Part 3: Investing in the Luggate Park development

Inquiry into property investments by Delta Utility Services Limited at Luggate and Jacks Point.

In this Part, we discuss:

  • Delta's intention to look for growth opportunities in residential property development before investing in Luggate;
  • the Luggate Park development and the opportunity to invest in it;
  • how Delta considered the opportunity and the risks;
  • negotiation of the terms of a joint venture to develop land at Luggate Park;
  • the structure of the joint venture to develop land at Luggate Park;
  • how the value of the land was determined; and
  • the final approval for the joint venture.

We then comment on Delta investing in the Luggate Park development.

Summary of our findings

In our view, Delta went through a careful and reasonable process when getting into property development at Luggate. Delta approached the investment cautiously and sought legal and tax advice. The land value was agreed after a negotiation process and was based on an independent valuer's report.

We found no evidence that any inappropriate motivation influenced Delta when it entered into the joint venture at Luggate.

Delta managers and Mr Coburn identified risks to the project at key decision-making points, including when the approval of all Delta directors was sought. Delta's joint venture subcommittee told directors that all those risks had been considered. However, we did not see any real consideration or analysis of the risk of the market slowing or that there could be less demand for sections than estimated.

Delta's tax advisors had strongly recommended that Delta get expert advice about the financial projections for the development. In our view, it is unfortunate that Delta did not do so. The director with the most property development experience could not be involved because of a perceived conflict of interest. This was even more reason to get expert advice before committing to the joint venture.

We found instances of Delta choosing artificial structures for carrying out its business activities. These structures involved legally unequal ownership or governance arrangements, but the parties had no intention that they would operate unequally in practice. From the material we have reviewed, the purpose of these structures was to avoid the accountability requirements of council-controlled organisations. In our view, such a move is inappropriate for a public entity.

Delta Utility Services Limited's search for opportunities in residential property development

Delta's growth strategy for 2004 to 2006 included looking for new ways of working. In 2004, Delta and an infrastructure design company formed a new joint venture company, Fulcrum Partners Limited (Fulcrum). The joint venture's purpose was to look for opportunities in the South Island to build and operate infrastructure in residential subdivision developments of more than 500 lots. Fulcrum would either manage the construction of the infrastructure assets or buy them from the developer if they had already been built. Fulcrum would then maintain and operate the assets and charge home-owners a fee for doing so.

The parties referred to this as the "Fulcrum concept". The concept needed the relevant local authority to agree to Fulcrum maintaining and operating the infrastructure assets. The more common model is for the developer to build the infrastructure assets, then to vest them in the local authority to maintain and operate.

The joint venture company was structured so that the private sector partner owned one share more than Delta and had the right to appoint one more director.16 This arrangement was deliberate. It meant that Fulcrum was not a council-controlled organisation, so it was not publicly accountable.

In early 2004, Fulcrum identified developments at Jacks Point (near Queenstown) and Pegasus (near Christchurch) as potential opportunities. However, the developers of those sites did not proceed with Fulcrum's proposal. Fulcrum identified several other possibilities in Central Otago and Canterbury, including a residential subdivision project at Luggate, known as Luggate Park.

The Luggate Park development

Luggate is a small settlement between Wanaka and Cromwell. It is about 10 kilometres east of Wanaka on State Highway 6 and has a population of about 400 people.

Luggate Park is about 77 hectares and surrounds part of the existing Luggate township. At the time of the proposed development, the land was subject to four different zonings under the Queenstown Lakes District Council's district plan – township, residential, rural residential, and rural general.

In February 2004, Luggate Holdings Limited bought the land to develop a subdivision.

Luggate Holdings Limited bought the land from Luggate Village Holdings Limited, a company in which Delta director Mike Coburn had a 50% interest. Luggate Village Holdings Limited had owned the land from July 2003 to February 2004.17 The land transfer records show that two mortgages were put in place when Luggate Holdings Limited bought the Luggate land. One was to a bank, and the other was to Mr Coburn's company as a vendor mortgage. These were both discharged in February 2005, when a mortgage was arranged with a different bank.

The planned subdivision development at Luggate Park was for 255 lots, to be developed in two main stages. Stage 1 involved residential lots next to the existing township, and stage 2 would develop more lots in areas zoned residential, rural residential, and rural general. The different areas of the development were known as 1A and 1B (stage 1), and K, 2A, and 2B (stage 2).

Construction18 of the Luggate Park subdivision began in 2004 after stage 1 received resource consent. Property titles were issued for 83 lots in areas 1A and 1B.

Stage 2 of the Luggate Park subdivision involved about 56 hectares of:

  • 24 larger lots on an elevated plateau that overlooked the rest of the development on one side and the Clutha River on the other (stage 2B);
  • 10 lots zoned "rural residential" (stage K); and
  • 138 smaller lots on a large bit of flat land (stage 2A).

How the Luggate opportunity arose

Luggate Holdings Limited, the owner of the Luggate Park land, was a company in which Mr Boult and other beneficial shareholders had interests.19 Mr Boult was one of two directors of Luggate Holdings Limited when that company bought the Luggate Park land. As we explain later in this Part, the joint venture structure that was eventually negotiated involved several companies and was reasonably complex.20 However, it is clear from the documents we reviewed and from our interviews that, although there were other beneficial shareholders and another director, in practice Delta was primarily negotiating with Mr Boult about entering into the joint venture. Where appropriate, we refer to the interests of Mr Boult and the other beneficial shareholders in the Luggate land as "the Luggate interests". However, in most circumstances, we have simply referred to Mr Boult.

Delta had talked with Mr Boult about the Fulcrum concept in 2004 and 2005. They had agreed that the Luggate Park development would be a good candidate. However, they could not get the Queenstown Lakes District Council's support so decided not to proceed with the Fulcrum concept there.

In May 2006, in response to interest from Delta in such a venture, Mr Boult on behalf of the Luggate interests offered Delta the opportunity to buy into the Luggate Park subdivision development. Before this, Delta had done some contracting work at Luggate Park during stages 1A and 1B of the development, and Aurora Energy Limited had entered into capital works agreements for electricity assets at the subdivision.

The option of buying into a residential subdivision development was a different sort of business opportunity than Delta had previously considered. It was a departure from Delta's core business at that time. However, Delta was looking for new opportunities and was interested in investing in property development with an experienced partner. The option to buy into Luggate arose a few weeks after the Council first advised the holding company of its requirement for extra dividends.

