that knowledge. Notwithstanding that, they concluded:
Our review of the merger model and related financial information noted that there were four instances where Kiwi may have varied from generally accepted accounting principles. Our review of these issues concludes that the future impact on the payout of the merged entity is not material.
[258] Mr Hagen said that having identified that there were different accounting and depreciation policies, EY should have done an exercise to normalise the historical performance figures of each company, in order to assess the implications of these on the projected payouts under the merger model. However it was only in relation to an assessment of the fairness of the differential that the differences in past accounting policies were relevant and, he said, that this was 'just one of the many factors to be considered in that particular assessment". The merger model had adopted a forward focus dependent upon an analysis of projected future payouts and, as Mr Hagen stressed, it was the greater gain which was projected to accrue to Tui suppliers under the merger, compared with Kiwi suppliers, which in the end justified the differential -not the historical differences in payout. In such circumstances, historical results are only relevant to the extent that they are useful as a predictor of future payouts and, as such, are but one indicator.
[259] Assessing the various matters that Coopers & Lybrand had listed as requiring to be restated on a common basis, Mr Hagen thought the only matter with an ongoing effect that could potentially have reduced the forecasted comparative differentials was Tui's more conservative depreciation policy. He concluded however that any adjustment to account for Tui's different depreciation policy would have had a minimal effect on the merged company's accounting profit, and no greater effect on expected payouts. Therefore his evidence served to reassure that although the EY team had not carried out a normalisation exercise, its conclusion that the impact of any differences in past accounting policies on the future payout of the merged entity was not material.
[260] Likewise, Mr Davies' evidence was also reassuring. Mr Davies thought it appropriate to have accepted Tui' s estimates of its future payouts, and said the issue of whether or not these were based on more conservative policies than those of Kiwi was irrelevant in the circumstances. It was the greater gain which was projected to accrue to Tui suppliers under the merger (compared with Kiwi suppliers) which justified the differential, not any historical differences in payout. In a supplementary brief, Mr Davies provided an analysis of the competing strengths of the two companies, which demonstrated for the Court that in reality Kiwi was the stronger entity .The reality was that although Tui had earned more per kg of milksolid than Kiwi, it was unable to turn that into a higher payout per kg, and that is what mattered. Mr Davies' analytical exercise supported the general belief in the efficiencies to be gained from larger scale operations. This contrary to Mr Henry's submission (quoted in paragraph [248] above). Mr Davies' conclusion on the matter was as follows:
...on balance I believe Kiwi to be the stronger entity .It appears to be more efficient in converting revenues into payouts, it has a significantly greater cash flow, and has greater borrowing strength should this be required, either for expansion of operations or in a price war should that have come about. This is consistent with what I would expect in an industry where efficiencies of scale have driven an historical pattern of amalgamations into larger and larger operating units.
[261] Before concluding this section it is important to refer to two apparent misconceptions which may have exacerbated the plaintiffs' anxiety over the "normalisation" issue. The first misconception is that Tui's conservative historical accounting policies meant that it had a 'nest-egg squirreled away' which could be tapped into, if necessary , to increase payouts. That unfortunately was far from the true position. The second misconception is that a simple change of accounting policies could engender an increase in payouts. On the contrary , as Mr Hodder succinctly put it, "you cannot conjure up payout out of consistent accounting policies".
Change of Accounting Policies in the Future
[262] This issue can be dealt with quite shortly.
[263] It appears that the Tui directors were putting contingency plans into place against the possibility that the merger would not proceed. These plans may have included revision of Tui's accounting policies for the future. However, any such contingent future plans were probably in the nature of survival measures rather than measures that would ensure increased payouts for future years.
[264] Mr Silver said in evidence that there was no suggestion, so far as the EY review team was concerned, that had the merger not proceeded Tui would have altered its accounting methodology in the future to adopt the types of changes that would meet or better Kiwi's payouts. On the contrary, he said, the future payout estimates prepared on behalf of the Tui directors disclosed no intention of altering the accounting methodology in the future, much less of "normalising" with Kiwi's approach.
[265] On the basis of Mr Silver's evidence I am satisfied that, from the point of view he and Mr Cullwick in carrying out their review of the merger and its terms, there was no evidence that the Tui board would adopt different accounting policies from those it had found appropriate in the past, or that any such different accounting policies would have varied its forecasts upwards. I am therefore also satisfied that the adjustments suggested by Professor Pratt are theoretical only as they are not supported by firm evidence of any clear intentions by the Tui directors.
