Bulley v Attorney-General for and on behalf of the Ministry of Energy [2012] NZHC 615 (2 April 2012)

Last Updated: 26 April 2012

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-463-640 [2012] NZHC 615

IN THE MATTER OF an application under ss 64 and 66 of the Trustee Act 1956 for orders in respect of the trusts of a deed dated 1 August 1994

BETWEEN DAVID ALLEN BULLEY, KEVIN JOSEPH HENNESSY, BRIAN EDWIN PONTING, PETER JAMES PATTERSON, DONNA MAREE SMIT AND WADE ROSS BROWN AS THE TRUSTEES OF THE EASTERN BAY ENERGY TRUST Applicants

AND THE ATTORNEY-GENERAL FOR AND ON BEHALF OF THE MINISTRY OF ENERGY

First Respondent

AND GRAHAM PRYOR, STEPHEN TIPENE PERENARA MARR, CATHY DEWES, KENNETH RAURETI, HARINA WARBRICK, MARTIN MARR AND MEREPEKA RAUKAWA-TAIT AS TRUSTEES OF THE TE MANA O NGATI RANGITIHI TRUST

Second Respondents

Hearing: 7 - 9 February 2012

Appearances: A Molloy QC, M Beech and M King for the applicants

D Consedine (abiding) for the first respondent

C Carruthers QC and M Branch for the second respondents

D Hurd for Consumers

Judgment: 2 April 2012

_{JUDGMENT OF CLIFFORD J}

BULLEY AND OTHERS v THE ATTORNEY-GENERAL AND OTHERS HC WN CIV-2010-463-640 [2 April

2012]

Introduction

[1] The applicants are the current trustees (“the Trustees”)1 of the Eastern Bay Energy Trust (“the Trust”), a trust for the benefit of Consumers of electricity in the (Eastern) Bay of Plenty. The terms of the Trust, including the definition of the term Consumer, are recorded in a deed of trust dated 1 August 1994 (“the Trust Deed”) made between Bay of Plenty Energy Limited (“the Company”) and the Trustees. In August 1994 the business of the then Bay of Plenty Electricity Power Board (“the Board”) was, pursuant to the Energy Companies Act 1992, transferred to the Company and five million shares in the Company - 25.03 per cent of its issued capital – were vested in the Trust.

[2] The Trust now owns 77.32 per cent of the shares in the Company, now called Horizon Energy Distribution Limited.2 The Trust may wish to acquire further, and perhaps all of the, shares in the Company.

[3] The Trustees have brought these proceedings because doubts have been raised – by reference to certain provisions of the Trust Deed – as to the lawfulness of the Trust’s current and possible future ownership of shares in the Company. The Trustees seek directions under s 66 of the Trustee Act 1956 to confirm that the Trust’s current ownership of shares in the Company is lawful in terms of the Trust Deed. If the Court declines those directions, the Trustees seek orders under s 64 of the Trustee Act giving them power to retain the Trust’s current shareholding, and to acquire further shares, in the Company.

[4] The Attorney-General abides the decision of this Court.

[5] Mr Hurd appeared to represent the interests of Consumers under the Trust

Deed pursuant to orders sought by the Trustees when they began these proceedings. Mr Hurd generally supports the outcomes sought by the Trustees.

1 In this judgment I use the term “the Trustees” to refer not only to the applicants but also to the

_{other persons who at relevant times were the trustees of the Trust.}

2 Throughout the various affidavits and submissions provided to the Court, slight differences were recorded as regards firstly the percentage of shares the Trust currently has in the Company, and second the percentage of the shares the Trust obtained from United Networks Limited in 1999 (discussed further at [25], [29] and [31]). For consistency, this judgment has recorded these two percentages as 77.32 per cent and 52.29 per cent respectively.

[6] The second respondents are the trustees of the Te Mana o Ngati Rangitihi Trust (“the Ngati Rangitihi Trust”), a local iwi trust and itself a Consumer. The second respondents were joined to these proceedings in circumstances referred to in more detail below. The second respondents oppose the orders the Trustees seek.

Factual background

Electricity reform

[7] Since the mid 1980’s the electricity industry in New Zealand has been subject to a process of reform. That process is ongoing. Two significant steps in that process form an important part of the background to this case:

(a) In 1992 energy companies, such as the Company, were created pursuant to the Energy Companies Act 1992 to own and operate the businesses previously owned and operated by local government through municipal electricity departments and power boards. As part of that process, local decisions were made as to the ownership of those new energy companies. The fundamental choices generally considered were ownership by local authorities, ownership initially (and subject thereafter to share trading) by consumers, and ownership by trusts for the benefit of consumers, ie consumer trusts. Many, indeed the majority, of local communities decided that a consumer trust should own all or a majority of the shares in “their” energy company.

(b) In 1998 energy companies were required by the Electricity Industry Reform Act 1998 to sell either their network, electricity distribution, businesses or their energy supply businesses. Thereafter, a network business could not be owned by a firm which also ran an energy supply business. Most, if not all, energy companies, including the Company, decided to sell their energy business and retain their network businesses. That significantly changed the nature of the Company’s business.

The Energy Companies Act 1992

[8] Pursuant to the Energy Companies Act, each “establishing authority”, as power boards and local authorities were termed, was required to prepare an establishment plan and submit that plan to the Minister of Energy by 31 December

1992. The Minister was required to approve the plan as soon as practicable. Where a power board was the establishing authority, as was the case in the Eastern Bay of Plenty, that board had to consult on its establishment plan with its interim trustees. In Auckland City Council v Auckland Electric Power Board (AEPB), another case concerning the terms of a consumer trust, Williams J described the role of interim

trustees as involving:3

... an approach where commercially oriented Board members would take the initiative on the issue subject only to the veto power of the Interim Trustees, all formerly elected Board members who stood in the shoes of consumers.

[9] All establishing authorities were required to consult publically with their local communities on their establishment plans, including as to the basis upon which voting shares in the relevant energy company were to be allocated, and to whom.

[10] The Minister could approve an establishment plan as submitted or amend it. Interim trustees had, in effect, powers of veto as regards share allocation plans: the Minister could not give effect to share allocation plans which were not endorsed by interim trustees. In such a circumstance, and as a fall back, shares in the relevant energy company could be allocated to the constituent local authorities of the power board in question.

[11] Williams J described the process as follows:4

Thus it can be seen that the process leading to the decision on ownership involved agreement between three separate entities. First, the Board directors, who were appointed for their commercial expertise and who had the present responsibility for the undertaking. Second, the Interim Trustees, who had been elected by the local community and had the relevant knowledge and expertise to contribute in an informed and representative way. Finally, the Minister was responsible for ensuring

3 Auckland City Council v Auckland Electric Power Board (AEPB) HC Auckland CP26/93, 16

_{August 1993 at 7.}

4 At 9.

that overall Government policy as reflected in the Act was ultimately served by the ownership structures submitted in an establishment plan.

[12] Once an establishment plan was approved, an Order in Council would – on a date to be appointed – vest a board’s undertaking in its relevant successor company, and vest the shares in that company in the manner recorded in the relevant share allocation plan. The Energy Companies Act makes no reference to consumer trusts as owners of shares in energy companies, initial or otherwise.