In his May 2006 letter, Mr Boult:

  • referred to his previous discussions with the chief executive about property development in Central Otago and various other developments he was involved in.
  • advised that stage 2 of the Luggate Park development was the best prospect for a joint venture with Delta.
  • said that stage 1A had been completed with titles issued and that all but one of the lots had sold. Work was under way on stage 1B, and 35 of 37 lots in this stage21 had been sold and were due to settle in late 2006.
  • suggested that there was the opportunity to look at stage 2 of the development (the undeveloped and yet to be consented land) as a standalone project that might suit a joint venture.
  • noted that there were three parts to stage 2 – 2A, 2B, and K – involving a total of 172 lots. The lots were a mixture of "high end" lots that looked out over the Clutha River, rural residential lots, and a significant number of smaller and cheaper residential lots.
  • noted that stage 2 would be one of the last subdivisions to qualify for cheaper local authority development contributions for roading, water, and other infrastructure, which should make the sections cheaper than those on offer in the area in the future.
  • said that stage 2 was subject to resource consent but that the outcome should be known by late 2006 or early 2007.

On behalf of Luggate Holdings Limited, Mr Boult provided a financial model for stage 2. He said that the model was reasonably conservative but a basis for discussion. He estimated that the gross sales value of the stage 2 lots would be $30.3 million and that the development should yield a return of about $7.5 million (about 33% of total expenditure). For the purposes of the model, Mr Boult valued the land at $10.75 million. However, he said that Luggate Holdings Limited would be happy to sell the land at valuation. He noted that the model assumed that the land would be sold to the joint venture when resource consents had been issued. He also noted that the joint venture would own the land free of debt but borrow development costs.

Mr Boult also noted that the proposal could ensure development work for Delta for the subdivision, subject to a transparent arrangement for that work.

How Delta Utility Services Limited considered the opportunity and the risks

Delta managers considered Mr Boult's proposal. In July 2006, they recommended that the Delta directors:

  • agree in principle to forming a joint venture to develop stage 2 of the Luggate Park subdivision after resource consents had been issued; and
  • determine which of the directors would work with management and Mr Boult to finalise the joint venture.

Delta managers said that a joint venture company would be formed to oversee development and construction of stage 2 of the subdivision. Delta would have one less share than the Luggate interests but equal board representation. The parties later decided to use an unincorporated joint venture rather than a company and agreed that each party would have a 50% interest in the joint venture but there would be unequal board representation.22

Delta managers gave the directors Luggate Holdings Limited's financial projections for the property development. They noted that the projections would require testing, and said that this would be the initial and ongoing responsibility of the joint venture board that would be established.

Managers identified the following risks to the joint venture partners:

  • Disputes
  • Market slowing
  • Liabilities – professional, construction, regulatory
  • Termination/exit arrangements
  • Negative reaction by others, limiting individual opportunities for the parties. This risk is assessed to be small in regard to the Luggate opportunity, but larger as/if the JV moves to subsequent opportunities.

Most of these identified risks eventuated to some degree, and the venture was drastically affected by the lack of market interest. We comment on Delta's approach to considering risks at the end of this Part.

Managers summarised the proposal as follows:

… this proposed [joint venture] represents an opportunity for DELTA to become involved in the marketing and development of a specific parcel of land. This will assist DELTA to decide its final appetite for such activity. In return DELTA offers Mr Boult "partnership" with a very capable development construction company. While DELTA will benefit from the opportunity to price construction work to a related party, the scale of the target development is such as to limit this benefit at the outset. Accordingly, the proposal is more in the nature of a learning opportunity.

At this time, Mr Coburn told managers that he used to own the land and that he understood that there were major planning problems with stage 2 of the development.23 Managers responded that Mr Boult was working through those matters. They also noted that Delta would not enter the joint venture until the land had been consented.24

A report to Delta directors in early 2008 summarised why Delta had wanted to get into property development in 2006. The 2008 report noted that Delta directors agreed in 2006 that Delta should explore involvement with land development:

  • as a means of developing wider knowledge of a market that was important to its civil and electrical contracting businesses;
  • to gain access on preferential terms to work for its civil and electrical businesses; and
  • as a means of improving profitability by "diversifying along the development chain".

A Delta manager explained this last point to us. In its contracting role, Delta had to compete for work and saw itself at the bottom of the development chain rather than as a decision-maker. It thought that becoming involved in property development as an owner/decision-maker as well as a contractor would move it higher up the development chain and improve profitability.

Negotiating the terms of the joint venture

In July 2006, Delta agreed in principle to form a joint venture with Mr Boult25 for stage 2 of Luggate Park.

Delta directors and management told us that they were aware that Fulton Hogan had bought land for property development ventures and had found this a good way of keeping its workforce busy in quiet periods. Delta directors and management were open to the idea of Delta taking part in these sorts of ventures as part of Delta's growth strategy and because a competitor had succeeded in doing so.

Delta formed a joint venture subcommittee to further develop the proposal. It appointed three of its directors (Mr Polson, Mr Liddell, and Dr Evans) as members of the new subcommittee. Delta's chief executive and chief financial officer were also members.26 Delta was also considering another joint venture opportunity at this time (at Jacks Point), so the subcommittee was formed to consider both proposals.27

Figure 6 shows the members of the joint venture subcommittee from 2005/06 to 2009/10.28

Figure 6
Members of the joint venture subcommittee, from 2005/06 to 2009/10

2005/06 2006/07 2007/08 2008/09 2009/10
Ray Polson (chairman) tick. tick. tick. tick. tick.
Norman Evans tick. tick. tick. tick. tick.
Ross Liddell tick. tick. tick. tick. tick.
Stephen Wilson tick. tick. tick. tick. tick.
John Walsh tick. tick. tick. x

x: Left during the financial year.

For the rest of 2006 and throughout 2007, Delta worked with Mr Boult on the structure of the joint venture agreement. The joint venture subcommittee oversaw that work. Both parties were supported by legal and tax advisors who worked on a draft joint venture agreement.

Matters that needed to be agreed included:

  • the land that would be subject to the joint venture agreement;
  • how and when the price of the land would be determined (a December 2005 valuation needed to be updated, and Delta needed to decide whether it wished to get its own valuation);
  • what would happen if resource consent was granted in stages;
  • the legal structure for the joint venture;
  • how Delta would buy into the venture (for example, by using equity or debt);
  • the tax effects on the Council group of Delta becoming involved in property development;
  • standard aspects of joint ventures, such as how disputes would be resolved and exit arrangements;
  • how the venture would be governed and managed;
  • how profits would be shared; and
  • accountability arrangements, including financial reporting and audit arrangements.

In December 2006, Delta managers reported to the joint venture subcommittee on the draft joint venture agreement and the above matters. Delta managers advised that:

  • Delta should enter into the transaction through a subsidiary (based on tax advice).
  • The agreement contained an "out clause" for Delta if resource consent had not been granted by 30 June 2008.
  • The joint venture would not proceed if the land value was not within a specified range.
  • One of Mr Boult's companies, Armada Holdings Limited (Armada), would manage the project and report to an owner board that would be established. The joint venture was to pay Armada all costs it incurred in managing the business, including a monthly fee to cover Mr Boult's time.

Managers recommended that the subcommittee seek the Delta board's agreement in principle for the more detailed joint venture arrangements outlined in paragraph 3.41, subject to a satisfactory business plan. The business plan was to be provided when the valuation for the land was available. The Delta board agreed to this.

In March 2007, Mr Boult updated the financial projections for the Luggate joint venture for the Delta board's consideration. He provided three versions of the financial model:

  • "likely" (the expected outcome if they were to do the subdivision then);
  • "break-even" (showing that property prices would have to drop by 27% before the joint venture lost money); and
  • "optimistic" (the effect of a 10% increase in property prices).

In our view, this is an example of the parties' tendency to focus on the potential benefits of the joint venture project rather than the risks and worst-case scenario. We comment on this at the end of this Part.

The parties negotiated the terms of the joint venture agreement further in the first few months of 2007, including the important matter of how the land would be valued. The joint venture subcommittee met in May 2007 to consider the assumptions that would determine the land value, the progress with the resource consent process (noting that a significant condition of the joint venture was for the land to be fully consented), and the financial projections for the development.

For the financial projections, Delta managers told directors that better information about the likely sale proceeds, development costs, and how long it would take to sell the lots would be available when the land was valued after consents had been issued.

Getting shareholder approval

On 2 May 2007, Delta directors resolved to proceed with the Luggate joint venture, subject to approval from the holding company and to the joint venture agreement including a clause that tied the land value to a gross profit expectation of 30%.

On 10 May 2007, Delta sought the holding company's approval to proceed with the joint venture. This approval was needed because Delta's statement of intent required shareholder approval for Delta to acquire shares in a company or organisation, or assets exceeding a total investment of $1 million.

Delta's summary of the proposal at that time included that:

  • Delta and Luggate Holdings Limited would become 50:50 partners in a property development joint venture to develop 172 residential sections for resale at Luggate.
  • Delta's participation would be through a fully owned subsidiary, which would hold Delta's share of the joint venture.
  • Delta would provide a secured interest-free advance for 50% of the land value.
  • Development work would be funded by joint venture bank debt.
  • Delta's advance would be repaid in full 20 months after the start of the project and would have a peak of less than $6.0 million.

Figure 7 shows how Delta managers summarised the financial expectations of the development.

Figure 7
How the managers of Delta Utility Services Limited summarised their financial expectations of the development at Luggate Park

Sales value of developed lots 30.387
Marketing and selling costs (1.693)
Development costs (9.676)
Overheads and funding costs (0.601)
Land value (10.750)
Surplus before tax 7.667

Delta managers also noted that:

  • The financial projections would be finalised when resource consents were issued and the land valued.
  • The agreement entitled Delta to carry out that part of the $9.7 million development work that it had the capacity to do.

On 15 May 2007, the holding company's board agreed to Delta's proposed involvement in the joint venture and to Delta lending the joint venture $5 million as a secured loan. All of the members of the holding company's board were also directors of Delta (Mr Coburn, Dr Evans, Mr Hudson, Mr Gilks, and Mr Liddell).

At its meeting on 13 June 2007, the holding company's board noted that Delta was looking at two developments: the joint venture property development in Luggate and expanding into Queenstown with a proposed purchase of a small company. The minutes note that:

  • The required capital injection was less than $10 million (and so within the holding company's spending authority from the Council).
  • The chairman (Mr Hudson) said that he could brief the Council.
  • Three Council officers and the Mayor (Peter Chin) were present for the discussion.

We have not seen any evidence that the holding company board scrutinised or tested the Luggate investment proposal. It appears that approval was a formality.

Communicating with Dunedin City Council

At the time of the Luggate investment, governance and communication arrangements between the Council and the holding company were as follows:

  • A liaison committee comprised the Mayor, the chief executive of the Council, the chairman of the Council's Finance and Strategy Committee (Councillor Syd Brown), and the chairman of the holding company. The purpose of the liaison committee was to brief the Council on large transactions. Meetings were informal, and minutes were not taken.29
  • Quarterly meetings arranged by the holding company briefed councillors on holding company matters.
  • The Council's former general manager of finance and corporate support, Mr Stephens, was the company secretary of the holding company and attended board meetings. The Mayor and the chief executive were also invited to attend the first part of holding company board meetings for a general update. At times, other senior Council staff attended.

We asked the Council for records of any specific communication from Delta or the holding company about the Luggate investment. The Council has not found any such records. Senior Council staff and the Mayor would have had some, but not detailed, knowledge of the investment from attending a holding company board meeting in June 2007. More information was provided about Jacks Point, which we cover in Part 5.

Because the Council has not found any records, we have not seen any evidence from mid-2007 that the chairman of the holding company (Mr Hudson) formally briefed the Council on Delta matters, including Luggate Park. Mr Hudson was a director of the holding company and of Delta when both the Luggate Park and Jacks Point investments were made. He was also a councillor. However, Mr Hudson told us that he did not see himself as a conduit for information to the Council about companies in the holding company group.

Delta did not publicise the Luggate Park joint venture investment. However, Delta answered questions about it when contacted by the Otago Daily Times in September 2008. The investment does not seem to have been known about publicly before then.

Why Newtons Coachways (1993) Limited was involved

Delta's tax advisors had recommended using a subsidiary to advance funds to the joint venture. Delta arranged to purchase Newtons from the Council and to establish it as a subsidiary of Delta. This was because it was more convenient for Delta to buy Newtons from the Council than to form a new subsidiary.

The Council had previously established Newtons as a name protection company. However, the Council no longer needed Newtons for that purpose. Newtons was a council-controlled organisation30 and remained so after it was purchased by Delta. Delta did not appear to realise that Newtons was a council-controlled organisation or think about accountability requirements, such as the need to prepare a statement of intent, when it first purchased the company.