Did the Review Report Provide a Positive Assurance?
[266] Professor Pratt raised a new issue during the hearing: namely, whether the Review Engagement Standards of the New Zealand Society of Accountants (and particularly Review Standard 8 ("RS8") of the Statement of Review Engagement Standard No 1 1989) precluded the EY Jensen review team from giving a positive expression of opinion on the ultimate question put to it in the absence of having carried out an audit. That question was "... whether the merger proposal is fair and in the best interests of the Tui shareholders ".
[267] The review team's expression of opinion was stated in the conclusion to their report in the following way: Following our independent review we conclude that the merger proposal is "fair and in the best interest of Tui shareholders".
[268] Before embarking on an examination of this semantic issue, it is helpful to first consider the scope of the review and the terms of engagement within which it was conducted, as that provides insight into whether the review was in the nature of an audit or was of a different character.
[269] The scope of the review and terms of engagement were clearly and succinctly stated in the introduction to the report. In the introduction Messrs Silver, Cullwick and Jensen set out the terms of reference and carefully emphasised the restricted basis upon which their review had been conducted. The opening paragraph states:
...This 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.
[270] This is followed by advice that the review: does not constitute a due diligence review and should not be treated as such; does not constitute a valuation of either Kiwi or Tui; and has not verified further issues such as: the fair market value of either Kiwi or Tui based on either a standalone or a merger basis;
[271] The nature and content of the introduction to the report thus makes it abundantly clear the restricted nature of the review, the confines of its terms of reference and stresses that it was not a due diligence.
[272] According to the evidence of Messrs Hagen and Davies, the review was not an audit either: rather it was in the nature of an appraisal.
[273] RS8, which Professor Pratt thought of mandatory application to the report provides as follows:
...The report [of a member of the New Zealand Society of Accountants] should contain a statement that nothing has come to the member's attention which would cause the member to believe that the assertions contained in the financial information do not present a true and fair view in accordance with the disclosed basis of accounting. Where the member is unable to make such an assertion, the reasons for the inability to do so should be stated.
[274] Professor Pratt thought the manner in which the review team's conclusion was stated contravened RS8 because it amounted to a positive assurance, rather than containing an appropriate caveat, as required by RS8. In his view, the review team should have expressed their conclusion rather more diffidently and somewhat along the lines: Following our independent review nothing has come to our attention which causes us to conclude that the merger proposal is not fair and not in the best interests of Tui shareholders.
[275] Notwithstanding his views, Professor Pratt accepted that the average Tui shareholder would lack the expertise to understand the difference between an audit and a review, although he believed they would be influenced by the .'unequivocal expression of opinion" given by the EY Jensen team. Mr Davies was however sceptical as to whether the subtle difference between a positive or negative assurance would have any significance for lay persons or make any real impression upon them. [276] Mr Hagen disagreed entirely with Professor Pratt's view on the applicability of RS8 to the report in this case. He said that the Reporting Engagement Standards referred to by Professor Pratt only applied to professional engagements carried out by members of the New Zealand Society of Accountants, and which involved audits of financial statements or review of financial statements and other financial data, where the purpose was to provide a level of comfort as to the content of the financial information contained in a report prepared or provided by another. Therefore, the Review Standards did not apply in the present case, which involved a review "best described as an appraisal report". Nor did Mr Hagen agree with Professor Pratt's assertion that the EY reviewers were under an obligation to express a negative opinion in carrying out their task. RS8 did not apply in any case to Mr Jensen, who was not a member of the New Zealand Society of Accountants. Nor did Mr Hagen think the Reporting Engagement Standard, relating to work performed by assistants and others required Messrs Silver and Cullwick to check or take any responsibility for Mr Jensen's work. Mr Jensen was specifically chosen and appointed to lead the review team because of his industry knowledge and experience, and it was reasonable for the EY members of the team to rely upon him in this regard.
[277] Mr Hagen said the only guideline published by the Institute of Chartered Accountants relevant to this case was GU-IO, although there are no professional standards or guidelines with direct applicability to the provision of appraisal reports in the context of co-operative companies, and in particular of a merger of two co- operative dairy companies pursuant to s 24A of the Act. GU-IO is not an auditing standard but deals with appraisal reports prepared by members of the Institute pursuant to the requirements of the New Zealand Stock Exchange. Although not strictly applicable to the Tui/Kiwi merger, it could be useful as an indicator of the standard that might reasonably be expected of an appraisal report prepared by a member of the Institute.
