IN THE MAORI LAND COURT OF NEW ZEALAND WAIARIKI DISTRICT 5 WAIARIKI MB 297 A

Transcription

1 IN THE MAORI LAND COURT OF NEW ZEALAND WAIARIKI DISTRICT UNDER IN THE MATTER OF 5 WAIARIKI MB 297 A Section 244, Te Ture Whenua Maori Act 1993 The Pukeroa Oruawhata Ahu Whenua Trust - Application to vary the Trust Order MALCOLM TUKINO SHORT, JAMES ALEXANDER WILSON, HAMILTON MANAIA PIHOPA KINGI, STUART ROTOHIKO TE HAUPAPA HARRIS JOHN DAVID RANGITAUIRA, AND DAVID TAPSELL AS TRUSTEES OF PUKEROA ORUAWHATA AHU WHENUA TRUST Applicants Hearing: 6 April 2010 (Heard at Rotorua) Appearances: Mr G J Dennett, Counsel for Trustees Judgment: 9 April 2010 RESERVED JUDGMENT OF JUDGE S R CLARK Introduction [1] The trustees of the Pukeroa Oruawhata Trust ( the trustees ) have filed an application pursuant to s 244 of Te Ture Whenua Māori Act 1993 ( TTWMA ) seeking to vary their trust order. [2] The trust order at clause 3(x) permits the payment of a trustees honorarium of $90, per annum for six trustees. The trustees have the power to determine how that honorarium is to be allocated amongst themselves. [3] The application before the Court seeks to vary the trust order in two ways: a) First to increase the level of the annual honorarium from $90, to $108, per annum with effect from 7 November 2009; SHORT MLC A APRIL April 2010

2 b) Secondly to pay trustees who have served at least 10 years a retirement honorarium, equivalent to three times the current annual trustee honorarium. [4] The issue for determination is whether to grant the variations sought by the trustees. Section 244 [5] This application is brought pursuant to s 244 of TTWMA. That section reads as follows: [244 Variation of trust (1) The trustees of a trust to which this Part applies may apply to the Court to vary the trust. (2) The Court may vary the trust by varying or replacing the order constituting the trust, or in any other manner the Court considers appropriate. (3) The Court may not exercise its powers under this section unless it is satisfied (a) (b) that the beneficiaries of the trust have had sufficient notice of the application by the trustees to vary the trust and sufficient opportunity to discuss and consider it; and that there is a sufficient degree of support for the variation among the beneficiaries.] [6] Section 244(2) gives the Court a discretion as to whether or not it can vary a trust order. That discretion should only be exercised if the conditions set out in s 244(3) have been made out. [7] The application was accompanied by a copy of a draft set of minutes from an annual general meeting held on Saturday 7 November The draft minutes record that the two variations sought were discussed by the owners. Resolutions supporting the recommendations are recorded in the minutes. [8] When considering the issue of sufficiency of notice and sufficiency of opportunity to discuss the proposed variations, the Court notes that materials such as a copy of any newspaper advertisement of the annual general meeting, a copy of any correspondence/notice to the owners and a copy of the agenda for the annual general

3 meeting did not accompany the application. Nor was that material placed before the Court during the course of the hearing. [9] The trustees that appeared in support of the application indicated that their recollection was that the annual general meeting had been advertised in the Rotorua Daily Post and/or the New Zealand Herald. They also thought that a letter was sent to all beneficial owners for whom the trust holds addresses, notifying them of the annual general meeting together with a copy of the agenda. [10] In the absence of that material the applicants were directed that it be made available to the Court within 14 days of the hearing. [11] Following the hearing the trust secretary/accountant filed with the Court advertising instructions. From those advertising instructions the Court is satisfied that a notice appeared in the Daily Post, the New Zealand Herald and the Bay of Plenty Times on Saturday 24 October 2009 and Saturday 31 October No copy of any letter sent to the beneficial owners was filed with the Court, however the trust secretary/accountant has made the Court aware that the topic of an increase in annual trustee remuneration and an honorarium for retiring trustees was notified to the beneficial owners and discussed at the 2008 annual general meeting. Upon checking the minutes of the 2008 annual general meeting I am satisfied that that matter was deferred for further discussion until the 2009 annual general meeting. [12] Thus the Court is satisfied that the beneficial owners have had sufficient notice and sufficient opportunity to discuss and consider the proposed variations. [13] On the issue of sufficiency of support, the draft minutes of the annual general meeting record that there were 120 people in attendance with 34 apologies. No attendance list was supplied and there is no indication in the minutes as to how many of the 120 people in attendance were owners or not. The Court was assured by the trustees present before the Court that 120 people in attendance was a fairly typical turnout for the annual general meeting. The number of owners in this block recorded as at 12 February 2010 are 5,246. On a percentage basis the turnout is very low, 2.3%. What the Court does note is that there was no objection raised to either of the

4 proposed variations during the course of the annual general meeting and none recorded during the Court hearing. [14] Read literally, support from 2.3% of the beneficial owners to a variation of trust hardly fulfils the statutory requirement of a sufficient degree of support. However taking into account the reality that there is often a minimal turnout at annual general meetings and the lack of express opposition to the proposals, what the Court can be satisfied of is that there was a sufficient degree of support for the proposed variations, from those people who attended the annual general meeting in November Application to Increase Trustees Honorarium from $90, to $108, [15] In support of the proposed increase, counsel submitted four main grounds: a) There was an independent expert report from Strategic Pay recommending a fee level increase of 16.8%; b) The application is supported by the owners; c) The application is affordable given the current asset size and revenues of the Trust; d) The trustees are deserving of the application given their stewardship of the Trust and their historic low levels of remuneration. [16] No one doubts the size, significance and success of the Pukeroa Oruawhata Trust ( the Trust ) today and its subsidiaries. The annual report for the year ending 31 March 2009 indicates that the Pukeroa Oruawhata Group ( the Group ) is made up of the Trust and a number of other entities being the Pukeroa Oruawhata Holdings Limited, Pukeroa Lakefront Holdings Limited, Pukeroa Properties Limited, Pukeroa Properties (No.2) Limited, Waihunuhunukuri Holdings Limited and Te Hope o Tutanekai Trust.

5 [17] The annual report for the Group for the year ending 31 March 2009 indicates a net equity of $77,992,897.00, operating revenue of $9,548, and a net tax paid surplus of $782, There is no doubt that since the inception of the Trust in 1980, the trustees have transformed a debt laden group of properties into a significant commercial enterprise. [18] Having said that the Court has a number of misgivings about this part of the application. [19] As a starting point the Court notes that the trustees did not provide it with a copy of the most recent financial statements for the Trust or the Group together with the application. A copy had to be made available by counsel during the hearing. This is surprising when the application is premised in part upon a submission that the application is affordable given the current asset size and revenues of the Trust. [20] An examination of those accounts indicates that in addition to the trustees fees, all six trustees receive directors fees from the various subsidiaries. In total for the year ending 31 March 2009, $259, was paid in trustees and directors remuneration. [21] The Court compares that to the total amount made in distributions to the beneficial owners which was $365, When expressed as a percentage of the net surplus of $782,753.00, distributions for the Group is 46.5% of the net income. [22] The Court has calculated that trustees /directors fees when expressed as a percentage of the net surplus for the year ending 31 March 2009 are 33.1%. Thus a significant percentage of the net surplus is paid out in trustees /directors remuneration. [23] From the bar Mr Dennett indicated that the Trust secretary provided him with information that the net surplus for the Group for the year ending 31 March 2010 is likely to be in the region of $1.5 million. The Court took that submission to mean that if the variations are adopted, directors and trustees fees if expressed as a

6 percentage of the net surplus would decrease from the figure of 33.1% paid in the year ending 31 March [24] The Court does not have the financial statements for the year ending 31 March 2010 nor any drafts and thus there is no independent way of verifying that position. [25] The Strategic Pay report recommends an increase in fees based on a May 2009 Strategic Pay/Institute of Directors fees survey. The survey showed an increase in directors fees over a three year period of 16.8%. It should be noted Strategic Pay acknowledge that the years 2007 and 2008 were influenced by strong growth in the economy, a trend which is expected to fall given the current economic conditions. [26] The trustees sought from the beneficial owners an increase in remuneration of 16.8% for all trustees and an increase in the deputy chairperson s rate of 20%. A concern the Court has is that the increase in remuneration is not linked at all to the performance of the Trust let alone the Group. [27] The Court raises this concern because the net tax paid surplus for the Group has decreased since In 2006 the net tax paid surplus was $1,087,289.00, in 2007 $986,699.00, in 2008 $785, and in 2009 $782, [28] When one examines the equity position of the Trust for the same four years the Court notes a significant increase in the Trust equity position from $56,847, to $78,242, During the corresponding period however the net surplus for the Trust has varied. For the year ending 31 March 2006 the net tax paid surplus for the Trust was $168,442.00, for the year ending 31 March 2007, $185,149.00, for the year ending 31 March 2008, $140,967.00, for the year ending 31 March 2009 a deficit of $155, [29] The Court also notes that in an earlier Strategic Pay report attached to a copy of the financial statements for the year ending 31 March 2008, they eschew the use of the CPI as a measure to adjust directors fees. Strategic Pay s opinion is we do

7 not recommend the use of the CPI as this measure is a very general one and a better assessment of labour market trends is obtained from Directors Fee survey. [30] An obvious concern for the Court is that basing recommendations for trustees /directors fee increases on a fee survey is artificial in the sense that it is not directly linked to performance. If the application for an increase in trustees fees was based solely on the performance of the Trust, as reflected by the net tax paid surplus for the year, given the deficit of $155, in the year ending 31 March 2009, no increase in trustees fees is justified. [31] Another area of concern the Court has is that the report from Strategic Pay is drawn from a survey in which comparisons made are to limited liability companies and not comparable ahu whenua trusts or Māori incorporations. [32] The Court has noted that in a reserved decision involving this Trust, Mitchell v Short & Ors Pukeroa Oruawhata Trust (2003) 277 Rotorua MB 285, Judge Harvey expressly noted that in any future review of trustees fees, an attempt should be made to compare like with like to ensure that reports are relevant to the debate. Judge Harvey expressly referred to trusts and incorporations of a similar ilk for example Lake Taupō Forest Trust, Lake Rotoaira Forest Trust, Rotoiti 15 Trust, Tuaropaki Trust, Mangatu Incorporation, Wakatu Incorporation, Paraninihi Ki Waitorara Incorporation and Taharoa C Incorporation. [33] Mr Dennett was counsel in Mitchell v Short and all of the trustees who appeared before me were trustees at that time. Thus the Court is surprised that no attempt was made to compare the proposed fee increase with trustees and directors fees paid by those trusts and incorporations referred to in the Mitchell v Short case. [34] No attempt was made to compare the proposed level of fees with the level of fees paid to the directors of significant Māori commercial enterprises, such as Tainui Group Holdings. Such information is publicly available online. [35] At the risk of repeating oneself, the trustees should now be well aware that in any future review of trustees fees the Court will not automatically rubber stamp the

8 proposed increase. The Court will almost certainly want to look at the financial position of the trust to see whether the proposed payments are affordable and sustainable. The Court might also be interested in comparing the level of proposed fees of this Trust with others of a similar size and nature to broadly ensure a consistent approach. [36] I now turn to the major concern the Court has with this part of the application. The Strategic Pay report dated 5 September 2009 is premised on the basis that the trustees have kept fee levels at relatively low levels when compared with similar sized entities. The Court notes that the report references the fact that the same group of trustees/directors serve on four organisations within the Group. [37] On the third page of its report Strategic Pay states its understanding of current fee levels being: a) For the Pukeroa Oruawhata Group: Chairman $20, Trustees $14, b) For Pukeroa Oruawhata Holdings Limited: Chairman $25, Trustees $17, [38] It is apparent that Strategic Pay were working on the assumption that the total fees paid to the chairman totalled $45, and for each of the trustees $31, The figures Strategic Pay were working with are inaccurate in that no mention is made of fees paid to the trustees, in their capacity as directors of Pukeroa Lakefront Holdings Ltd and Pukeroa Properties (No.2) Ltd. [39] The full table of trustees /directors remuneration is set out at page 18 of the financial reports for the year ending 31 March That table is set out as follows: POT POHL PLHL PPNO2 TOTAL Malcolm Short (Chairman) 20,000 25,882 7,052 8,619 61,553 Alec Wilson 14,000 17,255 5,820 5,373 42,448 Pihopa Kingi 14,000 17,255 4,477 5,373 41,105 Stuart Harris 14,000 17,255 5,373 5,373 42,001 Rawiri Rangitauira 14,000 17,255 4,477 4,477 40,209 David Tapsell 14,000 17, ,702 TOTAL $90,000 $112,157 $27,199 $29,662 $259,018

9 [40] It is not apparent to me why the total amount paid in trustees and directors remuneration was not referred to in the Strategic Pay report. This is significant as Strategic Pay assumed, based on the figures they refer to in their report, that the fee levels paid to the trustees were relatively low. Given that they did not refer to the full amount of the trustees /directors fees paid, this was a significant flaw in their report. [41] Thus Strategic Pay compared fee levels based on what they were told with the results of their May 2009 survey. [42] At the second page of their report they set out a table drawn from that survey for current fee levels. That table is set out below: Chairman (Total Fees) Lower Median Upper Quartile Quartile Revenue $5.1M to $10M 18,000 24,500 45,000 Assets $100.1M to $200M 50,000 57,500 63,000 Directors (Total Fees) Revenue $5.1M to $10M 10,040 15,000 20,000 Assets $100.1M to $200M 26,801 37,500 50,004 [43] Taking as an example, the chairman Mr Short s remuneration, it totals across the Group $61, When compared to the Strategic Pay table on a revenue basis that sum far exceeds the upper quartile figure. On an asset basis the fees paid to Mr Short are slightly less than the upper quartile figure. [44] Four of the other trustees received fees in total ranging from $40, to $42, On a revenue basis, those fees paid are in all cases double the fee paid for the upper quartile figure. On an asset basis, those fees are certainly greater than the median figure of $37, but less than the upper quartile figure of $50, [45] One trustee Mr David Tapsell, was paid $31, On a revenue basis this sum is greatly in excess of the upper quartile figure of $20, On an asset basis

10 it lies approximately between the lower quartile figure of $26, and the median figure of $37, [46] That examination reveals that on a revenue basis all of the trustees received fees greater than the upper quartile figures. On an asset basis: Mr Short received fees approximate to the upper quartile figure; four of the six trustees received fees in excess of the median paid and only one trustee s fees lay in the lower quartile median figure. [47] Thus I am of the view that the Strategic Pay report is seriously flawed given that the full trustees /director s remuneration across the Group is not referenced in their report. Thus the comparisons they have drawn are inaccurate. [48] In summary the application to increase the directors fees from $90, to $108, per annum is dismissed for the following reasons: a) Trustees /directors fees when expressed as a percentage of the net surplus across the Group are significant. From the most recent set of financial statements it was 33.1%; b) The proposed increase in fees for trustees is not linked to performance. The performance of the Trust for the year ending 31 March 2009 shows a net deficit for the year ending 31 March 2009 of $155,135.00, a decrease of $296, from a surplus figure of $140, for the previous financial year; c) The Strategic Pay report is drawn from a survey of limited liability companies. No evidence has been put before me of a comparable exercise carried out in relation to similar ahu whenua trusts or Māori incorporations; d) Most significantly the Strategic Pay report is based on an assumption that the level of fees paid to the trustees/directors of the Group are at relatively low levels. The Court has found as a fact that the full

11 trustees /directors remuneration, as set out in the financial report for the year ending 31 March 2009, is not referred to in the Strategic Pay report. The remuneration figures that the Strategic Pay report rely on are significantly less than the actual trustees /directors remuneration paid. When one takes in to account the actual figures paid for trustees /directors remuneration they reveal that the trustees are paid rates broadly commensurate with commercial rates and on some measures equivalent to upper quartile fees. [49] For those reasons the Court rejects any suggestion that the trustees are paid less than broadly commercial rates. In fact the analysis carried out shows otherwise. Therefore for those reasons this part of the application is dismissed. Retirement Honorarium [50] The trustees also seek to vary the trust order by adding a clause which allows them to pay retiring trustees who have served not less than ten years, a retirement honorarium. [51] Counsel explained the basis on which the proposal was put to beneficial owners: a) Trustees had to have served ten years; b) It related to trustee fees only; c) The proposed fee is three times the annual trustee honorarium; d) In the event of an eligible trustee dying in office, the retirement honorarium to be paid to the credit of the estate of the deceased trustee. [52] Notwithstanding the fact that the owners present at the annual general meeting on 7 November 2009 supported this proposal, the Court is not going to accede to this part of the application.

12 [53] The Court knows of no other ahu whenua trust in which a retirement honorarium is paid. I asked Mr Dennett if he knew of any examples, he was unable to refer me to any. [54] No examples of Māori incorporations paying committee of management members retirement fees, were put before the Court. [55] The reports from the Strategic Group are lukewarm on this issue. In their report of 5 September 2009, whilst indicating that a case could be put to the owners for providing a retirement payment, they note that payment of retiring allowances for directors have generally been discontinued in recent years in New Zealand often with compensating fee level increases. They also note that best practice in relation to retirement payments is to eliminate them. [56] Included in the Pukeroa Oruawhata Group annual report of 31 March 2008 is a report from Strategic Pay dated 23 November In the first paragraph they do not recommend the payment of retirement allowances. It is noted that such payments have generally been discontinued in recent years in New Zealand and where retirement fees were removed fee levels often increased to compensate. [57] In the Court s questioning of counsel, the Court gained the distinct impression that a rationale for the retirement honorarium payment was to reward long serving trustees for their stewardship over many years, particularly over the first two decades when those trustees received either minimal payments or nothing. [58] Whilst the Court recognises those efforts there is no guarantee that any trustee will receive any remuneration. In fact as a matter of first principle it is a duty of all trustees to act gratuitously: Peach v Jagger [1911] 30 NZLR 423. The rationale is that a trustee is not allowed to derive a benefit from the trust property: Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 3 All ER 75 (PC) (at p 1075; p 77 per Lord Templeman). The interests and duties of the trustee must not conflict: Bray v Ford [1896] AC 44 (HL).

13 [59] The Court accepts that this principle has never been an inflexible one and indeed there are a number of cases in which there has been a departure from the principle that trustees should act gratuitously. Many of those examples are of trusts in the Rotorua and Taupō vicinity which have become successful commercial entities. For a discussion of the approach to the Court refer to Paehinahina Mourea (1995) 237 Rotorua MB 114 (237 ROT 114), Tauhara Middle 4A2B2C Opepe Farm Trust (1996) 68 Taupō MB 27 (68 TPO 27), Waipapa 9 (1995) 67 Taupō MB 10 (67 TPO 10), Tuaropaki E (2002) 77 Taupō MB 25 (77 TPO 25), Tuaropaki Trust (2005) 82 Taupō MB 206 (82 TPO 206), Matata 59Y (Putauaki Trust) (2008) 117 Whakatane MB 145 (117 WHK 145), Mitchell v Short & Ors Pukeroa Oruawhata Trust (2003) 277 Rotorua MB 285 (277 ROT 285). [60] The Court does not read the authorities and principles to suggest that trustees are entitled to a form of golden handshake if a trust ultimately is commercially successful. Given that trustees fees are broadly at a level commensurate with commercial rates it would in the Court s opinion be too radical a departure from the ordinary principles on trustees remuneration to also allow a retirement honorarium. Furthermore as the Strategic Pay reports reveal, the use of retirement honorariums in limited liability company situations are in decline. [61] Whilst the Court leaves open the possibility that it may well be possible in an appropriate case for a trust to have a provision allowing for a retirement honorarium, it is not convinced that this is an appropriate case to do so. [62] This part of the application is also dismissed. Pronounced in open Court at am/pm in Hamilton on this day of April S R Clark JUDGE