The milk dries up
Reggie and Regina have a dairy farm in the Waikato. They are part of a dairy co-operative and hold 180,000 shares in the dairy co-operative, equal to an estimate of their farm’s kilogram milk solid (KgMS) production.
When Reggie and Regina first joined the dairy co-operative in the 2012/2013 season, they had just come off a record season in 2011/2012 where their farm had produced 180,000 KgMS. The dairy co-operative assessed Reggie and Regina’s shareholding based on their previous year’s production and allocated them 180,000 normal shares in the dairy co-operative.
From the time Reggie and Regina had joined the dairy co-operative, their farm had not been able to achieve the same production levels. Reggie and Regina wanted to surrender 10,000 ‘dry’ shares (shares which were not backed by their KgMS production) to the dairy co-operative.
The dairy co-operative declined to accept Reggie and Regina’s dry shares. The dairy co-operative’s board said that it had introduced a policy in October 2008 that it would not exercise its discretion to accept the surrender of dry shares unless the decrease in actual production was 15% or more than the allocated shareholding for the previous year.
The dairy co-operative said its 15% threshold was appropriate because it allowed for the seasonal variation in production that dairy farmers can experience.
Reggie and Regina’s view
Reggie and Regina were disappointed. They felt that the dairy co-operative was acting unfairly by not exercising its discretion in their favour. Reggie and Regina also felt the dairy co-operative had unreasonably set their shareholding level based on one strong season.
Reggie and Regina complained to FSCL and asked us to review the co-operative’s policy and its constitution.
The dairy co-operative’s constitution allowed the dairy co-operative to use Reggie and Regina’s KgMS production from the 2011/2012 season to fix Reggie and Regina’s shareholding at 180,000 shares for the 2012/2013 season. We found the constitution had been correctly followed and the initial share allocation to Reggie and Regina was reasonable.
We also reviewed Reggie and Regina farm’s output and found its KgMS production had decreased 7.8% from its 2011/12 season to its 2014/15 season.
We found the dairy co-operative’s constitution did not provide a mechanism for shareholders to redeem the shares they held in excess of their kg/ms production, and that it was at the dairy-co-operative’s discretion to accept Reggie and Regina’s surrender of their ‘dry’ shares.
We considered the dairy co-operative’s policy, that it would only exercise its discretion when a shareholder’s milk production dropped by 15% from its initial production level, was reasonable and appropriate. We agreed with the dairy co-operative that the 15% threshold was appropriate in balancing the seasonal variations inherent in dairy farming and the need to provide real relief where a shareholder experienced a significant drop in production.
We concluded that the dairy co-operative had fairly applied its policy to Reggie and Regina and had fully considered Reggie and Regina’s position in making its decision.
We recommended that Reggie and Regina discontinue their complaint.
Most companies’ powers will have a basis in legislation or in a company’s constitution. FSCL can review the wording of constitutions and see whether those powers are being reasonably applied. Where a company has developed a policy, we can also assess how that policy was formed and whether it has been fairly applied in the circumstances.