[278] As Mr Hagen is the author of a number of the New Zealand Accounting Standards and Guidelines, including GU-IO, I accept his advice on this issue. Professor Pratt's advice on the matter could perhaps be regarded as in the nature of a counsel of perfection although, as he fairly acknowledged, he had not considered the merger model or the workings of the review team in preparing the report, prior to expressing his opinion on the matter .
Benefit of Timing Adjustment
[279] Professor Pratt identified a benefit to the Tui suppliers in receiving an earlier payout than Kiwi suppliers. He calculated the benefit as being 1-2c per kg of milk solid. However, as Mr Davies explained, there was another side to the issue. He said that a dairy company which delays payment to suppliers, benefits by keeping its borrowings lower and likewise its interest expense. This in turn improves profitability .As dairy companies generally payout virtually all of their reported profits, the benefit from the lower interest cost flows back to the supplier via the higher profit and thus results in higher payout. Any adjustment then becomes a factor of difference in the dairy company's borrowings rates and those of the suppliers. On this basis, Mr Davies thought the calculated adjustment of 1-26 per kg of milk solid theoretical only and of an insignificant level. I accept his opinion in this regard.
Was the Report Independent and Were the Terms of Reference Subtly Changed by the Review Team?
[280] These related issues can be shortly disposed of. The BY Jensen report was submitted in draft to Messrs Murdoch and Norgate for comment and input. Mr Hagen thought that the degree of editing by those persons appeared to be greater than normal but did not believe that any contamination of the integrity of the report had occurred as a result. He agreed with Ms Taylor that the draft of such a report should normally only be referred to management for the purpose of checking for factual errors or for obvious misunderstandings. It was unusual for any significant editing to occur. However, having reviewed the various versions of the BY Jensen report and the amendments suggested by the senior managers, Mr Hagen found no evidence of bias, nor any evidence that the independence of the report had been compromised by the editing process.
[281] I accept Mr Hagen's assessment on this issue. Unusual as the degree of consultation may have been, the reality is that the EY Jensen report did no more than confirm already established facts. Therefore the fact that Tui/Kiwi senior management provided assistance, by way of comment and suggested amendments, did not mean the report contained misstatements or that the review team were , captured' by those personnel. On the basis of the evidence of the review team and Mr Hagen's opinion, I am satisfied that the EY Jensen report did not lack independence, or was biased or pre-determined in any way.
[282] In reading this conclusion I take into account the very short time frame in which the report had to be completed. This meant the review team needed ready assistance with clarification and the provision of necessary information. On the timing issue and the issue of independence generally, Mr Jensen said as follows:
...because of the time constraints we were working under, we had to rely on the information that was being given to us as being accurate. I was aware that the Ernst Young team was going to make the draft report available to senior management of Tui. I agreed, as I believed that was a sensible course of action. It was important that the review team properly understood all of the relevant factual information. We wanted to ensure that Tui had the opportunity to point out any factual inaccuracies or any misunderstandings on our part of what we had been told by the Company, prior to the report being finalised. I considered this prudent. I did not see it as in any way compromising the independence of the review team.
[283] The second allegation, that the terms of reference were somehow subtly changed by the authors of the report to enable them to provide a positive assurance where one was not warranted, turned out to be completely unfounded. That allegation was based on a misconception by Ms Taylor as to which document contained the agreed terms of reference. The terms of reference were apparently as published to the shareholders and as stated in the introduction of the report itself. There is therefore nothing in this point.
Was the Report Based on Current Information and Up-to-date Assumptions?
[284] Ms Taylor suggested that the authors of the report were at fault for failing to base their calculations on the most recent Tui figures, and suggested that no effort had been made to update the Tui projections. This allegation was based on the discovery by her (in the course of preparation for this litigation) of a revised projection dated 8 August 1996. Tui's future budget in the report was, however, based on a document dated 29 May 1996.
[285] The evidence for the review team on this point came from Mr Basrur, the member of the team with responsibility for analysing the information provided on Tui's stand-alone position and on the future benefits to be derived by Tui and Kiwi.
[286] EY was first approached on 27 August to provide a review team at short notice. A multi-disciplinary team was put together in very short order and on 2 September Mr Basrur wrote to Mr Murdoch, as CEO of Tui, asking for any further supporting details and financial information, including the Tui stand-alone model. The response he received the following day contained material covering the period 1996-2000. Mr Basrur had no reason to doubt that the figures he received reflected the most current forecast at that time. Thus the review team was entitled to rely upon those figures and there is nothing in this point.
