Kiwifruit Insiders Special Privileges Project

17 February 2015

KIWIFRUIT INSIDERS SPECIAL PRIVILEGES PROJECT

IKGA raises concerns over apparent conflicts of interest on KISP

Last week IKGA members received a copy of the Kiwifruit Industry Strategy Project ( KISP) “ Pre Referendum Explanation” document which has had IKGA committee members telephones running hot.

This has been compounded with IKGA learning that Zespri Director Paul Jones has been buying Zespri shares at the same time that the carefully selected members of KISP (including Mr Jones business partner the former longstanding Zespri Director & Chairman Craig Greenlees) were deliberating on the future of the kiwifruit industry.

The reason our telephones have been running hot is because KISP has ignored grower concerns on share alignment and calls for Zespri to become a co-operative like Fonterra. Instead, KISP, members have been engaged in special meetings outside the normal submission process with…. “ a group representing a number of current shareholders who are currently overshared and former growers who have retained their shares (dry shareholders)” . KISP is now recommending, as a result of these meetings with this special interest group, that growers support dry shareholders keeping their shares and overshared growers like Mr Jones, Mr Greenlees and the Chairman of Zespri Peter McBride (both of whom sat on KISP and would naturally enough be highly influential as Chair and former Chair of Zespri) be allowed to keep the shares they have acquired over and above their kiwifruit production to a level of 4 shares to every 1 tray of kiwifruit production and continue to receive dividends on those shares for the next 7 years.

IKGA has therefore decided to rename KISP for what it appears to be – an INSIDE JOB TO GIVE SPECIAL PRIVILEGES TO A SELECT GROUP OF GROWERS.

IKGA would like Mr Jones and Mr Greenlees who have both been actively buying kiwifruit orchards and shares in recent times to publicly disclose:

1. Their current direct shareholdings in Zespri and production alignment with those shares.

2. The shareholdings of “associates” being parents, partners, siblings, children and entities controlled by them.

3. The reasons why Mr Jones had the confidence to make large scale investments in kiwifruit orchards and Zespri shares before he became a director of Zespri.

4. Copies of the share trading approvals given to Mr Jones in accordance with the Zespri Director and Employee share trading rules for all of the share trades undertaken by him and his associates since he became a director of Zespri.

5. If either Mr Jones or Mr Greenlees or any of their associates funded grower Darren Chinnery to run the lobbying campaign with KISP on behalf of the special interest group.

.

IKGA ALSO CALLS ON MR GREENLEES TO CONFIRM THAT WHILE A DIRECTOR OF ZESPRI HE DID NOT DISCLOSE TO MR JONES OR ANY ASSOCIATES OF HIMSELF OR MR JONES ANY MARKET SENSITIVE INFORMATION OR STRATEGIC INFORMATION THAT HAD NOT BEEN DISCLOSED TO THE MARKET ( ie the wider kiwifruit industry.) 2

IKGA also wants Zespri to explain why approval was given to Mr Jones for purchases of shares made by him ahead of the release on 16th December of market sensitive information relating to Zespri’s profit forecast.

The background to this issuee lies in the requirement of the Kiwifruit Export Regulations 1999 that require Zespri to be an ordinary company with no alignment between shareholding and production unlike Fonterra which is a co-operative where production of milk is related to shareholdings and where dairy farmers can choose to supply milk to another processor and exporter. In 2010 IKGA voiced concerns at the unfairness of the situation that had evolved under the 1999 regulations where there was an imbalance between shareholdings in Zespri and kiwifruit production. As a result of that, in 2010, NZKGI and Zespri decided at a “Share Group” meeting that they were going to “encourage dry shareholder buy backs” and make Zespri shares “more affordable , more liquid and more aligned with kiwifruit production”. This statement recognized that growers who increase production or, for whatever reason [ eg the financial impact of PSA on them, historically poor returns (arguably because of the Zespri cost structure) crop failure or poor advice ] sell their Zespri shares have no easy way to acquire shares to get into alignment unless, of course, dry or overshared shareholders like Mr Jones decide to sell some of their shares. Given historically high dividend yields accruing from the fruit returns of all growers compelled by law to supply Zespri the trading in Zespri shares has been very light as acknowledged by KISP.

That statement by the share group was almost 5 years ago. Predictably enough the “Share Group” got nowhere. The situation is now out of control with these latest KISP recommendations made after they heard from the special interest group representing the interests of people like Mr Jones, Mr Greenlees and Mr McBride.

IKGA says that kiwifruit growers do not need to worry about other parties and foreign investors pursuing what KISP describes as “self-interest at the expense of delivering sustainable long-term wealth to NZ Kiwifruit growers.” They need to look instead at the overshared growers who are members of KISP and the pattern of share purchases by Paul Jones on the Zespri Canopy website and ask themselves where the real “self-interest” resides.

According to Zespri’s annual report there are 2350 growers and 2133 shareholders in Zespri but 658 shareholders together own 74.7% of the shares in Zespri leaving 1475 shareholders with the rest of the shares. Some of these shareholders are no longer growers.

In 2010 Zespri advised IKGA that there were 338 “dry” shareholders being former growers who had sold their orchards but kept their shares in Zespri. IKGA has looked at the figures from Zespri and worked out that based on that historical data there are at least 555 growers with no shares in Zespri.

2133 shareholders

less 338 “dry” shareholders (based on 2010 figures *)

gives 1795 grower shareholders.