Delta initially appointed Mr Polson, Dr Evans, and Mr Liddell as directors of Newtons. Mr McLauchlan, Grady Cameron, and Mr Coburn were later appointed as directors in July 2009.

Figure 8 shows the directors of Newtons from 2005/06 to 2012/13. Newtons was re-named Delta Investments Limited from July 2011.

Figure 8
Directors of Newtons Coachways (1993) Limited/Delta Investments Limited, from 2005/06 to 2012/13

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
Ray Polson (chairman) tick. tick. tick. tick. tick. tick. tick.
Norman Evans tick. tick. tick. x
Ross Liddell tick. tick. tick. x
Stuart McLauchlan tick. tick. tick. tick.
Grady Cameron tick. tick. tick. x
Michael Coburn tick. tick. tick. x
Jim Harland tick. x
David Frow tick.
Ian Parton tick.

x: Left during the financial year.

Structure of the joint venture to develop land at Luggate Park

In mid-2007, Delta entered into an unincorporated joint venture to develop and sell the land at Luggate Park for profit. Delta's tax advisors said that an unincorporated joint venture was an appropriate legal structure for the development and would enable the joint venture parties to claim any tax losses.

Figure 9 sets out the five parties to the Luggate Park joint venture and their roles.

Figure 9
Parties in the joint venture to develop property at Luggate Park

Joint venture party Main role
Luggate Holdings Limited* Owner of the land but required to transfer the land to Luggate Properties Limited
Luggate Properties Limited,** a wholly owned subsidiary of Luggate Holdings Limited Formed for the purpose of the transaction to be the registered proprietor of the land
Newtons Coachways (1993) Limited (a wholly owned subsidiary of Delta Utility Services Limited) Acquired from Dunedin City Council for the purpose of the transaction

Required to advance Delta's funding for the venture to Luggate Properties Limited
Delta Utility Services Limited Construction company for the joint venture
Armada Holdings Limited, a company owned by Mr Boult and his family Management company for the joint venture

* Luggate Holdings Limited was incorporated on 23 September 2003. Neil Macdonald was a director from 23 September 2003 until 22 June 2012. David Stock was a director from 10 September 2007 until 27 August 2008. Mr Boult is the only current director and was appointed on 23 September 2003. The 100 shares are held jointly by Mr Boult and Mr Macdonald.

** Luggate Properties Limited was incorporated on 29 May 2007, and was removed from the Companies Register on 25 February 2014. Mr Boult was a director from 29 May 2007 to 25 February 2014. Mr Macdonald was a director from 29 May 2007 to 22 June 2012. Mr Stock was a director from 6 May 2008 to 27 August 2008.

Figure 10 shows the structure of the Luggate Park joint venture.

Figure 10
Structure of the joint venture to develop land at Luggate Park

Figure 10 Structure of the joint venture to develop land at Luggate Park.

Delta and Luggate Holdings Limited used new subsidiaries for the transaction. The joint venture agreement required one of the new subsidiaries, Luggate Properties Limited, to have no activities other than its functions under the joint venture agreement. This was to ensure that it was a "clean" company that was not subject to any other business obligations.

The subsidiaries were the active parties (the participants) in the joint venture once it was established. The joint venture agreement required them to form a new company to hold the land as a trustee for their interests in the joint venture and to sell the individual lots after they had been developed. The company was named Luggate Nominee Limited. Each joint venture party owned a 50% share in it and appointed one director.31

Luggate Nominee Limited held the land as trustee as follows:

  • It held the interest of Luggate Properties Limited in the unimproved land solely for that company.
  • It held the interest of the joint venture in the improvements to the land carried out under the development for the joint venture.

We describe funding, governance, and management arrangements in the next Part.

Working out the value of the land

The land subject to the joint venture was the undeveloped land in stage 2 (about 56 hectares) and unsold lots in stage 1. Luggate Holdings Limited had applied for consent to subdivide the land in stage 2 of Luggate Park.

The joint venture agreement was to have full effect when resource consents were issued. Either party could withdraw if this had not happened by 30 June 2008. However, the joint venture agreement provided that the arrangement could be restructured if consents were issued in phases, provided the parties considered that it was economic to proceed.

In mid-2006, Mr Coburn had said that he understood that there were some planning issues with the land. He raised this again in late 2007, when Delta managers sought approval from directors to proceed with the joint venture. In mid-2006, Delta managers had been clear that the agreement would proceed only if the desired land use was consented. Mr Boult had said the same in his communications at that time.

Consents were issued for the proposed subdivision of stage 2A of the land in September 2007. However, they were declined for stage 2B. Luggate Holdings Limited appealed that decision to the Environment Court, and consent for stage 2B was eventually granted in October 2009.

The parties amended the joint venture agreement in early 2008 to state that, despite the delay with consent, the stage 2B land would be developed on the same terms that applied to the land that consent had been granted for.

The joint venture agreement provided that:

  • the land would be independently valued;
  • for the purposes of working out the value of the land, only the consented land would be valued;
  • the valuer had to take account of the parties' expectation to make a net profit of 30% on the sale of each lot, after deducting development costs; and
  • if the land value was below a specified amount, Luggate Holdings Limited could withdraw and, if it was above a specified amount, Delta could withdraw.

When the joint venture agreement was amended in 2008 (because of the delay with resource consent for stage 2B), the parties did not amend the clause that said that only consented land would be valued for the purpose of determining the land value.

Valuation reports

The parties used a valuer who had previously valued the land for Luggate Holdings Limited. The valuer reported to the parties in October 2007, valuing the consented and unconsented components of the Luggate Park subdivision at $14.42 million. This was the stage 2 land known as 2A, 2B, and K, and the unsold lots in stages 1A and 1B.

The valuer's report discussed growth and property sales in Queenstown, Wanaka, and Cromwell. It noted that, although the rate of growth in Wanaka had slowed in 2006 and 2007, affordable land in the district was in demand. Developments in Luggate and nearby Albert Town could meet that demand. The report's main conclusions were that:

  • There would be a significant reduction in sale rates in the short term, based on the current status of the market and competing subdivisions in the Southern Lakes region.
  • The township of Luggate would maintain reasonable demand in the short term. Sales would be at the market level, but there would not be speculation for investment purposes.
  • It would take longer to sell sections, in line with the general market activity in the region.

The land was valued for mortgage-lending purposes using a method of discounted cash flows and a hypothetical subdivision, taking into account the estimated costs of developing each lot. Based on development costs for stages 1A and 1B and industry averages, the report assumed that it would cost $55,000 to develop each lot.

The valuer updated the estimated land value several days later after reducing the number of lots on the upper plateau in stage 2B by 15. This was in keeping with revised plans for that part of the development and because resource consent had been delayed. This led to a revised value of $13.46 million.

The overall land value in the valuation report included the value of the unconsented land and the likely sales values of that land. The parties considered that the unconsented stage 2B land had a value of $1.5 million. They appear to have included the value of that land because they considered it likely that consent would be issued, rather than determining the value after consent had been granted. This was contrary to the original intention of the parties, as stated in the joint venture agreement, that only consented land would be included when determining the land value.

Reaching agreement to proceed

Delta's joint venture subcommittee considered the valuation report in November 2007. One of Delta's directors on the joint venture subcommittee, Mr Liddell, had concerns about the quality of the valuation report. His concerns included that the expected sales value of the developed lots was too high and the estimated development costs were too low. He also thought the unconsented land should be excluded. Mr Liddell said:

All in all, I think we have to be really careful, even though we want some contracting work.

Delta managers carried out financial analysis to test Luggate Holdings Limited's financial projections and the assumptions in the valuer's report. This analysis looked in particular at development costs, likely sales values, and profit margins. In early December 2007, Delta managers recommended that the joint venture subcommittee proceed with a land purchase price of slightly less than the amount Luggate Holdings Limited was seeking. That price was about $1.4 million less than the revised valuation report.

The joint venture subcommittee met on 6 December 2007 to discuss the recommendation. Mr Liddell said that he thought the land was worth nearer $10 million than $13 million. However, the subcommittee agreed to advise Mr Boult that Delta would go ahead with the joint venture at a land cost of $12 million, after Delta staff had reviewed the estimated development costs for the consented lots and confirmed that they would not exceed the $8.07 million included in the valuation.

Mr Boult then proposed to take nine developed lots out of the joint venture that were ready to be sold, with the effect of reducing the land value to $10.715 million. Mr Boult sought Delta's agreement to share in the costs of undergrounding overhead power lines that crossed part of the development. Delta agreed to these changes.

Delta staff had reviewed the estimated development costs and considered them higher than forecast by the valuer and Luggate Holdings Limited. Delta staff wanted to decrease the land value by the difference (from $10.715 to $10.461 million). Delta's records note that Mr Boult verbally agreed to this amount at that time. The parties later agreed to a slightly increased amount of $10.7 million after further changes to the land included in the joint venture.32

Figure 11 summarises the process used to determine the agreed land value of $10.7 million.

Figure 11
Process used by Delta Utility Services Limited to determine the land value at Luggate Park

Event and timing $million
October 2007 valuation report – consented and unconsented land; stages 2A, 2B, and K; and unsold lots in stages 1A and 1B 14.420
October/November 2007 – valuation report amended to reduce the number of lots in stage 2B by 15 lots 13.460
December 2007 – value is reduced when nine developed lots ready for sale are taken out 10.715
December 2007/January 2008 – value reduced at Delta's request to reflect development costs that are higher than forecast 10.461
April 2008 – parties agree to increase in land value after one developed lot is removed and three added 10.700

The joint venture subcommittee agreed on 19 December 2007 to recommend that the Delta board go ahead with the proposal, subject to confirmation that Delta, through Newtons, would have an equal say in all joint venture decisions. Managers confirmed this.33

On 20 December 2007, Delta staff, on behalf of the Delta directors on the joint venture subcommittee (Mr Polson, Mr Liddell, and Dr Evans), sought approval from the other Delta directors (Mr McLauchlan, Mr Hudson, Mr Douglas, and Mr Coburn) to proceed with the joint venture development.

In seeking approval, Delta staff set out the background to the proposal in some detail. The background included revised financial projections and stated that the development was expected to take 27 to 36 months. Delta staff noted that the joint venture would acquire the unconsented land as part of the arrangement.

Final approval of the joint venture

There has been speculation about, and interest in, which directors voted to support the Luggate investment. Their approval was sought by email. Each director replied by email on 21 December 2007, copying all concerned. We note their responses in the sequence that they were given.

Mr McLauchlan, who was appointed to the board in July 2007, said:

I have not been aware of the detail of this deal until reading this email. We have a subcommittee of the board who have been working on this deal and if they are in agreement… I will vote in favour. I would like to know [Mike Coburn's] thoughts on this as he has a lot of experience in this area.

Mr Hudson said:

I agree to support the subcommittee's recommendation but with a degree of nervousness.

Mr Douglas said:

I have been keeping in touch with developments on Luggate and although I do not have the detail that the subcommittee has and the venture is not as good as first envisaged I consider the venture is still worthwhile. Delta should learn a lot from the experience.

These three directors were relying on the work of the joint venture subcommittee, made up of three of their fellow directors and two Delta managers. The directors and managers were particularly keen to hear Mr Coburn's views. Mr Coburn gave a longer response:

Everyone is aware because of a perceived conflict of interest I've had little or no information on the project, nor have I had any input into any of the discussions but based on my knowledge as a developer of substantial subdivisions in the Queenstown Lakes District Council, I comment as follows, not in any way criticising the process that has taken place, only to ensure that all directors are aware of the risk in a project such as this, bearing in mind I am a director/shareholder of the company that sold this parcel of land to JB's company in the first place.

Having declared his previous interest in the land and his perceived conflict of interest, Mr Coburn then raised questions and concerns about:

  • the development costs, which he thought were too low and should be nearer $10 million;
  • whether all contributions payable to the Queenstown Lakes District Council had been taken into account;
  • the forecast gross revenue of $28.5 million from sales of the developed sections, which suggested an average sale price of $217,000 for each lot  - he thought an average sale price in the range of $150,000 to $170,000 was more realistic;
  • the land (stage 2B) not having been consented - because this consent could be difficult to obtain, he would allocate no value to that land;
  • the ambitious timeline to develop and sell lots - 40 to 48 months was more realistic;
  • profit - profit for such developments was usually in the last 25% of sales;
  • interest costs, which were likely to remain high; and
  • the significant effort and risk to secure $5.3 million of work for Delta.

Mr Coburn ended his remarks with:

Just a few comments for consideration based on little information. I am sure the subcommittee have considered all the risks in making their recommendation. I wish to abstain from voting for obvious reasons.

