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Buying and Selling a Farm With or Without Fonterra Shares

29 June 2018

Before the introduction of Trading Among Farmers (TAF) and Fonterra supply contracts, only Fonterra suppliers could hold Fonterra shares and suppliers were required to hold one Fonterra share for every 1kg of milk solids they supplied. Although the Fonterra share standard hasn’t changed, TAF and supply contracts have given dairy farmers more flexibility around the purchase, ownership and sale of shares.

When a farm changes hands, the buyer has several options: purchase the Fonterra shares from the seller (if the seller agrees), purchase shares on the Fonterra Shareholders’ Market (FSM), enter into a supply contract with Fonterra and share up over three or six years (depending on the contract type), or supply to a dairy company other than Fonterra. Farm sellers can sell their shares to the buyer or sell them on the FSM over three years and receive the Fonterra dividend during this time.

Where Fonterra shares are not included in the sale, the agreement for sale and purchase is simpler. However, buyers should still carefully consider the agreement provisions, even if they intend to supply a different company. Agreements should include warranties from the seller that the farm complies with Fonterra’s supply requirements, the seller will rectify any deficiencies identified in the QCONZ report and Transport Report and the buyer will be entitled to access Fonterra records regarding the farm. Other Fonterra standards could also be included such as warranties regarding the state of the effluent system, waterway management and the completion of a Nitrogen management plan. If the buyer does not intend to supply Fonterra then they should consider requiring the seller to purchase the vat from Fonterra.

A seller should be very careful giving warranties to a buyer. To avoid potentially expensive surprises, the seller could obtain a Transport Report before signing the agreement. The report could detail outstanding requirements in relation to fencing of waterways, the tanker track and the vat stand. One advantage of including Fonterra shares in the sale is that buyers and sellers have certainty over price. As the agreement is often signed well before settlement, the share price can fluctuate during that period.

There are many more matters that should be negotiated and included in an agreement for the sale and purchase of a dairy farm.  The significant sums of money involved mean they deserve significant attention.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott