James Farmer

Legal Commentary

Whatever the result, is this the last time the America's Cup event is held in New Zealand?

Monday, September 14, 2020
New Zealanders have had a love-hate relationship with the America’s Cup and in particular with Team New Zealand since at least the time when the Cup was lost to Alinghi in 2003.  Always regarded – and in fact – “a rich man’s sport” and as such not easily fitting the New Zealand psyche where Jack is as good as his master, the efforts of Peter Blake, Russell Coutts, Brad Butterworth and Tom Schnakenberg in wresting the Cup from the United States and Dennis Connor in 1995 gave us a pride of achievement, a sort of David and Goliath feeling.

That pride and feeling was maintained through 2000 when the Cup was successfully defended in Auckland against an impressive array of 11 Challengers, including 5 from the United States.  When the Cup was lost 3 years later, there were undoubtedly many who were happy for us to revert to our more humble station at the bottom of the World but equally many others who desperately wanted to hang on to the adrenalin rush that holding the Cup had given us.

The problem for New Zealand, then and ever since, was one of money.  Lacking an Ernesto Bertarelli or a Larry Ellison or a Patricio Bertelli, Team New Zealand continued to be reliant on commercial sponsors.  The cost of an AC team was enough to make even a billionaire’s eyes water and Ellison’s Oracle took BMW into its fold.   Alinghi and Luna Rossa/Prada also had support from commercial sponsors.  Team NZ acquired Emirates (and gave them naming rights) and Omega and continued to have support from Toyota New Zealand.  The continuation of the basic monohull design that had been used for a number of AC editions assisted in keeping costs down and the number of challengers up, as compared with the switch to catamarans by Oracle after it won the Cup and, more recently and radically, the foiling monohull that the current Cup will be sailed in, chosen by Team NZ [TNZ]. 

It is a matter of comment that TNZ had since 2003 been a vocal critic of the excessive costs that boat design and development placed on the poorer teams i.e. TNZ.  In July 2013, when the AC Match was being held in San Francisco, Grant Dalton said that to attract a good number of challengers the Event needs to have budgetary constraints. That makes inexplicable the decision, when Team NZ won the Cup back again in Bermuda in 2017, to switch from the 48 foot catamarans which by then were fully established to a 75 foot foiling monohull, a boat previously unknown to yachting.  The effect of that decision was in all probability to exclude new teams from entering the current Cup – the result 11 challengers in 2000 continuing with the existing boat down to 3 in 2020.  The reality was that no start-up team could hope to be competitive against existing teams with extensive AC experience and especially against TNZ who had a significant head-start as the originators of the concept.  

As an aside (to which I will return), it is ironic that the costs of the development of the design concept – invoiced to America’s Cup Event Limited [ACE] in the sum of $3 million - should now be the subject of dispute between ETNZ and the New Zealand Government with the former claiming it was entitled to claim that those costs were payable by the latter as being costs incurred “to facilitate the successful promotion and staging of the 36th America’s Cup and the Events while showcasing and promoting Auckland and New Zealand”: Host Venue Agreement [HVA], clause 2(a).  

A feature of TNZ’s funding since the time when it lost the Cup in 2003 has been the increasing contribution made by the New Zealand Government, especially since winning the Cup back again in 2017.   It would seem probable that that contribution in total exceeds by a considerable degree that by any single commercial sponsor and for the current Event the total of all commercial sponsors.

A controversial component of the current funding is the host venue fee (called the “Event Investment”) payable by MBIE on behalf of the Government pursuant to the HVA between MBIE, the Auckland Council, TNZ and ACE, a wholly owned subsidiary of TNZ.  This was raised by TNZ very late in the negotiations with the Government and the Council for contributions by them to fund the staging of the Event (in themselves said to be likely to be upwards of $200 million).  It was said by TNZ that Abu Dhabi and Sochi (Russia) had been offering $80 million or more for the right to hold the Event.  The Mayor of Auckland described this request as having come “out of left field”.  The public reaction was adverse and within days Grant Dalton was reported, in an interview by the Sunday Star Times, as saying that he “vowed to keep the Cup in New Zealand”.  In that interview, he was reported as saying that the hosting fee was never sought by TNZ but was to cover the costs of the Event.  Be that as it may, MBIE however does not hold the view that the $3 million invoiced by TNZ to ACE is similarly consistent. 

Enter the Beattie Varley [BV] audit investigation commissioned by MBIE on 13 March 2020 on behalf of itself and the Auckland Council.  This followed a complaint by Event managers Mayo and Calder (referred to by BV as the “Whistleblower”)  of irregularities by ACE and TNZ in the expenditure of the MBIE Event Investment, including the $3 million paid by ACE to TNZ.  ACE’s reaction, after providing some documents only to BV on 20 April, was to refuse to cooperate and participate in the audit further.  Depending on your taste, that was either unhelpful, contrary to its obligations under the Host Venue Agreement to provide access to ACE/TNZ documentary records and personnel, arrogant or just plain dumb.  In any event, it provoked an interim report by BV recording that this attitude prevented it from “effectively” carrying out its commissioned job.  The publicity around that, including litigation brought by the media in the High Court in an (unsuccessful) attempt to obtain a full copy of the interim report, swiftly brought ACE/TNZ to heel and cooperation was extended leading to BV’s final report of 20 August 2020.

A published summary of the report was accompanied by a joint statement issued by MBIE, the Council and ACE/TNZ.   The statement said that BV had found no evidence of financial impropriety or misapplication of funds, including no fraud and no payment of personal expenses from Crown monies.  It also however recorded concerns around record-keeping and a difference between MBIE and ACE/TNZ on whether the Class Design Costs should be borne by the Event and therefore by the Crown.  This difference was to go to mediation, as required by the dispute resolution process contained in the HVA. 

BV described as “challenging” the determination of the nature of the Class Design “expense”, said to have been incurred by TNZ and payable by ACE to promote and present the Event, as well as the validation of the amount charged.  TNZ/ACE initial resistance to cooperating an inquiry into this issue did not deter BV who said that the “advancing of funds without an associated expense would not be using the Event Investment for ‘costs arising in the management and delivery of the Events’”.  Ultimately however BV concluded that, as is now happening, this issue was one of contractual interpretation to be decided under the Host Venue Agreement. 

Nevertheless, BV was strongly critical of TNZ/ACE.  The Report said that “the failure to maintain a contemporaneous, documented record that would allow objective verification warrants criticism at a governance and management level and attracts greater criticism when ACE’s Event costs are materially funded by the Crown”.  It pointed to the fact the HVA expressly required ACE to maintain true and accurate records in connection with the use of the Event Investment.  The boat design costs incurred by TNZ had ceased in July 2018 but an invoice (backdated) was not rendered to ACE until a year later.  Funds were in fact transferred in July 2018.  Mayo and Calder claimed that around that time a [redacted] TNZ person had said to them that TNZ needed $3 million for TNZ salaries, said by them to have been initially a loan but then, a year later, invoiced as an expense. 

In a lengthy schedule to its Report, BV analysed the quantification of the $3 million transfer.  They ascertained that in November 2019, the ACE directors had directed that all relationships and payments between TNZ and ACE were to be “properly recorded”.  With the assistance of a consultant retained for the purpose, it was determined that “proper substance” needed to be put around the $3 million charge and more detail in respect of the invoice for “proper accounting practices”.   TNZ’s CFO then prepared in succession 3 “breakdown schedules”, the first 2 of which were however rejected by the TNZ board.  The third attempt was approved by the board but BV were not convinced:

“It is difficult to see how the creation of such a schedule provides ‘proper substance’ and ‘proper accounting practice’ in respect of the $3,000,000 recharge.  Selecting staff and costs and percentages so as to come to the required amount does not provide proper substance.  The $3,000,000 amount was not based on this schedule.  The $3,000,000 was an amount that [redacted person] assessed as being an appropriate sum.  ACE says there was ‘no science’ to it.”

Indeed.

Other appendices to the BV Report assess a number of items of expenditure including “fundraising costs” and travel expenses (shared between TNZ and ACE) under a contract providing for a monthly retainer and fees paid to “two main suppliers” (names redacted).  These sections of the report are so heavily redacted as to personnel and amounts, along with the lack of time-keeping, to make the lack of any apparent adverse findings by BV difficult to assess.