The Board’s establishment plan

[13] The Board prepared a first establishment plan on 7 October 1992. The plan provided for the shares in the Company to be vested in Consumers, with a small proportion going to a Shareholders’ Society and employees of the Company as an incentive to optimise company performance. The Board’s interim trustees (“the Interim Trustees”) endorsed the plan. The Company was duly incorporated on 29

May 1993. However, in May 1994 the Minister of Energy declined to approve that establishment plan. Although there was no evidence directly before me as to the reason for that decision, in an earlier judgment relating to the Trust Keane J commented:5

A group of consumers opposed the plan and by petition requested that at least 50 percent of the assets be settled on a trust.

...

I infer that opposition influenced the Minister’s decision.

[14] The Board submitted a revised plan in June 1994. Key features were that:

(a) A consumer trust – ie the Trust – was now to be established. A total of

20 million $1 shares would issue: five million – or 25 per cent – to the

Trust, the balance to customers and staff.

(b) As before, there was a shareholding cap of 20 per cent, from which the Trust was excluded. The cap was described as having been “set at

_{20 per cent to enable listing of the shares on the NZ Stock Exchange”.}

5 Re Hennessey HC Rotorua CIV-2005-463-400, 13 July 2006.

I understand that remark to mean that the cap of 20 per cent facilitated listing without the Company risking being taken over.

(c) The proposed Shareholders’ Society would not now be established,

the Trust effectively taking its place.

[15] The plan reflected local debate, particularly over the proposed share allocation principles. Reporting on community consultation, the revised establishment plan noted that a major concern was a desire to retain local ownership. There was tension between the Board and the Interim Trustees as to the percentage of the shares in the Company to be vested in the Trust. Correspondence enclosed with the establishment plan shows that Trustee opinion was divided as to whether or not 51 per cent, 40 per cent or 25 per cent of the shares should be allocated to the Trust. At one point a motion was passed by the Interim Trustees that the number be

40 per cent. After further discussion, the Board concluded that the allocation of 25 per cent was the highest allocation it could support being recommended to the Minister. The Board’s view was that an allocation to the Trust of anything more than

25 per cent would diminish the Company’s ability to act as a successful business.

The Interim Trustees ultimately decided to support that approach.

The Trust Deed

[16] The Trust Deed was made on 1 August 1994 between the Company and Messrs Butler, Law, Parkinson, Ponting and Steele as the (initial) Trustees. The recitals to the Trust Deed, which set out its general background, include as (D) the following:

The Company records its direction to the Trustees the Company’s wish [sic] that the Trust Fund be applied for purposes which are energy related having regard to the general intention of the establishment plan.

[17] Clause 4 of the Trust Deed records that the Company had established the Trust to enable the Trustees to apply the Trust Fund “for or towards energy related purposes for consumers”. In terms of that fundamental purpose:

(a) The term “Consumers” was defined to mean persons whose premises were directly connected to the Company’s distribution network and who directly or indirectly paid for the Company’s services.6

(b) The term Energy Related Purposes was defined to mean:

Purposes7 which relate to some aspects of the beneficial use, application or enjoyment in the District8 of New Zealand’s energy resources including:

(a) Improvements to the safety of the general public by removing road and overhead hazards caused by above ground electricity supply support systems in the District;

(b) Improvements to the supply of electricity to the general public in rural or remote areas in the District by replacing, inadequate or unreliable supply systems.

(c) Avoiding remedying or mitigating any adverse effects of energy related activities in the District on the Environment;

(d) Promoting research into more efficient ways of producing and distributing electrical energy for the benefit of the general public in the District including the awarding of research scholarships or prizes and the funding of research and development projects;

(e) The provision of financial assistance to persons in the District to enable them to make better use of energy resources available to them or to subsidise the cost to such persons of existing supplies of energy;

(f) Acquiring equity in the Company up to a maximum of 25% of the issued Capital of the Company.

[18] It is common ground that the provisions of clause 4, although they do not use the capitalised terms “Energy Related Purposes” and “Consumers”, are to be construed as if they did.

[19] The powers the Trustees were given to undertake the trusts of the Trust Deed are set out in clause 8. These, as relevant, include:

6 The definition of Consumers originally provided by the Trust Deed referred to Consumers as being persons “named in the records of the Company”, and also included a reference to persons liable to pay for electricity supplied by the Company. The definition was amended in 2002, pursuant to the provisions of the Electricity Amendment Act 2001, in response to the required split of the Company’s lines and energy business in 1998.

7 _{Not otherwise defined.}

8 Defined by reference to the previous franchise district of the Board.

8.1 Subject to the express terms of this Deed (and without limiting the generality of the foregoing) the Trustees shall have in relation to the Trust Fund and the income arising from the Trust Fund all the same powers as a natural person acting as beneficial owner of the property from time to time comprising the Trust Fund and such powers shall not be restricted by any principle of construction or rule of law except to the extent that such is obligatory.

8.2 Without limiting the generality of the preceding paragraph and merely by way of example the Trustees shall have the powers set out in Schedule II to this Deed which may be exercised either alone or jointly with any other person.

8.3 Notwithstanding clause 8.1, the Trustees shall not dispose (whether legally or beneficially) of any interest in the Shares unless the disposal has been approved by a Special Resolution of the Trustees.

[20] Schedule II provides a range of typical specific powers, such as to invest, sell, borrow, lease and so on. Of particular relevance to this proceeding, paragraph (o), read together with the opening words of Schedule II, provides that, subject to any express terms in the Trust Deed limiting or restricting such powers, the Trustees have the power to “invest the Trust Fund or any portion thereof in acquiring further shares of the said company, provided that more than 50% of the Consumers responding to a postal questionnaire shall give prior approval to any such acquisition”.

The Vesting Order

[21] The Energy Company’s (Bay of Plenty Electricity Limited) Vesting Order made on 29 August 1994 effected the vesting of the Board’s undertaking in the Company on 1 September 1994 and the issue of shares in the Company as provided by the establishment plan. As not all of the 225,000 shares reserved for employees were taken up, as matters turned out, the Trust’s five million shares represented

25.03 per cent of the shares issued.

Subsequent events

[22] The initial allocation of shares in the Company resulted in a Fletcher Challenge subsidiary, Power Supply Corporation Limited, receiving 17.9 per cent of the ordinary issued shares of the Company. Notwithstanding the shareholder cap in the Articles of Association, by December 1994 that shareholding had been increased

to 26.1 per cent. At or about this time, the Trust and Fletcher Challenge entered into a shareholders’ agreement, whereby they granted pre-emptive rights to each other and agreed to use their best efforts to remove the shareholding cap from the Company’s articles of association. That shareholding cap was, in fact, removed on

20 March 1995.

[23] From an early stage the Trust gave consideration to acquiring further shares in the Company, initially in the context of the pre-emptive rights contained in the shareholders’ agreement with Fletcher Challenge. By July 1996 Power New Zealand Limited (“PNZ”) – an energy company based in the Auckland metropolitan area – was moving to acquire Fletcher Challenge’s shares, and those of a number of institutional investors. A shareholders’ agreement of 12 July 1996 between the Trust and PNZ cleared the way for that investment by PNZ. Again, the Trust and PNZ granted each other pre-emptive rights. In the context of a possible further acquisition of shares in the Company pursuant to those pre-emptive rights, the Trustees had been made aware of an ambiguity in the Trust Deed. The ambiguity is whether:

(a) Subclause (f) of the definition of Energy Related Purposes (“Subclause F”) imposes a cap or upper limit of 25 per cent as the maximum proportion of the shares in the Company the Trust may hold; or whether

(b) Paragraph (o) of Schedule II (“Paragraph O”) allows the Trust to

acquire further shares in the Company, subject to the prior approval of

50 per cent of the Consumers voting in a postal ballot.

[24] Over time the Company received a range of legal advice on that issue. In general terms I think that advice can fairly be categorised as saying whilst the matter was the subject of some uncertainty, there was a reasonable argument that Subclause F was not such a cap or upper limit and that, subject to a positive consumer poll, further shares could be acquired pursuant to Paragraph O. It is also fair to say that different advisers expressed that opinion with varying degrees of confidence. I was provided with a detailed narrative of that advice over time. I do not think I need to

record that narrative in any further detail. As relevant, it simply sets the scene for the question of interpretation that must be decided by me.

[25] The passage of the Electricity Industry Reform Act in 1998 again focussed attention on share ownership issues. The Company decided to sell its energy business and retain its lines business. In anticipation of that transaction being effected, at one point the Trust decided that its strategy would be to acquire shares from PNZ to increase its shareholding in the Company to at least 51 per cent, and perhaps to acquire all of PNZ’s by then 52.29 per cent shareholding. In September

1998 and – it seems obvious – to clear the way for such an acquisition, the Trust carried out a poll of its consumers.

[26] The Trust circulated that poll under cover of a letter which, as relevant, read as follows:

Dear Electricity Consumers

You will have read about the changes to the legislation regarding electricity companies. As a result Bay of Plenty Electricity Limited (“BoPE”) is required to divide its existing business into two parts: one to own the network of lines through which electricity is conveyed to your property, and the other to supply your electricity and own the generation assets which BoPE now owns. This means that your Trust which owns 25% of the shares in BoPE may need to change its position.

Your Trust was formed by a Trust Deed which sets out the powers under which the Trust is controlled. These powers do not contemplate the changes that could be required under the new legislation. For the Trust to have the flexibility to ensure that your investment through the Trust is correctly positioned for the future to the best advantage, some changes to the Trust Deed are necessary. To make those changes however, your support is required.

We have therefore provided a voting paper with this letter. The voting paper is to enable you to vote regarding the changes required for the Trust to alter its investment from the present 25% of BoPE which it holds, to a new investment in one, or both of the new companies. This is not possible under the present Trust Deed which says that the purpose of the Trust is “to enable the trustees to apply the Trust Fund for or towards energy related purposes for consumers”. The term Energy Related Purposes is defined to include various improvements regarding safety and supply of electricity, overcoming adverse effects, promoting research, enabling better use to be made of energy resources and acquiring equity in BoPE up to a maximum of 25% of BoPE. The words relate to holding a maximum of 25% of the shares (equity) in BoPE, not any new subsidiary or other company9 which

9 Emphasis in original.

might be brought into being by BoPE. We, the trustees, would like that ability to ensure that we have the necessary powers to look after your investment. There are additional specific powers provided to the trustees which include “acquiring further shares of the Company (BoPE), provided that more than 50% of the consumers responding to a postal questionnaire shall give prior approval.”

To provide the trustees with the greatest flexibility to proceed as they see fit we ask you to vote in favour of the resolutions set out below. If you have any queries, either take this note to your financial advisor for guidance, or talk to either myself (telephone number 07 308 5265) or Toni Owen (telephone number 07 308 7243) of the Trust.

...

[27] The voting paper contained three resolutions. Two are directly relevant here:

BAY OF PLENTY ELECTRICITY CONSUMER TRUST VOTING PAPER

I agree that the limitation of only being able to acquire up to a maximum of 25% of the shares in BoPE should be amended to allow the trust to own as many shares as it believes to be in the best interest of the Trust and the consumers.

In favour

Against

I agree that the Trust Deed should be amended to allow the trustees to invest the Trust Fund in shares in any subsidiary or other companies formed directly or indirectly by BoPE to operate any business formerly owned by BoPE.

In favour

Against

...

[28] The covering letter, and those resolutions, reflect the uncertainty in the legal advice the Company had received. Thus, the covering letter focuses on the need to amend the Trust Deed because provision was not made in Subclause F for the Trust to invest in companies other than the Company, and notes the ability to acquire further shares in the Company pursuant to Paragraph O. The first resolution, on the other hand, expressly addresses the possible limit imposed by Subclause F on acquiring shares in the Company, and would remove the same. The reference to the Trust acquiring equity shares in both companies, formed to own the divided parts of the business, is also confusing given the requirements of the reform legislation. The fundamental requirement was, after all, that those divided parts could not be owned

by the same entity. But the reform legislation was itself complex, and nothing was made of that latter matter before me. It must also be noted that a poll in this form was problematic, as the Trust Deed contains no power of amendment of the type the poll presumes. Be that, for the moment, as it may, voting on the poll was decisive. Of the 5,989 and 5,922 valid votes cast on Questions 1 and 2 respectively, 5,547 and

5,368 were in favour of the proposed amendments.

[29] The Trust advised the Company of those results on 9 October, and asked the Company to instruct Kensington Swan to make the necessary changes to the Trust Deed. Coincidentally the Company had, by 21 October, completed the sale of its energy business and on that date distributed $100.5 million of the proceeds to its shareholders. The Trust’s share of that distribution was some $25 million. PNZ had also, by this time, split its lines and energy businesses. Its lines business was now owned by United Networks Limited (“United”), which had also succeeded to PNZ’s shareholding in the Company.

[30] At this point the Company’s solicitors, Kensington Swan, reviewed their advice. In letters of 3 November and 14 December 1998 Kensington Swan ultimately concluded that no changes to the Trust Deed were required and that the consumer poll was sufficient, by itself, to authorise the acquisition by the Trust of further shares in the Company. A resolution of the Trustees of 18 December 1998, prepared by Kensington Swan, recorded the position reached as follows:

RESOLVED

That the Trustees note the voting of Consumers to the effect that the Trust may own as many shares in Bay of Plenty Electricity Limited as the Trustees believe to be in the best interests of the Trust and the Consumers or may invest the Trust Fund in shares in any subsidiary or other companies formed directly or indirectly by Bay of Plenty Electricity Limited to operate any business formerly owned by Bay of Plenty Electricity Limited and resolve to act accordingly.

[31] Throughout 1999 the Trust and United discussed the future of their shareholdings in the Company. Agreement was reached that the Trust would acquire all United’s shares in the Company for $12.50 per share. Settlement of that transaction took place on 20 December 1999. As a result, the Trust owned 77.32 per cent of the shares in the Company, the position which continues to this day.

[32] On or around 14 September 2009 Marlborough Lines Limited (“Marlborough Lines”) made a partial takeover offer for 51 per cent of the Company. As the Trust held 77.32 per cent of the Company’s shares, that offer could only succeed if the Trustees accepted the offer for a portion of the shares the Trust held. The Trustees did not and Marlborough Lines’ partial takeover failed.

[33] Following that failed bid, the Trustees considered the benefits of the Trust acquiring the remaining shares in the Company that it did not already own. In November 2009 the Trustees decided to make an offer of $4 per share for the minority shares in the Company. The Trustees set about preparing the necessary consumer poll, sending this poll out to consumers in January 2010.

[34] In early February, the second respondents issued their own separate proceedings seeking, as I understand it, the substantive relief of declarations that the poll was a nullity and that the Trustees had acted in breach of the Trust in proceeding with the poll. The second respondents questioned the ability of the Trust to hold more than 25 per cent of the shares in the Company. At that time, the second respondents applied for an interim injunction to stop the Trustees from continuing with the poll. By agreement on or about 9 February 2010 the Trust and the second respondents agreed that the Trust would not take any further steps until, in effect, these proceedings had been heard.

[35] On 14 June 2010 Marlborough Lines made a stand in the market and acquired

10.1 per cent of the shares in the Company. It has since made further acquisitions and as at 26 July 2010 held 12.5 per cent of the shares in the Company. Marlborough Lines is funding the costs of the second respondent in bringing these proceedings. It is interested, as are the second respondents, in acquiring further shares in the Company. Were that opportunity to arise, as Mr Carruthers frankly admitted, it is possible that the Ngati Rangitihi Trust and Marlborough Lines would act together in some way, although I was told no firm arrangements of that nature yet exist.

[36] In that context I make two observations:

(a) Although the second respondents raise concerns – as a Consumer in their own right, and on behalf of the beneficiaries of the Ngati Rangitihi Trust who are also Consumers – as to whether or not the Trust’s investment in the Company is appropriate, I consider that their interests in this litigation lie principally in the opportunity that success may provide for them to acquire further shares in the Company. That does not, in any way of course, affect my assessment of the validity of the legal arguments they raise as regards the interpretation of the Trust Deed. It may however be relevant to an assessment under s 64 as to what was expedient or in the best interests of Consumers.

(b) The second respondents suggest that if the Trust Deed does not give the Trustees power to acquire more than 25 per cent of the shares in the Company, but I am of a mind to empower them to retain shares in the Company in excess of that pursuant to s 64, the Trustees should – by reference to the need to diversify the Trust’s investments – be allowed to retain no more than 50 per cent of the shares in the Company. It seems clear to me that the interest the second respondents, and Marlborough Lines, have in acquiring further shares in the Company has influenced that position.

[37] On 29 September 2010 the second respondents were joined to these proceedings, which as commenced named the Attorney-General as the sole respondent, by consent.

The issues to be decided

[38] The Trustees apply for directions under s 66 of the Trustee Act that they had and have the power to acquire shares in the Trust above and beyond the 25 per cent referred to in Subclause F. If the Court does not consider that they had and have such power, the Trustees apply for orders under s 64 empowering them to retain their existing shareholding in the Company and to acquire further – and potentially all the

– shares in the Company.

[39] Prior to my hearing the Trustees’ applications, the Trustees and the second respondents helpfully agreed on the issues that I needed to determine on those applications. Adapted to reflect the background to these proceedings that I have now set out, and the arguments before me, those issues are:

Issue 1 Does the Trust Deed give the Trustees power to acquire more than

25 per cent of the shares in the Company, provided they comply with the provisions of Paragraph O as regards a poll of Consumers?

Issue 2 If the answer to Issue 1 is yes, (that is I find the Trustees did have power to acquire more than 25 per cent of the shares in the Company) did the Trustees comply with Paragraph O in connection with their purchase of 52.29 per cent of the shares in the Company from United in 1999?

Issue 3 If the answer to either of Issues 1 or 2 is no, then, in terms of s 64 of the Trustee Act 1956, does the Court have power to authorise the retention by the Trustees of the additional 52.29 per cent shareholding in the Company acquired by the Trustees in 1999?

Issue 4 If the answer to Issue 3 is yes, should the Court so order on the basis that, in terms of s 64, that retention is either “expedient in the management or administration of property vested” in the Trustees, or “would be in the best interests of the persons beneficially interested under” the Trust?

Issue 5 If the answer to Issue 1 is no and the answer to Issue 4 is yes, (that is the Trustees did not have power under the Deed to acquire more than 25 per cent of the shares in the Company but I allow them to retain the additional 52.29 per cent pursuant to s 64) should the Court also order that the Trustees may acquire further, and potentially all, the shares in the Company, again in terms of s 64, on the basis that such acquisition is either “expedient in the

management or administration of property vested” in the Trustees, or “would be in the best interests of the persons beneficially interested under” the Trust?

[40] The Trustees included within their formulation of those issues, questions relating to the 0.03 shareholding in the Company received, pursuant to the Vesting Order by the Trustees in 1994, in excess of 25 per cent. The Trust could, therefore, be said to have acquired more than 25 per cent of the Company, and to have done so without Consumer approval. Where does this leave the Trust?

[41] I have little difficulty in concluding that this is a minor and mechanical matter. It was always anticipated that the Trust would, under the Vesting Order, be allocated five million shares pursuant to the Share Allocation Plan. That is precisely what happened. The fact that, by dint of the outcome of the level of staff interest in investing in the Company, those five million shares were not 25 per cent of the capital in the Company, but slightly more than that, is in my view neither here nor there. There can be no doubt that the Vesting Order lawfully gave effect to the Share Allocation Plan, and that the Trust Deed provided for the Trust to have vested in it shares pursuant to the Share Allocation Plan and the Vesting Order. I do not think that issue requires any further analysis. I am therefore satisfied that the five million shares were, in terms of the Trust Deed, lawfully vested in the Trustees and so declare.

Evidence

[42] The evidence was largely provided by affidavit and supplementary –

reasonably limited – cross-examination. [43] For the Trust:

(a) Mr Bulley, the Trust’s current Chairman, provided an affidavit in which, largely based on the documentary record – including the revised establishment plan, he set out the factual background to these proceedings much as I have recorded in this judgment. In addition,

Mr Bulley referred in some detail to the legal advice the Trust had received from time to time, and to advice the Trust had received as to the benefits involved in acquiring shares from United and possibly moving to full ownership of the Company.

(b) Roger Coulter, an investment adviser with Craigs Investment Partners provided a number of affidavits as an expert witness on the question of the benefit for the Trust of the acquisition of United’s shares and the Trust’s possible acquisition of all of the shares in the Company.

(c) Paul Willis, the Treasurer of the Trust, provided affidavits relating to discovery issues and identifying what the Trust saw as the benefit of it moving to a 100 per cent shareholding in the Company. Mr Willis also provided an affidavit responding to one filed by Marlborough Lines’ Chairman, Mr David Dew, in support of the position taken by the second respondents.

[44] Affidavits supporting the Trustees in their applications were also provided by Mr Robert Tait, the Chairman of the Company, and Mr R J Anand, the Company’s Chief Executive Officer.

[45] For the second respondents, affidavits were filed by:

(a) Mr Dew, which contained some helpful background factual material and also provided Mr Dew’s opinion, and that of Marlborough Lines, on what may or may not be appropriate strategies for consumer trust owned lines companies.