Mr Jensen
[287] During the course of the hearing the very few allegations levelled against Mr Jensen effectively evaporated. The first allegation was that he was pro-merger and therefore not truly independent. This was derived from Mr Hedley's view of Mr Jensen being "pro-merger" or "big picture for future reasons" and from some comments that Mr Jensen was thought to have made about mergers between co- operative dairy companies being the "way to go" and the Kiwi/Tui merger being of "more, monetary benefit for Tui than Kiwi".
[288] Nothing that I heard in evidence during the hearing persuaded me in the slightest that either Mr Jensen or Messrs Silver and Cullwick commenced their review exercise with any pre-determined view that the Tui/Kiwi merger was fair and in the best interests of the Tui shareholders, or that they worked towards such a pre- determined conclusion in a blinkered fashion, or that they had their views moulded by the input they received from the Tui/Kiwi senior managers.
[289] Two deletions from the draft report also drew particular comment. One related to the cost of switching supply and the other related to tax issues that may have had a negative influence on Tui suppliers. The former was deleted, according to Mr Basrur, because it was not possible to predict on any meaningful basis what the ultimate cost of switching might be. The latter, which Mr Jensen was responsible for, was deleted for the following reasons given by Mr Jensen:
A consideration of the tax issues was not included in the terms of reference signed off by me on 3 September 1996. ...Ernst Young decided to add this issue to the terms of reference. In my view the tax considerations arising out of a merger were not of any material relevance because whatever the tax position ultimately was, it would be addressed by the merged company. My understanding was it would not have any impact on individual Tui shareholders. My concern was that having raised the tax considerations, Ernst & Young needed to be more definitive in their conclusion to that issue. In the raft report they suggested a binding ruling be obtained from the IRD. This was unachievable in the time frame. I did not want shareholders to vote "Yes " or "No " because of some uncertainty on this particular issue.
[290] Neither of the above criticised amendments, by way of deletion, altered the substance or conclusion of the report in any material way. This was the view expressed by Mr Hagen, when he was asked to comment on the effect of the deletions. I accept that view and Mr Jensen' s evidence on this issue.
[291] A further allegation of bias, made by Ms Taylor, related to a facsimile message sent by Mr Jensen to EY commenting on the tax considerations issue. That allegation was properly withdrawn by Ms Taylor during the course of her cross- examination by Mr Crombie.
[292] The case against Mr Jensen also concerned the supply loss issue, as that issue affected Part 9 of the report for which he was responsible, as well as Part 6 for which the EY team was responsible. I now comment on that issue under a separate sub- heading.
The Issue of Supply Loss in the EY Jensen Report
[293] I have already definitively found that there was a real risk of supply loss if the merger did not proceed and thus there was no misstatement of the issue in the EY Jensen report. Part 6 of the report dealt with the Implications of Supplier Losses and, as noted, Mr Jensen also dealt with it in passing in Part 9 of the report ( essentially incorporating the effect of Part 6).
[294] The statements about potential supply loss in Part 6 of the report were introduced in appropriately equivocal terms in paragraph 1; for example, "If the proposed merger does not proceed, then it is possible that some of the present shareholders of Tui would discontinue supplying Tui and start supplying Kiwi instead." (emphasis added)
[295] The second paragraph contained a table showing the "likely" losses of Tui's supply if the merger did not proceed and a corresponding reduction of forecasted Tui payouts, based on discussions and estimates supplied to the EY review team- ( emphasis added) The table is clearly contingent and is accurate in its contingent predictions.
[296] In Part 9 of the report Mr Jensen stated simply and factually as follows:
The desire of a number of Tui's existing and prospective shareholders to transfer their supply to Kiwi was one of the factors that motivated the Boards of the two companies to consider, and then propose a merger. If the merger does not proceed, it is clear that a number of Tui shareholders will join Kiwi in 1997. Applications to do so have increased since the first Extraordinary General Meeting. It is probable that a number will be accepted.
[297] I can find no possible fault with the above statements, nor with the table which contains no more than forecasts based on the information to hand, which information was truthful, being based on reality .If anything, the estimates of forecast losses in the table could probably be construed as extremely conservative.
Conclusion
[298] I am satisfied that, apart from the failure to normalise accounting differences between the two companies so as to properly compare Tui and Kiwi pre-merger, there is no foundation to any of the criticisms of the EY Jensen report. The report contains no misstatements, negligent or otherwise. As for the failure to normalise the historical accounting differences, I accept the evidence of Messrs Hagen and Davies that this had no impact on the forecasted payout of the merged entity and thus did not constitute a negligent omission on the part of the EY team and did not affect the validity or soundness of the report or its conclusion.