Mr Polson responded to his fellow directors, saying that he had asked managers to draft a response to Mr Coburn's comments. Mr Polson said:

Suffice to say the subcommittee canvassed all those risks and were satisfied on balance. Naturally there are development risks – we need to take those or not get involved in property development at all. There will be lessons learned for sure.

Later that day, the Delta staff member who had been the most closely involved with the project emailed directors in response to Mr Coburn's comments. The staff member began with:

For the avoidance of any doubt I do not profess to have any expertise in this field and the comments [given below] relate to the discussions that have occurred inside the JV committee ...

The staff member noted that managers had confidence in the value of the construction work that Delta would get from the joint venture. However, the underlying problem had always been working out the likely sales value of the developed sections and when sales would take place. The joint venture subcommittee had noted that a 25% reduction in sale prices would still leave the venture in a positive position, and Delta would still profit on the expected construction work by about $1 million. The staff member then provided detailed responses to each of the issues Mr Coburn had raised, based on work by the joint venture subcommittee.

In response to Mr Coburn's comment that he would allocate no value to the unconsented land, the staff member noted that the financial assumptions for the development gave this part of the land a value of $1.5 million, and Mr Boult was optimistic that consent would be granted. However, if consent was not given to develop it into smaller lots, it could be sold as two 10-hectare lifestyle blocks. Even if that land had no value, the profit margin on the whole deal would reduce by only 2%, from 30% to 28%.

Managers contacted Mr Boult later that day, confirming that Delta had agreed to proceed. The joint venture agreement was amended to reflect the agreement on the value of the land and some related matters (such as agreement to share the cost of having underground power cables). The agreement was also amended to reflect that resource consent had not yet been issued for the stage 2B land, but that land would be developed on the same basis as the consented land when consent was given.

In late December 2007, on behalf of the Luggate companies, Mr Boult signalled that the joint venture agreement should be further amended to reflect that the joint venture parties would negotiate in good faith an additional payment above the agreed $1.5 million value of the stage 2B land for any added value that land would have when consent was granted. Delta's initial response was not positive. It considered that any gains from the rezoning of the stage 2B land once consent was given should benefit the joint venture. It appears that Mr Boult did not pursue this matter further.

Immediate attempts to change the agreement

In early January 2008, immediately after Delta directors had agreed to proceed with the joint venture at the agreed land value, Mr Boult sought to change the funding structure. He proposed that the joint venture borrow $4 million from the bank up front. This would have raised an extra $2 million for Luggate Holdings Limited at the start of the joint venture.

Although this would have reduced the amount of Delta's advance to the joint venture (through Newtons) by $2 million, it would have meant that Newtons owed $2 million of the bank debt, and the bank would have a mortgage with priority over Newtons' mortgage. This would have reduced the priority of repayment of Delta's funding and increased Delta's risk.

Delta managers sought guidance from the joint venture subcommittee. In doing so, managers referred to Mr Polson's view that the market was tightening and risks rising. Managers noted that "his view is the deal is either as it has been agreed or there is no deal". The joint venture subcommittee was concerned about the attempt to change the deal so soon after it had been agreed. The subcommittee did not think that this boded well for the project. It said that the agreed funding arrangement was not negotiable. The Delta board endorsed this decision.

For a short time, it looked like the venture might not proceed. In early February 2008, Mr Boult proposed some other funding options to get the venture "back on track". These options included Delta lending an additional $2 million to the venture or taking a bigger share of about 70% or even 100% in the venture. However, Mr Boult proposed that he still manage the project under a profit-sharing arrangement.

Delta was concerned about these requests to change the funding basis. In early February 2008, managers and directors were ready to walk away from the deal. However, they were reluctant to do so because of the time and effort they had put into it.

On 27 February 2008, several Delta directors discussed the deal with Mr Boult at a Delta client function in Queenstown. Mr Boult proposed another variation on the deal to Delta managers the next day. He noted that some directors were keener to proceed than others.

In late February 2008, Delta told Mr Boult that the directors were not prepared to depart from the previously agreed funding arrangements. However, they were willing to proceed with the previously agreed arrangements or to end the agreement if Mr Boult wished to go ahead with another party.

In early March 2008, on behalf of the Luggate companies, Mr Boult agreed to proceed with the deal as previously agreed.

Our comments on the decision-making process

We have assessed Delta's decision to enter the joint venture against relevant requirements of the Local Government Act 2002 and the Companies Act 1993.

Local Government Act 2002

As a council-controlled trading organisation, Delta is subject to the requirements of the Local Government Act 2002.

The statutory objectives of a council-controlled organisation include:

  • achieving the objectives of its shareholders, both commercial and non-commercial, as specified in its statement of intent; and
  • carrying out its affairs in accordance with sound business practice (if the council-controlled organisation is a council-controlled trading organisation).

The second of these objectives is most relevant to how Delta made decisions about Luggate Park.

Did Delta make decisions in accordance with sound business practice?

Delta went through a careful and reasonable process to consider the opportunities presented by getting into property development, including finding a partner to work with. Mr Boult had property development experience, and Delta had worked with him before (including at Luggate Park).

Delta did not rush into the decision. It took the decision in stages, from agreement in principle to forming a joint venture subcommittee to work on the detail, to detailed negotiations about the legal structure, to a final decision. The process took just under two years.

Delta managers and directors approached the investment cautiously. The managers got legal and tax advice to support their advice to directors, where necessary. Delta's board questioned and tested the financial projections (including the estimated development costs, the likely sales proceeds, and the land value). The land value was agreed after negotiation, using the independent valuer's estimate as a starting point.

The business case for the project was essentially the financial projections and the expectation that Delta would profit when properties sold and from the construction work. This would contribute to Delta's growth strategy and ensure work for Delta's staff in Central Otago. The Delta directors we spoke to were clear that they had to keep their staff in work after expanding Delta's operations in the South Island.

Delta managers and Mr Coburn identified risks to the project at the main decision-making points, and the joint venture subcommittee said that it had considered all of those risks. However, we did not see any real consideration or analysis of the risk of the market slowing or that there might be less demand for sections than estimated.

The joint venture partners expected profits of 30% of the value of the venture or about $7.5 million. Delta expected to make a further $1 million profit from the contracting work. Managers said that, even with a 25% fall in property prices, the project was viable, and Delta would get the benefit of the contracting work.

The risk assessment was more focused on the financial model and the accuracy of its assumptions, such as development costs, and when Delta could expect to make the profit, not on what might happen if some or all of the lots failed to sell.

Operating a business and having a growth strategy for the business involves a certain element of risk-taking. In this instance, the directors were looking for new ways of generating income and dividends. The directors understood that getting into property development was higher risk than their contracting business. However, they regarded the Luggate opportunity as a "learning exercise" for their business. They expected the company to learn and benefit from working with an experienced property developer and had a reasonable expectation that sales would result from the property developer's marketing expertise.

A significant risk to property development is timing, because market changes can delay profits. The estimated time of 27 to 36 months for sales and profit proved to be optimistic. Delta did not appear to consider how long it might need to wait for returns and how this might affect the rest of its operations.

The likely development costs being higher than first estimated despite Delta having carefully considered these costs affected the project's viability. Because of the estimates' significance to the venture's success, Delta could have had the estimates independently reviewed.

Delta's tax advisors had strongly recommended that Delta get expert advice about the financial projections for the development before committing to the joint venture. In our view, it is unfortunate that Delta did not do so. Delta has noted that it is always easier to judge the outcome of a business investment retrospectively than to assess risks to growth opportunities in advance. The directors did not predict the change in the property market or the duration of its effects. They do not consider that seeking any further advice at the time would have changed that.

Did Delta pay too much for the land?

From the start, the parties intended the joint venture would start when resource consents were granted. However, as negotiations progressed, the parties decided to include the unconsented stage 2B land in the land value and, therefore, in the price Delta paid to enter into the venture. They agreed that the unconsented land had a value of $1.5 million, so the extra cost to Delta at that time was $750,000.

The joint venture agreement was amended in January 2008 to state that the stage 2B land would be developed on the same basis as the land that had received resource consent. However, this amendment did not address the fact that the joint venture agreement provided that only consented land would be included when determining the land value.

Mr Coburn had raised a concern in late December 2007 about the unconsented land and whether it had any value. Delta managers said that, even if the unconsented land had no value, Delta's profit would reduce only slightly. They made it clear to directors that the price included the unconsented land, but not that this was contrary to the original intention or the joint venture agreement. It is not clear that the parties or their advisors turned their minds to this at the time.

Delta proceeded on the basis of Mr Boult's confidence that consent would be granted. They did this against their original intention and despite Mr Coburn's comment that he would allocate no value to the unconsented land. This raises the issue of whether Delta paid too much for the land or whether it was just a timing matter, because consent was eventually granted. In our view, the fact that consent had not been given for part of the land was reason for caution, and Delta should not have paid for the value of the unconsented land when entering the joint venture.

Delta's loss might have been less if the parties had kept to their original intention. Delta notes that the judgement that consent would be granted proved to be right. However, a more cautious approach would have been to reconsider whether it was economic to proceed with stage 2B (and pay for a share of that land) when consent was granted, considering the sales of the consented and developed sections and the market at that time.

Compliance with other accountability requirements in the Local Government Act

The Local Government Act states that decisions must be made by, or under the authority of, the board of the council-controlled organisation and in accordance with its statement of intent and (for a company) with its constitution.

The statement of intent is an important accountability and authority mechanism for a council-controlled organisation, because it ensures that the council-controlled organisation operates within broad parameters approved by the shareholder.

Delta's statements of intent for the relevant periods contained general objectives about expanding its business to provide returns to its shareholder. These objectives included growing the company into a leading business, further diversifying and expanding the company's activities in operating and managing utility assets, and maximising financial returns and the value added by the company and its financial strength.

The Delta directors' decision to enter into the Luggate joint venture was in keeping with Delta's growth strategy at that time. Its shareholder, the holding company, approved that decision. We would not expect a statement of intent to specifically authorise a particular transaction, such as the Luggate joint venture. However, we would expect any such investment to be within the broad parameters of the statement of intent – and it was.

Newtons did not have a statement of intent when the investment was made. We comment on this in the next Part.

Legal structures and accountability arrangements

The Fulcrum company and the Luggate joint venture had unusual legal structures. These structures were designed to give Delta a slightly smaller interest than the private sector partner and, therefore, to ensure that neither entity was a council-controlled organisation.34 However, both entities operated on an equal basis in practice, because neither private sector partner exercised its right to appoint an additional board member.

At a significant point in the decision to proceed, Delta directors sought assurance from managers that they would have an equal say in all matters concerning the Luggate joint venture, and managers gave this assurance. This was not entirely consistent with the joint venture agreement, but it did operate that way. Delta knew from an early point in negotiations that the other joint venture partner did not intend to exercise its right to appoint an extra representative to the joint venture owner board.35

The result of the unequal structures was that the entities were not subsidiaries or council-controlled organisations. The accountability framework set out in the Local Government Act therefore did not cover them. That framework includes public statements of intent, annual reports, and public audit. For subsidiaries, it also includes consolidation and reporting in Delta's group financial statements.

It is open to a commercial entity such as Delta to choose other legal structures for carrying out its business. However, in this instance, the entities were structured in an artificial way – the parties were legally unequal but had no intention of operating unequally. From the material we have reviewed, this was done to avoid the accountability requirements of council-controlled organisations.36

In our view, using the accountability framework for council-controlled organisations would have meant greater accountability for the entities and would have provided better and earlier information to the Council and the public. Delta notes that the structures were partly used to simplify financial reporting requirements, but, more importantly, they were used to avoid drawing private sector parties into a disclosure regime that did not apply to them and that could be expected to discourage private sector participation.

We do not consider that Delta's use of artificial structures to avoid accountability arrangements is appropriate for a public entity. We can understand the perspective of private sector partners, but increased accountability through mechanisms such as the statement of intent process and broader reporting requirements is one of the effects of doing business with publicly owned entities. Enhanced reporting and the opportunity to engage in the statement of intent process should be of value to the private sector partner as well.

Companies Act 1993

The Companies Act acknowledges that directors will sometimes have interests in other parties that the company does business with. It defines the circumstances in which a company director will be considered to be "interested" in such transactions. These circumstances include that the director will or might receive a material benefit from the transaction, or if the director is a director, officer, or trustee of a party to the transaction.

Managing conflicts of interest

If a director is interested in a transaction, they must disclose that interest to the board of the company and enter it in the company's interests register. A director can enter a "general notice" in the interests register and disclose to the board their interests in other entities and that they are to be regarded as interested in any transaction that the company might enter into with any of those entities. This is enough disclosure of interest for any future transactions between the company and those entities.37

Delta managers and directors applied a cautious approach to managing conflicts of interest in the Luggate decision. Delta records show that Mr Coburn was perceived to have a conflict of interest with the Luggate land. The reason for this is not clear from the records. Mr Coburn does not appear to have been "interested" in Luggate Park in Companies Act terms, because the vendor mortgage from Mr Coburn's company to Luggate Holdings Limited had been discharged.