(b) Mr Graham Pryor, one of the second respondents, provided a background to the Ngati Rangitihi Trust and the social and economic profile and position of the Trust and its beneficiaries. Mr Pryor’s affidavit set out the reasoning behind the Ngati Rangitihi Trust’s position that the Trust might continue to hold 50 per cent of the shares

in the Company, but should be required to sell shares in excess of that amount and not to acquire further shares.

(c) Mr Lewis Weaver, an actuary, set out his expert opinion on the Trust’s current investments and the importance for the Trust of having a diversified investment portfolio.

(d) Professor Antonius van Zijl gave expert evidence as a professor of accounting and financial management on diversified portfolio investment theory and on the riskiness of the Trust’s investment in the Company. That risk, assessed by reference to the volatility of the Company’s share price, the principal measure of risk adopted in diversified investment portfolio theory meant the return of seven per cent which the Trust, it would appear to have been agreed, had received over time was unacceptably low

[46] Most of that evidence is relevant for Issue 3 and following. In saying that, I do note that Mr Carruthers in cross-examining Mr Bulley identified elements of the documentary record discovered by the parties that he submitted were relevant to Issue 1.

Analysis

Issue I – a question of interpretation

The correct approach to interpreting the Trust Deed

[47] The first issue is whether – properly interpreted – Subparagraph F places a cap on the percentage of the shares in the Company the Trust may hold or whether, pursuant to Paragraph O, the applicants may acquire shares in excess of 25 per cent of the shares in the Company, provided they obtain the approval of Consumers. How should I approach that exercise of interpretation?

[48] Counsel were in broad agreement on that question: the correct approach to interpreting a trust deed was in principle the same as that to be adopted in

interpreting a contract. There would appear to be ample authority for that proposition.10

[49] In terms of that proposition, it is now well settled in New Zealand that questions of contractual interpretation are to be approached on the basis of the principles set out in Investors Compensation Scheme Ltd v West Bromwich Building Society,11 as originally adopted by the Court of Appeal in Boat Park Ltd v Hutchinson,12 and as subsequently confirmed by the Supreme Court in such cases as Wholesale Distributors Ltd v Gibbons Holdings Ltd and Vector Gas Ltd v Bay of Plenty Energy Ltd.13 As Tipping J observed in Vector:14

The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. In order to be admissible, extrinsic evidence must be relevant to that question. The language used by the parties, appropriately interpreted, is the only source of their intended meaning. As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds. Evidence is not relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean, or what their negotiating stance was at any particular time.

[footnotes omitted]

[50] In Vector, five separate judgments were given reflecting differing views amongst the Court on various aspects of contract law. In Trustees Executors Ltd v QBE Insurance (International) Ltd the Court of Appeal has provided, given that difference of views, some helpful comments on the Vector decision:15

The majority of the judges in Vector adopted the approach in Investors Compensation whereby the language the parties have used must be read in the context of the document as a whole and the surrounding circumstances. Under that approach, the wider background and circumstances should always be considered, even if there is no ambiguity or other interpretive

10 _{For example Re Sigma Finance Corporation [2009] UKSC 2.}

11. Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL).

12 _{Boat Park Ltd v Hutchinson & Findlay [1999] 2 NZLR 74.}

13 Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37; Vector Gas Ltd v Bay of

_{Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.}

14 _{At [19].}

15 Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 at [32]- [33].

difficulty with the words used by the parties. Evidence of background circumstances is not, however, relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean or to prove what a parties’ negotiating stance may have been at a particular time.

While it usually makes sense to start with the words of the contract and then move to the context of the contract before considering the wider background and circumstances, there is no presumption in favour of ordinary meaning. A meaning that may appear, when devoid of external context, to be plain and unambiguous, may not ultimately be what the parties intended when considered against all the relevant circumstances. As was noted by Tipping J in Vector, any initial view of the meaning must be provisional only and the reader must be prepared to accept that the provisional meaning may be altered once context has been brought to account.

[footnotes omitted]

[51] There are, in my view, two areas where the application of those general principles in this context requires some further consideration. The first is the question of who are properly to be understood as “the parties”. In an interesting discussion of the principles of construction in the text Drafting Trusts and Will Trusts in New Zealand, the authors advocate an explicit acceptance that modern principles of interpretation involve “large steps away from the false god of objective meaning

and towards seeking the author’s subjective intention”.16 Within that somewhat

controversial context they explicitly ask the question of whether the principles of construction of wills, trusts, contracts and statements are all the same. They accept that they are, but submit that allowance must be made for differences of context. Commenting, in effect, on this issue of who are to be regarded, as authors of a will or a trust, as “the parties” in terms of the principles enunciated above, they observe:17

One difference between wills and trusts on one hand, and contracts (and even more so, statutes) on the other, is that there are fewer occasions where there is any practical necessity to abandon the search for subjective intention. “[A] Will is a soliloquy while the language of a contract is addressed to another”.18

Because a will or a trust is normally a unilateral document, it is more often possible to find the subjective intention of the author if one looks for it sympathetically. In a contract one must assume that the parties are of one mind (which may not be the case) and seek a common intention.

16. James Kessler and Kerry Ayers Drafting Trusts and Will Trusts in New Zealand (Brookers, Wellington, 2010) at 3.11, p 34.

17 _{At 3.12, p 35.}

18 Skelton v Younghouse [1942] AC 571 at 579.

[52] Here, the context is different. The Trust Deed was clearly not a soliloquy, but rather the outcome of intended interactions between the members of the Board, the Interim Trustees, the local community more generally, and the Minister. Although nominally the settlor, the Company was – when established and until the establishment plan was given effect to by the Vesting Order – little other than a vehicle to give effect to that plan. As such, I do not regard it as “a party” to any material extent. I therefore reject the second respondents’ written submission that here the inquiry as to meaning should be limited to the (objectively assessed) intention of the Company as settlor. Rather, the parties were the Board, the Interim Trustees (representing Consumers), the local community and the Minister. In my view, therefore, the relevant factual background is the general background that I have

already outlined.19

[53] The second, and more difficult, question is how to draw the line in this case between evidence of that factual background which is admissible and excluded evidence of negotiations and statements of subjective intent. This is particularly the case, given the contents of the revised establishment plan. That plan not only sets out, as it was required to, the details of the Board’s business to be vested in the Company, and of the Company’s capital and of the proposed share allocation plan, but – as also required – a detailed narrative of the process of interaction and negotiation particularly between the Board and the Interim Trustees. It also records key features of the consultation with Consumers and the local community as required by the special consultative procedures. That too was, in effect, a process if not of negotiation then of something very close to it. It could be argued therefore that that material as set out in the establishment plan was not admissible evidence in terms of the accepted principles which exclude evidence of negotiations. In my view, it would here be more than a little artificial to ignore the background facts, that would have been well known to all “parties”, that there had been ongoing discussions, if not negotiations, as between those parties before the revised establishment plan was, with the support of the Interim Trustees, submitted to the Minister. Thus, in my view, the general outline of that process, and of the positions

_{taken by various of the parties at various times, do here form part of the relevant}

19 At [7]-[37].

factual matrix. In my view, that factual matrix as I have already summarised it, which led to the submission of the revised establishment plan to the Minister and its approval by the Minister, is the relevant and admissible evidence against which I am to consider the question of interpretation that has been raised. Of some significance for that exercise is the fact that at one point the Interim Trustees sought an allocation of 40 per cent of the shares in the Company, the Board thought – as already outlined

– that that was more than it would agree to and the Interim Trustees then endorsed the establishment plan which provided for an allocation to the Trust of a 25 per cent holding the Company.

