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Low returns from farming company - is that unfair for shareholders?

30 September 2017

More often than not farming is a long term multi-generational business. Substantial amounts of capital are employed but returns on that capital are typically very low. Over the longer term increases in farm values have compensated the owners where low profits in the short term have failed to deliver. What if a shareholder in a farming company does not accept the low returns and wants his or her capital out of the company?

Shareholders may claim relief for unfair conduct of company

The fortunes of shareholders, particularly minority shareholders, can depend on decisions over which they have no control. However, the law does afford shareholders various means of protection. One of those means is provided by section 174 of the Companies Act 1993. Under s 174 a shareholder (or former shareholder) who considers the affairs of the company have been, or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to the shareholder may apply to the Court. The Court may, if it considers it just and equitable to do so, make various orders, including orders requiring the company or other person to acquire the shareholder’s shares or pay compensation, regulating the conduct of the company, altering the company’s constitution, appointing a receiver, putting the company into liquidation or setting aside action taken by the company or its directors. In the case of a company owning a farm, the powers given to the court under s 174 could include the sale of the farm.

Leading case may give comfort to farming families

The leading New Zealand case on this section may give some comfort to farming families who want the farm to stay in the family long term despite the substantial investment and low returns. The leading case was decided in 1984 and involved a family company which had carried on business as a general carrier for nearly 50 years. The shares were owned by the third generation of the company’s founder. Several of the shareholders were employed in the business. The company had been managed very conservatively and recent returns to shareholders had been low, but the company was in a very sound financial position. The business had been carried on from premises owned by it for more than 40 years. These premises had appreciated in value. The company had significant cash in the bank, it had no liabilities except trade creditors and was able to purchase assets from its own funds without resorting to borrowing.

One of the shareholders (who was not employed in the business) had tried to convince the other shareholders to sell the company’s assets and invest the funds in higher income earning investments. When that was unsuccessful he gave notice to the company that he wished to sell his shares. When nothing came of that he sought relief from the Court arguing that the company took a commercially unreasonable approach and generated a totally inadequate return to its shareholders.

The shareholder was unsuccessful. The court noted that relief under the section should not be lightly granted. Even so, there need not be mismanagement or improper conduct by the company for relief to be appropriate. The court held that this company could rely on its history and the understanding of past and current shareholders. It could continue to operate under conservative financial management and pursue its central objective of providing employment for family members. The court said that “It would be unrealistic in a family company to ignore family considerations of that kind”. The court went on to say that the pursuit of profits must not necessarily be the overriding goal of the company as the capital appreciation of its shares was also an important factor.

But … it all depends

Although this case supported the continuation of the status quo despite the low returns to shareholders, the court stated that “Fairness is not to be assessed in a vacuum or simply from one member's point of view: there must be a balancing of all the interests involved.” A different set of circumstances could result in relief being granted to a shareholder and that could include an order for the sale of the farm.

 

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