We did not get a clear sense of the perceived conflict from those we interviewed, but it appears that Mr Coburn was considered to have a conflict of interest as a previous owner of the Luggate land. Mr Coburn said that another reason might have been that he was a property developer in Central Otago, so he was in the same business as Mr Boult. There might have been a risk that Mr Coburn would have got information about the Luggate development as a Delta director that could have been useful to him in his other property ventures, so it would be preferable if he was not involved in making initial decisions.

We doubt that being a previous land owner would be enough, in itself, to be a conflict of interest. However, it is clear that Mr Coburn's property development activities needed to be carefully managed at times.

We do not criticise Delta for taking a conservative view on Mr Coburn's conflict of interest. Managing conflicts requires those closely involved to make judgements based on facts. That said, it was unfortunate that the Delta director who was an experienced property developer could not be actively involved, especially because Mr Coburn raised concerns about the proposal that proved to be valid.

The Delta directors on the joint venture subcommittee undoubtedly had considerable business and financial experience. However, they lacked significant experience in property development, as did the Delta managers who advised them.

In our view, the fact that the board member with the most experience could not be involved and the acknowledged lack of expertise in property development by Delta managers was even more reason to get expert advice before committing to the joint venture, as Delta's tax advisors had recommended.

Shareholder approval was a formality rather than independent scrutiny

Delta obtained necessary approvals from its shareholder, the holding company. However, the directors on the holding company's board who approved the transaction were also directors of Delta at the time of the approval, so this was a formality rather than independent scrutiny.

A Delta manager commented that the previous governance structure for the Council's council-controlled organisations, of having largely the same directors on the holding company and its subsidiaries, lacked the "commercial tension" usually seen in a group company structure. One of the directors said he was always clear that he fulfilled a different role when sitting on the board of the holding company than when on the Delta board. However, Delta managers told us this was not always clear to them.

The chief executive of the holding company confirmed to us that, because Delta had directors largely in common with the holding company, all decisions about Delta were discussed only within the Delta environment. The holding company had few records of those matters.38 The chief executive said that the holding company's role was to pass appropriate resolutions to ensure that the holding company group operated within its delegated authority from the Council and to pass on information to the Council.

No evidence that personal connections influenced the decision

Some of the people who contacted us raised the concern that personal associations between one or more of Delta's directors or managers and Mr Boult had inappropriately influenced Delta's decision to enter into the Luggate joint venture.

We were told that some of the directors knew Mr Boult through previous business dealings and that Delta managers knew him through his involvement in an Aurora Energy Limited scholarship scheme. However, these were standard dealings in the ordinary course of the directors' and Delta's activities.

We found no evidence that personal associations or inappropriate motivation influenced Delta to enter the joint venture with companies in which Mr Boult had interests.

Rather, the parties negotiated robustly about the terms of the joint venture agreement, supported by their legal and tax advisors. At several points, Delta would not agree to proposed changes to the agreement. At times, it was ready to withdraw from the agreement. We see this as evidence of a genuine commercial relationship between the parties, with both trying to protect their interests as is typical of business negotiations and arrangements.

16: Delta appointed three of its board members as directors of Fulcrum (Ray Polson, Ross Liddell, and George Douglas). The private sector partner also appointed three directors but never exercised its right to appoint a fourth.

17: Mr Coburn told us that he and a financial partner owned the land briefly but did not intend to develop it.

18: By construction, we mean providing infrastructure services such as roading, water, wastewater, communications, and power for the developed residential lots in the subdivision.

19: Companies Office records show that Mr Boult and Neil Macdonald jointly hold the 100 shares in Luggate Holdings Limited. The joint ownership indicates that the shares are held under a trust arrangement. Mr Boult confirmed this, and said that, in total, six people had varying interests in the company.

20: Later in this report, we sometimes refer to "the Luggate companies" to describe the other joint venture partner.

21: Later information referred to seven lots in stage 1B that remained unsold, so not all of these planned sales eventuated.

22: As with the structure of Fulcrum, the ownership structure was to avoid the joint venture being a council-controlled organisation.

23: Email from Mr Coburn to Delta's chief executive on 26 July 2006, after being sent the board paper proposing the joint venture with Mr Boult's companies.

24: As we discuss later in this Part, Delta did enter into the joint venture before all the land had been consented. Stage 2B was under appeal to the Environment Court when the joint venture agreement was finalised and payment made.

25: Although the joint venture structure that was later agreed involved several companies, at this stage Delta simply referred to the joint venture as being with Mr Boult.

26: John Walsh and Stephen Wilson.

27: Delta Utility Services Limited, minutes, 26 July 2006.

28: The joint venture effectively ceased to operate from mid-2009 when Newtons began to manage the investments.

29: The Larsen review report stated that, despite best intent, the liaison committee was ad hoc and operated informally. The review considered that the liaison committee needed to be disbanded and replaced with a more formal structure.

30: Newtons had no role other than name protection. It did not meet the accountability requirements in the Local Government Act 2002 for council-controlled organisations in the period it was owned by the Council.

31: Luggate Nominee Limited was incorporated on 25 January 2008. There are two shares, one owned by Luggate Holdings Limited and one owned by Newtons (now called Delta Investments Limited). Mr Boult and Mr Polson are directors.

32: In April 2008, the parties agreed to increase the land value to $10.7 million after the Luggate companies withdrew one of the developed lots from the joint venture but added three more. The joint venture agreement was amended by deed to reflect the increased land value.

33: Although the joint venture agreement provided for Luggate Properties Limited to have an extra representative on the joint venture owner board, Mr Boult had told Delta in May 2007 that the company would not exercise that right.

34: A proposed joint venture between Delta and Jacks Point Limited for a construction company under discussion in 2006 was intended to have a similar unequal structure. We describe this proposal in Part 5.

35: Email from the Delta manager most closely involved in the negotiations to Delta's legal advisor 10 May 2007 "… not to be formally recorded … Luggate have advised they will only be appointing 2 directors to the owner board …".

36: For example, the legal advice to Delta at the time assumes that this was the intention.

37: Sections 139 and 140 of the Companies Act 1993.

38: In responding to our request to the holding company for information about consideration of the Luggate and Jacks Point investments at holding company board meetings, the chief executive of the holding company gave us minutes of only two meetings (in June 2007 and April 2009).

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