CAUSATION AND LOSS
Have the Benefits of the Merger Come to Pass -Or Have the Tui Shareholders Suffered a Loss?
[299] Mr Hagen's considered opinion, which I accept, is that it is impossible to definitively analyse whether the payout actually received by former Tui shareholders from the merged company is less than the payout they could have expected to receive had Tui remained stand-alone and survived supplier loss.
[300] The actual differential paid has in fact been 59c, not 60c, as a consequence of better than expected results for the merged company, triggering the clawback provision in the merger proposal.
[301] Mr Hagen said it is not a simple matter to compare the actual performance of the merged company with that forecast in the merger proposal because of changes that were made to the NZDB cost models in 1996. Those changes increased the base prices so that the proportion of total payment to suppliers attributable to company margins was reduced. In those circumstances the payout above NZDB based (the payout measuring) may have reduced, but suppliers would still have received the same total return.
[302] Mr Hagen said, however, that the possibility of changes in the NZDB cost models was foreseen in the merger proposal, which specifically recognised that such changes could affect the appropriate "trigger" levels for the minimum payout provisions and the clawback provision in the merger proposal.
[303] Mr Hagen had prepared for the Court a table of adjusted results after allowing for NZDB cost model changes, showing a net gain to Tui shareholders as follows:
| 1997 | 1998 | 1999 | <|
| Tui standalone forecast | 35 | 37 | 40 | <
| Less accumulative cost model changes | (3) | (9) | (10) | <
| 32 | 28 | 30 | <|
| Less business development programme | (10) | <||
| 32 | 28 | 20 | <|
| Plus actual NZDB base price | 318 | 300 | 325 | <
| Adjusted Tui standalone forecast | 350 | 328 | 345 | <
| Actual Tui Supplier received | 354 | 328 | 352 | <
| (after merger and differential) | <|||
| Net Tui gain | 4 | 0 | 7 | <
[304] There seems no reason not to accept Mr Hagen's analysis and to therefore conclude that the payout received by the former Tui shareholders is more than they could have expected to receive had Tui remained stand-alone and survived supplier loss in the wake of the merger not proceeding.
FAIR TRADING ACT 1986 CLAIMS
[305] The Fair Trading Act 1986 claims fail against each of the defendants because I have found that no evidential basis exists for the allegations of misleading or deceptive conduct on the part of the Tui/Kiwi defendants, or negligent misstatement by EY and Mr Jensen.
[306] Furthermore, the plaintiffs' claim appears to be time barred by virtue of s 43(5) of the Fair Trading Act 1986. Pursuant to s 43 an application for relief must be made within three years from the time in the matter giving rise to the application occurred (s 43(5)).
[307] So far as the claims against the Tui/Kiwi defendants are concerned, the matters pleaded as "conducted" in the statement of claim do not extend beyond 11 September 1996, when the Operating Scenario was published to the Tui shareholders. This proceeding was not issued until 23 September 1999, more than three years after the allegedly infringing conduct occurred and therefore outside the limitation period for issuing proceedings under the Fair Trading Act.
[308] Insofar as the EY Jensen report is concerned, it was issued on about 17 September 1996 and it is a reasonable inference that it was received by the plaintiffs no later than 20 September 1996. Therefore any allegedly infringing conduct on the part of EY and Mr Jensen also occurred outside the limitation period for issuing proceedings under the Fair Trading Act and is time barred.
CROSS CLAIMS
[309] There is a cross claim by Mr Jensen against the EY defendants. This is based on Mr Jensen' s lack of competence to advise on any issues that were of a financial accounting and taxation nature, which were properly the province and responsibility of the EY team members. He therefore claimed entitlement to rely on the EY defendants findings on those issues when concurring with them on the conclusion that the merger was fair and in the best interests of Tui shareholders.
[310] As I have found there was no basis to the plaintiffs' claim in relation to the EY Jensen report, Mr Jensen's cross claim is effectively redundant and can be dismissed.
CONCLUSION I
[311] A summary of my findings in relation to each cause of action follows.
Cause of Action 1: I am satisfied that there was jurisdiction to hold the 27 September 1996 EGM and this cause of action must fail accordingly.