[54] At the same time I am less persuaded that some of the more detailed narrative of that process, which appears in the establishment plan, is admissible in terms of those general principles. It is clear that in the period leading up to the Board submitting the second establishment plan, there were negotiations between the Board and the Interim Trustees. The revised establishment plan evidenced those negotiations in a series of letters between 18 May and 15 June 1994. On 18 May the Interim Trustees advised their requirement for an allocation of 40 per cent. On 15

June, the Board’s Chair confirmed the Interim Trustees’ agreement to the revised

establishment plan with its 25 per cent allocation.

[55] At one point in that process the Interim Trustees raised a concern that, if the Company issued a small number of additional shares, the 25 per cent shareholding of the Trust would be reduced below 25 per cent and the Interim Trustees would therefore lose “one director from the Company”. This is a reference to a provision of the Company’s Articles of Association that “for so long as the Trust holds not less than 25 per cent of the shares” it would be entitled to appoint and maintain in office two directors, and for so long as it held “not less than 12.5 per cent of the shares” it would be entitled to appoint and maintain in office one director. The Interim Trustees proposed that their right to appoint two directors should continue whilst their shareholding was between 20 and 25 per cent.

[56] For the Board, and in that letter of 15 June 1994, the Chair advised the

Company:

With respect to the issue raised concerning the issue of shares to reduce the Trust’s Board representation I can assure you there are no intentions to issue shares simply to reduce the Trust holding. If any share issue is made on a pro rata basis to all existing shareholders the Trust would be able to purchase sufficient shares to retain its 25% holding. As far as allowing for two Directors whilst the Trust shareholding is 20%, unfortunately this cannot be agreed to as it would provide a disproportionate representation on the Board where the Trust was holding one fifth of the shares in the company but was being entitled to votes representing one quarter of the total shares. Such an arrangement would not be acceptable for a listed company.

[57] Mr Carruthers sought to rely on Mr Holmes’ expression of view that “if any share issue is made on a pro rata basis to all existing shareholders the Trust would be able to purchase sufficient shares to attain its 25 per cent holding” as pointing to the correct interpretation of Paragraph O as simply providing a mechanism whereby the Trust could “top up” its investment in the Company if there were a rights issue.

[58] In my view, those parts of the documentary record clearly constitute evidence of the negotiations between the parties which led to the approval by the Interim Trustees and subsequently the Minister of the revised establishment plan, including the terms of the Trust Deed. I therefore consider that those materials constitute inadmissible evidence in terms of the general principle I have outlined above. As I was, in my previous life, a commercial lawyer used to extended and carefully structured and recorded negotiation of contractual documents, in my view, those negotiations can in certain circumstances, when properly understood, help with the understanding of the contract finally arrived at. I have therefore had cause to question that rule of exclusion. It is to be noted that that rule is most often explained on the basis of a policy that to proceed otherwise would be to open the Court to being flooded with evidence of negotiations which are assessed, at the end of the day, as being of little help. Here, even if I were to regard this material as admissible evidence, it is not in my view of particular help to the task of interpretation. First, the statement in the Chair’s letters regarding pro rata issues is not, in any obvious way, linked to a decision to include Paragraph O in the Trust Deed. Further, and even if the suggestion from the minutes of the meeting of the Interim Trustees is that at quite a late point the Board was considering allowing the Trustees power to purchase additional shares so they could retain a 25 per cent holding in the Company, again there is no obvious link in an evidential sense to Paragraph O. It is pure speculation, on the basis of the evidence before me, that there was any such

link. It is just as possible that the Board could have taken advice on the terms of the Subclause F itself, and concluded that it did not, as in my view it does not, preclude the Trust’s participation in a rights issue to maintain its 25 per cent shareholding. Therefore, even if that very particular evidence had been admissible, which I hold that it is not, it would not have been of any great probative value, ie relevance. That conclusion therefore, and notwithstanding my commercial “doubts”, supports the general principle that such evidence is simply inadmissible: what I now realise that principle reflects is Judges’ assessments over time that such evidence is not only likely to be unhelpfully voluminous, but also at the end of the day and in the great majority of cases of little or no assistance.

[59] More generally, and as Keane J observed in Re Hennessey, in the context of being asked to make a declaration as to the extent of the powers of the trustees of the Trust:20

What the Trust actually enables the trustees to do is then critical; and that is to be assessed, I accept, as Millett J said in Re Courage Group’s Pension Schemes [1987] 1 All ER 528, at 537, from a standpoint that is ‘practical and purposive, rather than detached and literal’; a standpoint endorsed by Cooke P in Re UEB Industries Limited Pension Plan [1992] 1 NZLR 294, at 297. And this against the factual matrix within which the Trust was formed: Boat Park Limited v Hutchinson [1991] 2 NZLR 74.

The Trust is not, like a pension scheme, designed to function within a contractual matrix; a factor central to the UEB decision. But these trusts are created in a commercial context and are to be interpreted as broadly: Cave & Brown v Berkitt (HC Wellington, CP 180/00, 20 September 2001, Wild J), para 20; Re Andrews (HC Christchurch, M 5/02, 21 June 2002, Panckhurst J), para 58. It may be that any trust does.

[60] Applying those principles, I turn now to the question of interpretation that arises here.

Subclause F and Paragraph O

[61] There is no doubt that if, properly construed, Subclause F effectively imposes a limit on the extent to which the Trustees may invest the funds of the Trust in shares

_{of the Company, then that restriction prevails over the apparently broader power}

20 Re Hennessey HC Rotorua CIV-2005-463-400, 13 July 2006 at [50] – [51].

provided by Paragraph O. I say that is clear because both clause 8.1 and clause 8.2, in setting out the Trustees’ general powers, including by reference to Schedule II, are clearly expressed to be made “subject to the express terms of this Deed”. So are the provisions of Schedule II itself, where the phrase used is “subject to any express terms in this Deed limiting or restricting such powers”.

[62] The second respondents therefore argue – essentially by reference to what they say are the clear words of Subclause F, that the Trust’s investment in equity in the Company is limited “to a maximum of 25 per cent”. They argue further that that interpretation is consistent with the relevant factual matrix, and in particular the agreement between the Board and the Interim Trustees that the share allocation plan would only provide for 25 per cent of the shares in the Company to be vested in the Trust, notwithstanding the Interim Trustees initially having argued for a greater proportion. There is clearly some strength in that argument, which Mr Molloy for the Trustees and Mr Hurd for the Consumers responsibly acknowledged.