2350 growers less 1795 grower shareholders = 555 growers with no shares in Zespri but compelled by law to supply Zespri.

*Dry shareholdings will be more than 338 because dry shareholder numbers are growing as older growers sell their orchards but keep their high yielding Zespri shares.

Also, it is highly likely that the majority of the 1475 shareholders in Zespri who together only own 26.3% of the shares are under-shared growers. That means that around 85% of NZ Kiwifruit growers are not getting the full value of their fruit returns which are being diverted to pay for the promotion of the Zespri brand that belongs to Zespri shareholders ( along with the intellectual property in kiwifruit varieties developed with the aid of $35 million of taxpayer money) AND to pay dividends to dry shareholders and over shared shareholders of Zespri.. 3

There is nothing commercial about the KISP recommendations. They entrench a system of privilege for a few at the expense of the majority. Growers are not being told many things including that:

• Getting rid of the restrictions in the regulations around the constitution of Zespri will also get rid of the very specific requirement of the regulations that the Directors of Zespri must act in the best interests of the Company and cannot treat Zespri as a joint venture company. IKGA would argue that many of the documented governance failings of the board of Zespri are precisely because there is a board culture that treats Zespri like a joint venture.

• Changes to the core purpose of Zespri to allow it to continue to diversify away from being a pure marketer of NZ Grown kiwifruit could allow Zespri to engage in any business activity it likes such as using the Zespri brand to market other fresh produce if the Directors decided that was for the “financial benefit” of NZ Kiwifruit Growers. IKGA wonders if the parliamentary drafters will be able to define “financial benefit” or just leave it undefined as they did in the current regulations with the term “ overall wealth of NZ kiwifruit growers” which is used to kill off any collaborative marketing applications by other exporters that might impose competitive discipline on Zespri and the term “ commercial grounds” which is the basis on which Zespri can discriminate between growers and even refuse to accept a growers fruit for export as has been the case in the past.

IKGA SAYS THAT THE SPECIAL INTEREST GROUP HAVE A CHOICE:

1. Go to the Minister and ask for legislation like the Dairy Industry Restructuring Act to turn Zespri into a co-operative with production and share alignment , a collaborative marketing system that imposes competitive discipline on Zespri and an independent government appointed regulator;

OR

2. Keep your Zespri shares and DEREGULATE so that growers can choose their exporter and then we won’t care how many shares you have in Zespri or how Zespri operates.

KISP says that the changes it wants to make to the export regulations to remove restrictions on Zespri’s structure and governance are about giving Zespri shareholders “ flexibility to respond … to any event or emergency facing the industry”. KISP does not explain how being able to make changes to the company constitution of Zespri which would require a specially convened shareholders meeting does anything to enhance an industry emergency response. The industry responded quickly to the PSA incursion without any changes to the Zespri constitution. This statement is window dressing the reality which is that KISP is asking growers to support the wholesale capture of the industry and their livelihoods by a company currently under investigation by the SFO with numerous well documented failings in governance and which now appears to be coming under the control of a special interest group who have connived with KISP to attempt to make a raid on the regulations and gain absolute control.

This statement by KISP also ignores the fact that the industry is more than Zespri shareholders. The industry is all kiwifruit growers and the businesses that service the industry who, along with regional economies (especially in the BOP) are impacted by the way that Zespri operates.

IT IS BAD ENOUGH THAT A PRIVATE COMPANY LIKE ZESPRI OPERATING AS A STATE TRADING ENTERPRISE WAS GRANTED MONOPOLY TRADING RIGHTS OVER A $1 BILLION A YEAR INDUSTRY BY REGULATION WITHOUT SPECIFIC REFERENCE TO PARLIAMENT. IT IS ANOTHER THING FOR A SPECIAL INTEREST GROUP TO ATTEMPT TO BYPASS PARLIAMENT AGAIN AND GET THE MINISTER OF PRIMARY INDUSTRIES MR NATHAN GUY TO GIVE THEM ULTIMATE CONTROL AND EVEN GREATER PRIVILEGES. 4

THESE REGULATIONS DIRECTLY IMPACT THE PROPERTY AND PERSONAL RIGHTS OF 2350 GROWERS AND A BILLION DOLLAR INDUSTRY. CHANGES TO THEM SHOULD NOT BE A MATTER THAT BYPASSES PARLIAMENT. IF THE SPECIAL INTEREST GROUP GET WHAT THEY WANT THE REGULATIONS WILL BE AN EVEN GREATER UNCHECKED INFRINGEMENT OF THE PROPERTY AND PERSONAL RIGHTS OF KIWIFRUIT GROWERS THAN THEY ALLREADY ARE AND A CONTINUING BLACK MARK ON REPRESENTATIVE GOVERNMENT.

THE KISP VOTING IS A RORT NOT A REFERENDUM. GROWERS SHOULD BLOCK VOTE NO TO ALL THE KISP RECOMMENDATIONS.

Information about IKGA

• IKGA was established in May 2010 by a group of concerned kiwifruit growers.

• IKGA aims to provide an independent voice for kiwifruit growers because it has no confidence in the ability of KNZ or NZKGI to act as effective watchdogs on the activities of Zespri.

• IKGA believes there are questions that are not being asked about the activities of Zespri, the way it operates and how grower funds are dealt with.

• IKGA is concerned that Zespri has become another corporate and lacks proper accountability to growers.

• IKGA is not seeking the removal of the SPE – it wants the SPE to work better for Growers

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