Selling or purchasing a dairy farm – what are the fundamentals?

Nicola Oldridge – Solicitor

Fonterra Shares Part 1
With farming and agriculture being one of New Zealand’s largest industries, it is surprising as to how little is understood about the sale and purchase of dairy farms, and in particular, how Fonterra shares are dealt with as part of that transaction.

When selling or purchasing a farm, the parties may consider and negotiate the following options:

  • The dairy farm is sold together with the Fonterra shares;
  • The dairy farm is sold without the Fonterra shares. The Vendor may sell the Fonterra shares on the Fonterra Shareholders’ Market (FSM) over a period of no more than 3 years, receiving the benefit of the Fonterra dividend while the Fonterra shares are owned; or
  • The Purchaser decides whether to purchase all the Fonterra shares now, or to supply Fonterra upon a contract supply basis (depending on the contract supply terms).

If the parties agree that the Fonterra shares will be included in the transaction, the parties will agree on a price for those shares.   When agreeing on the price, the parties may consider the following options:

  • The parties agree on a fixed price for the Fonterra shares prior to signing the Agreement for Sale and Purchase (Agreement); or
  • The parties agree that the Fonterra share price is set independently by a formula having regard to the Fonterra share price on the FSM prior to the settlement date. This may be uncertain if the share price increases or decreases prior to settlement.

An advantage of including Fonterra shares in the sale is that both parties have certainty over the price they will have to pay for the shares, taking into account that the Agreement is often signed months before settlement and the share price may increase or decrease during that period.  If the shares are not included, the parties do not have that certainty.

However, these days it is more common for parties to agree that Fonterra shares are not included as part of the sale of a dairy farm, particularly for the simplicity of the Agreement.   However, this is not without its perils.

Purchasers should not overlook including additional contractual requirements in the Agreement, relating to Fonterra.  For example, the Purchaser will be intending to receive a compliant dairy farm from Fonterra’s perspective.  Even though Fonterra shares may not be included in the transaction, the Agreement can be silent on other relevant Fonterra supply requirements.

It is also recommended that the Agreement records something more than the common clause stating that the tanker track and cowshed meet Fonterra’s requirements.   From a Purchaser’s perspective, this may include:

  • Warranties by the Vendor that the farm complies with Fonterra’s supply requirements (even if the Purchaser will supply a separate dairy processor);
  • The Vendor will rectify any actions identified in the QCONZ report and Transport Report; and
  • The Purchaser’s right to access information regarding the Farm from Fonterra.

On the other hand, a Vendor should carefully review the warranties being given prior to entering into an Agreement.  A prudent Vendor could obtain a Fonterra Transport Report before signing the Agreement to avoid any expensive surprises which might arise when Fonterra undertakes the report as a result of the Purchaser’s application for supply. The Transport Report may highlight any outstanding requirements in relation to fencing of waterways, the tanker track and the vat stand.

The above matters are only a small portion of those that should be taken into account by parties considering entering into an Agreement for the sale and purchase of a dairy farm.   Supply contracts, liquidated damages and leasing of dairy farms are also relevant matters that parties will need to consider and negotiate with the help of their professional advisors.

If you are considering either selling or buying a dairy farm, we recommend that you come and see us first to discuss. The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation. Further information and assistance in relation to this article can be gained by contacting commercial lawyer Nicola Oldridge.