[63] But, as they both pointed out, Subclause F is something of an odd provision. The other sub-clauses of the definition of Energy Related Purposes are all forward looking provisions, and clearly direct the Trustees to an inclusive range of purposes to which the funds of the Trust may over time be directed. Subclause F is not a “purpose” in that sense at all. There is no relevant sense in which the Trustees were required to make a decision to acquire 25 per cent of the issued capital of the Company. Rather, the five million shares were to be vested in the Trustees by dint of the establishment plan and pursuant to the Vesting Order. Going forward, therefore, and as regards “acquiring equity”, there was little if any role left for that particular Energy Related Purpose. In my view, therefore, Subclause F is best understood as recording that important element of the establishment plan pursuant to which the Board, under pressure from the Interim Trustees and elements of the local community, had agreed to vest shares in the Trust, but only up to the maximum they would agree – namely 25 per cent of the issued capital of the Company. I therefore agree with Keane J’s observation that Subclause F is, together with the recitals, confirmatory of the agreed basis upon which shares would be allocated to the Trust,

rather than in and of itself imposing any limit on the Trust as regards its future investments.21

[64] That interpretation finds considerable support from the presence in Schedule II of the specific additional investment power provided by Paragraph O. There would be little point in Paragraph O if that was not the case. Paragraph O is not, in my view, to be construed as providing for a right of “top up”. That right would have been available to the Trustees even if the interpretation of Subclause F argued for by the second respondents was adopted. That is, Subclause F provided no restriction on the Company, if there were to be a rights issue and the Trustees wished to maintain its shares at 25 per cent, from doing just that. The only point of Paragraph O, if Subclause F is construed as the second respondents would have it, would be to require the Trustees to obtain the prior approval of Consumers before they took part in a rights issue to hold their shareholding at 25 per cent. Given the factual background I have outlined, and my finding that it was pressure from the Interim Trustees supported by Consumers that had led to the Trust being brought into existence and allocated shares at all, that is not an interpretation which has any attraction for me in terms of the well-established principles I have outlined.

[65] There are two aspects of the Articles of Association of the Company that provide support for the interpretation I prefer:

(a) First, in exempting the Trust from the 20 per cent cap otherwise applicable, the Articles do not restrict the Trust to holding no more than 25 per cent. If that had been the agreement of the parties, and in particular the intention – objectively assessed – of them, then it might have been thought that such a restriction would have been included.

(b) Secondly, I note that the provisions of the Articles which give the Trust special rights to appoint directors do so, as regards the Trust’s rights to appoint and maintain in office two directors, “for so long as

_{the Trust holds not less than 25 per cent of the shares”. If the Trust}

21 Re Hennessey at [23].

was limited to holding just 25 per cent, that would have been a somewhat surprising way to express that appointment right.

[66] I think another aspect of the background factual matrix is of relevance here. As noted, many and indeed most local communities decided to retain 100 per cent ownership of their local lines company. In that context, it cannot be regarded as surprising that the Trust here, although initially only receiving a 25 per cent share of the Company, could – over time and subject to the availability of funds and Consumer approval – increase its investment in the Company. The Company was, after all, listed on the New Zealand Stock Exchange so that – subject to the 20 per cent share cap which did not apply initially to the Trust and which was, in any event removed quite shortly after the Company was established, a takeover – including by the Trustees – was always a possibility.

[67] I therefore conclude that Subclause F properly construed reflects the central element of the revised establishment plan which, as agreed by the Board and the Interim Trustees, provided that on the vesting date the Trust would receive 25 per cent of the issued capital of the Company, but – notwithstanding the position taken at one point by the Trustees – no more. By the same token, Paragraph O provides for the Trustees to acquire further shares in the Company, “provided that more than

50 per cent of the Consumers responding to a postal questionnaire shall give prior

approval to any such acquisition”.

Issue 2 – The efficacy of the Consumer poll

[68] The issue here is whether the Consumer poll conducted by the Company in September 1998 was a valid poll, given that it did not refer to the specific transaction that took place approximately one year later between the Trust and United.

[69] I think that question can properly be answered by reference to Paragraph O

itself and the terms of the Consumer poll.

[70] On the face of it, the poll was expressed to authorise amendments to the Trust

Deed which, as noted, were not subsequently made. The second respondents

therefore argued that the poll had not approved the acquisition that subsequently took place. That argument is not without force.

[71] On balance, however, I have concluded – albeit by a somewhat narrow margin – that the combined effect of the letter to Consumers and the terms of the poll itself do, in terms of the clear and overwhelming affirmative vote recorded by Consumers in favour, constitute the Trust having obtained the prior approval of Consumers as necessary. In my view, the phrase “to provide the Trustees with the greatest flexibility to proceed as they see fit” in the letter to Consumers when considered in terms both of the proposal to amend the Deed and the reference to the need to obtain Consumer consent to further acquisitions of shares, means that a Consumer voting in favour would have understood that they were providing both for amendments to the Trust Deed and to the Trustees acquiring further shares so that the Trust would own “as many shares as it believes to be in the best interests of the Trust and the Consumers”, as provided in the first resolution. I agree that the wording is not as clear as it could or should have been. It does have to be remembered, however, that the draftsperson of the documents would have been trying to strike a balance between legal precision and comprehensibility. A number of Consumers noted at the time that they had difficulty understanding the poll documents. In this context, I do not think it would be appropriate to consider the poll documents in an overly legalistic or formalistic way. What I think has to be established is that the Consumers knew they were giving the Board their approval to acquire further shares in the Company, noting that – as Trustees – the Trustees could only enter into such an acquisition on terms which they thought were in the best interests of the beneficiaries. In my view a Consumer voting in favour of Resolution 1 would, when that action was considered in the context of the information contained in the covering letter, have understood they were approving the Trustees acquiring further shares in the Company and on that basis I consider that the poll was effective.

[72] In terms of s 66 of the Trustee Act I therefore declare that the Trustees, in acquiring 52.29 per cent of shares in the Company from United in December 1999, acted lawfully.

Other issues

[73] On that basis, it is not necessary that I consider the issues of validation or authorisation raised by the Trustees in reliance on s 64. Given the argument that I heard, however, I think it is appropriate that I record – even if more briefly than might otherwise have been the case – my conclusions on those issues. I do so by reference to the question of the retention by the Trust of the shares acquired from United. As regards the acquisition of further shares, if the Trustees did not have the power to do so I would not be prepared – in the abstract – to validate a further acquisition. In my view, such a decision could only be considered by reference to the terms of a specific proposal and when, moreover, consumer consent had been obtained.

[74] The first, and essentially legal issue, is whether s 64 of the Trustee Act gives the Court in these circumstances jurisdiction to confer a power on the Trustees to authorising the “retention” of these shares. For the second respondents, the argument was that s 64, as best as they could discover, had never been used before to retrospectively validate a breach of a trust deed and that the reference to “retention” in s 64(1) was properly to be understood as referring to circumstances where the acquisition of property had been lawful at the relevant time, but that the retention of that property had become unlawful – in terms of the relevant Trust Deed – by reference to events after that date.

[75] For the applicants, and for the Consumers, the argument was that there was no reason to limit the construction of the reference to “retention” in that way. If s 64 gave the Court jurisdiction to confer powers to acquire before the acquisition, then so it could give powers to retain, even though the acquisition at the time may have been unlawful.