Cause of Action 2: I am satisfied that there was no deceitful conduct by Kiwi, Messrs Norgate, Young or the Tui board to obtain a "Yes" vote to the special resolution at the 27 September 1996 EGM. The claim against Kiwi must fail in any case, as Kiwi was a representor who became a party to the merger contract and cannot therefore be sued in tort for deceit in relation to that contract.
Cause of Action 3: I am satisfied there was no deceit by Mr Young as to whether the merger model had been "audited" by KPMG. Again the claim against Kiwi in this cause of action must also fail for the further reason that Kiwi was a representor who became a party to the merger contract.
Cause of Action 5: I am satisfied that there ere no deceitful misrepresentations by Kiwi, Messrs Norgate and Young in July 1996 that Kiwi had 200-300 applications from Tui suppliers to supply Kiwi in the 1996/1997 or 1997 11998 season. Again the claim against Kiwi also fails on the basis that Kiwi was a party to the merger contract.
Cause of Action 7: I am satisfied that there was no deceit by Kiwi or Mr Young in concealing and not disclosing the agreement to acquire an interest in Mainland. Again the claim against Kiwi fails on the basis that Kiwi was a party to the merger contract.
Cause of Action 8,9,10: I am satisfied there was no breach or failure of duty of care by EY or Mr Jensen in providing an independent review report and no breach of duty of care in relation to the Executive Summary to that report.
Cause of Action 4,6,11: These are the Fair Trading Act 1986 causes of action. They do no more than repeat the allegations in causes of action 3, 5 and 8/9/10 respectively as deceitful and negligent breaches under the Fair Trading Act 1986. F or the reasons already given in relation to causes of action 3, 5 and 8/9/10, I am satisfied that there is no substance to the allegations underpinning causes of action 4, 6 and 11. Furthermore I am satisfied that these causes of action are time barred.
CONCLUSION II
[312] The allegations of deceit made in this case are particularly serious, the more so, in my view, because they have no foundation.
[313] The proceedings were not brought by the plaintiffs until 24 September 1999, almost three years to the day after the 75% majority vote to pass the special resolution was cast. I was informed that proceedings were not able to be issued until that late point in time because it was only then that some evidence of "deceit" was found by the plaintiffs' experts following a lengthy analysis of the "paper trail". Unfortunately, as I have found, the advice given to the plaintiffs by their experts was somewhat flawed owing to a number of misapprehensions; the applicability of the New Zealand accounting standards and guidelines; the differences in the valuation of shareholdings in dairy co-operative companies and companies listed on the New Zealand Stock Exchange; the difference between the legal environments under which the Tui/Kiwi and GlobalCo mergers took place; the fact that Arthur Andersons were expressly required to undertake separate valuations of NZDG and Kiwi prior to the GlobalCo merger and further expressly required to consider an EBITDA approach in carrying out such valuations. In addition Ms Taylor was unaware of the Commerce Commission's report on the Tui/Kiwi merger. Also, despite her criticism, Ms Taylor had not carried out an EBITDA valuation of the Tui shares herself, nor had Professor Pratt done an exercise on normalisation of the Tui and Kiwi accounting policies to restate their payouts on a common basis.
[314] In essence the plaintiffs' case was never founded on anything more than mere suspicion. Illustrative of this was their inability to point to any motive for the alleged "plan" of deception they pleaded against the Tui directors. They were unable to point to any evidence of a motive to deceive, or to conceal the "true authorship" of the Merger Update. Mr Henry simply described the allegedly 'concealed' authorship of that document as "yet another void", which he said confirmed the plaintiffs' suspicion that it must have been part of a conspiracy to deceive them. In determining whether it is possible to discern any motive on the part of the Tui directors to deceive the shareholders, it is of relevance to note that each had a personal interest in the outcome of the merger, in the sense of whether it was in their personal best interest and whether the 60c differential was a fair price to pay. This does not mean that the Tui directors were in a situation of conflict or were not at all times acting in the best interests of all of the Tui shareholders. But it renders highly unlikely the prospect that the Tui directors would have deliberately determined on a course that would cut across their own interests as shareholders.
[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 i the part of the Tui directors. The suspicion they harboured even led some to 1 approach the Serious Fraud Office following the merger, to ascertain whether any 1 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.
Solicitors: J \ Innes Dean, Palmerston North, for the Plaintiffs
Chapman Tripp Sheffield Young" Wellington, for the First, Second, Third and Sixth Defendants J : Buddle Findlay, Auckland, for the Fourth Defendants
Cooney Lees & Morgan, Tauranga, for the Fifth Defendant
Delivered at 1.30 pm on 21 December 2001.