[76] Section 64(1), as relevant, provides:

Power of Court to authorise dealings with trust property and variations of trust

(1) Subject to any contrary intention expressed in the instrument (if any) creating the trust, where in the opinion of the Court any sale, lease, mortgage, surrender, release, or other disposition, or any purchase,

investment, acquisition, retention, expenditure, or other transaction is expedient in the management or administration of any property vested in a trustee, or would be in the best interests of the persons beneficially interested under the trust, but it is inexpedient or difficult or impracticable to effect the same without the assistance of the Court, or the same cannot be effected by reason of the absence of any power for that purpose vested in the trustee by the trust instrument (if any) or by law, the Court may by order confer upon the trustee, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions (if any) as the Court may think fit, and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne, and as to the incidence thereof between capital and income:

Provided that, notwithstanding anything to the contrary in the instrument (if any) creating the trust, the Court, in proceedings in which all trustees and persons who are or may be interested are parties or are represented or consent to the order, may make such an order and may give such directions as it thinks fit to the trustee in respect of the exercise of any power conferred by the order.

[77] When enacted as s 81 of the Statutes Amendment Act 1936, the section originally provided as follows:

(1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure, or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions (if any) as the Court may think fit, and may direct in what manner any money authorized to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.

[78] Were this question to be considered by reference to the terms of s 81(1), therefore, it seems relatively clear that the parallel references to sales (etc) on the one hand and purchases (etc) on the other hand would not extend to the “retention” of an asset that may have been improperly acquired. The question therefore becomes the significance of the addition of the reference to “retention” in s 64(1), in the Trustee Act 1956 and its preservation in a subsequent amendment to that section in 1960.

[79] Whilst there is little legislative commentary regarding the wording of s 64(1), it is clear that the object of the section is to ensure the trust property is managed as

advantageously as possible in the interests of the beneficiaries. On that basis, I see no reason in principle to limit the application of the section in the way Mr Carruthers contended for, provided the Court is otherwise satisfied in terms of s 64(1). Retention of assets acquired in breach of the deed may, in my view, be justified after the event just as a similar acquisition may be validated before the event.

[80] I turn then to the second legal issue that was raised. For the second respondents, Mr Carruthers argued – very much in terms of Cooke J’s decision in Re Smith,22 that if Subclause F properly interpreted does place an upper limit on the extent to which the Trust may own shares in the Company, then to vest a power in the Trustees either to retain the shares in excess of that limit acquired by them, or to acquire further shares, would be improper as a rewriting of the terms of the Trust.

[81] For the applicants and the Consumers, Mr Molloy and Mr Hurd pointed to the decision of Tipping J in Re Greenwood, which they said was clear authority that the section was not to be so interpreted.23

[82] In my view, by reference first to s 81, where there was no equivalent reference to “contrary intention expressed in the instrument (if any) creating the Trust” as appears in the opening words of s 64(1), and second to the proviso to s 64(1), Tipping J’s interpretation of s 64 is the correct one and the one I adopt.

[83] Therefore, and subject to the proviso being met, the Court does have jurisdiction to vest the necessary power. I note that it was accepted before me that all Trustees and persons, who are or may be interested, were represented in terms of both of the applicants, Mr Hurd for the Consumers and Mr Carruthers for Te Mana o Rangatihi. The question would therefore become whether either or both of the tests found in s 64, namely expedience in the management or administration of property vested in a trustee or being in the best interests of persons beneficially interested, would have been met as regards the acquisition in 1999 of further shares from

_United.

22 _{Re Smith [1975] 1 NZLR 495.}

23 Re Greenwood [1988] 1 NZLR 197.

[84] The argument here was essentially a contest between experts as to the wisdom, or otherwise, of the Trust’s decision to acquire further shares in the Company, particularly when seen against the desirability of an investor diversifying their investments. There can be no challenge to the general principle which says that an investor should always be mindful of the benefits of diversification: as Mr Weaver acknowledged, this is simply to acknowledge the aphorism which warns against having all your eggs in one basket. But that general principle needs to be considered in the particular context of consumer trusts, and the ownership of local energy companies.

[85] For the Trustees, Mr Coulter gave evidence which noted that the acquisition of further shares had proved to be a sound investment in and of itself. It had also given the Trust greatly increased control of the Company which, in turn, facilitated the achievement by the Trust of its object applying the trust fund for Energy Related Purposes. More particularly Mr Coulter noted that average dividend income had been some $2.6 million per annum, representing an after tax annual yield which, in absolute and comparative terms had – in general terms – been a good investment.

[86] For the second respondents, the evidence of Professor van Zijl and Mr Weaver was to the effect that the Trust had undesirably concentrated its investments when it had acquired those further shares. Moreover, and from Professor van Zijl’s perspective in particular, the return earned by the Trust was not sufficient to compensate for the risk of its investment in the Company, when that risk was measured by reference to the volatility of the price of the Company’s shares on the New Zealand Stock Exchange.

[87] Having considered that expert evidence, I prefer that of Mr Coulter. I do not think that community trusts were ever set up to be diversified portfolio investors, so as to make diversity in and of itself a necessary attribute of their investments. The terms of the Trust Deed recognise as much, in providing in clause 8.5 that no Trustee would be liable merely because the investments of the Trust Board were not diversified. Beyond that, and as Mr Weaver himself frankly acknowledged, the Company’s investment in the Trust had performed well over recent years, relative to the performance of diversified investment portfolios. Furthermore, and as I

indicated at the outset of this judgment, the question of whether and to what extent a community trust will invest in and/or hold shares in a local energy company is, at the end of the day, a matter for the local community itself. Many local communities have decided to retain all or majority ownership of their local energy companies. Evidence for the second respondents that such decisions are inherently illogical is, in my view, theoretical and fails to take account of a range of valid considerations that no doubt influence such decisions.

[88] There is in my view a further consideration which would support a conclusion allowing retention by the Trustees of the additional shares they acquired from United. Were they not to be allowed to do that, they would have to sell those shares: they would, in effect, be forced sellers. That would place them in a commercially disadvantageous position. Moreover, they acquired those shares with what I consider to be the obvious support of the local community. They have now held the shares for more than 10 years. I do not think it could be said to be advantageous to the beneficiaries of the Trust for the Trustees now to be in a position to have to dispose of those shares.

[89] On that basis, and had I been required to reach this conclusion, I would have concluded that it was both expedient in the management of the property vested in the Trustees, and in the best interests of the beneficiaries of the Trust, that the Trustees be empowered to retain those shares.

Outcome

[90] It follows, therefore, that I make the first declarations sought by the plaintiffs, namely that the Trust Deed did empower them to invest in more than 25 per cent of the shares in the Company and that they did comply with the provisions of Paragraph O when they acquired the additional 52.29 per cent shareholding from United. I further declare that the original vesting in the Trust of all of the five million shares provided in the establishment plan was lawful. As regards the acquisition of further shares: I have found the Trust has the power to acquire such shares, provided it complies with the requirements for a poll. The question therefore

is one now for the Trust. If it considers a further acquisition in the Trust’s best

interests, it needs to acquire the necessary consent.

[91] I reserve the question of costs. I see no reason, however, why costs should not follow the event. If the parties are unable to reach agreement on the question of costs, brief submissions may be filed no later than one month from the date of this judgment.

“Clifford J”

Solicitors/Counsel:

A P Molloy QC, Barrister, Auckland ([e-mail]) Sharp Tudhope, Tauranga ([e-mail])

Crown Law Office, Wellington ([e-mail]) C Carruthers QC, Barrister, Wellington ([e-mail]) Harkness Henry, Hamilton ([e-mail])

D Hurd, Barrister, Auckland ([e-mail])