Media reaction to Grant Dalton’s claim on television, following the release of the summary of the final BV Report, that TNZ/ACE had been vindicated, that there was no impropriety and “nothing wrong” did not agree with those assertions.  Patrick Smellie, BusinessDesk Editor, wrote: “Grant Dalton has a strange take on the meaning of ‘vindication’”.   Smellie’s interpretation of the Report (at that time revealed only in summary form) was that it “shows that ACE, whose chief executive is Dalton, was being sloppily run, took a high-handed attitude to being investigated, is now in mediation with MBIE on whether some of its spending was wrongly funded by the taxpayer, and it failed to ‘maintain true and accurate records’ as required by its government contracts”.

Patrick Smellie also highlighted an unsatisfactory feature of the TNZ/ACE corporate structure and governance, namely the fact that Dalton was the CEO of both companies, though the boards were otherwise different.  In short, Dalton was the only common component of both companies and as such was the controlling pivot.  Given the fact that the two companies had different sources of funding (one of them principally from the Government and Council) and lines of accountability, it was concerning that there was no non-executive control overall and it could not be said (as it should be) that “lines are not blurred and processes are strong”. 

This theme was taken up by the highly respected business journalist with the NZ Herald, Fran O’Sullivan, who said that a joint CEO for both companies was not consistent with the public reason given by Tina Symanns, the Chair of ACE, at the time of ACE’s formation, that the challenge was to make “sure we separate the work on the event from the team so they can focus on defending the Cup”.   That separation is also at the heart of the HVA.  As Fran O’Sullivan put it: “Having a joint CEO … does not cut it”.  She appealed to Symmans and to the Chairman of TNZ, Sir Stephen Tindall, to end this unsatisfactory situation, if only in the interests of Dalton focusing on the primary job he was hired to do, successfully defending the Cup Challenge.

It is plain that Tindall and Symanns and their respective board members now have a heavy responsibility to sort out as a matter of urgency the TNZ/ACE structure and to install corporate financial and management procedures and standards that match the enviable standards of TNZ’s sailing, design and shore management units.   Tindall’s reported statement that, with the completion of the BV final report, TNZ/ACE were “pleased to have put this behind us” certainly will not, without more, appease media commentators and others who read that report and find that it raises more questions than it answers.  This is the time when, as chairman, Tindall needs to step up and sort out the management shambles that exists in TNZ and ACE.   The talented TNZ employees deserve nothing less.

It may be too late however to restore public and Government confidence in TNZ in its current corporate form and with its current management personnel.  Apart from the weaknesses and failings identified by BV, questions also need to be asked how a company that appeals to the public for financial and other support can adopt a bespoke structure which has sitting over the top of its board a person (Matteo de Nora) described as “Team Principal” with undefined powers and accountabilities.   De Nora’s contribution, financial and otherwise, to TNZ goes back a long way and has been considerable.  But there is no sound principle of corporate governance that would countenance the role of a person who is not a director of the board having superior access to and influence over the CEO/managing director of a company than the directors, particularly in the circumstances that Grant Dalton occupies over both TNZ and ACE.

Questions need to be asked also as to whether the Royal New Zealand Yacht Squadron is taking an effective supervisory role in the management of an Event that comprises the Defence of the Cup which was won in its name.   It is understood that the Squadron by contract entered into many years ago conferred on TNZ full authority to mount and defend challenges, as the case may be.  But, under the Deed of Gift by which the America’s Cup was established, only a yacht Club which holds an annual regatta can challenge for and hold the Cup.  The Squadron should hold TNZ to account for what is done in its name.

The Future

It can safely be predicted that any Government that is in power after the conclusion of the Match in March next year is most unlikely to provide any further financial assistance to TNZ or to ACE in the event that TNZ does successfully hold on to the Cup.  There will be a number of reasons for this, apart from the lack of further confidence in the financial responsibility of TNZ’s current leadership and in its ability to respect corporate governance principles.  The small number of challenges, which can be ascribed to the costs and difficulties imposed on new entrants from the choice of a foiling monohull, will mean that the much vaunted economic return for the investment of public funds was always unlikely but the onset of Covid-19 has cemented that outcome.  More seriously, the massive ongoing Budget deficits that now face future Governments and New Zealand people at large will destroy completely the New Zealand appetite for paying for the privilege of holding high-cost America’s Cup events in this country.

And so back to the title to this commentary: will this be the last America’ Cup Match held in New Zealand, irrespective of the outcome of the present Event next March?  

The choice for a successful TNZ will be either to sell hosting rights around the world to the highest bidder or to trim the scale and scope of the Cup back to a much more modest, self-funding level, making use of the existing Event facilities in Auckland and choosing a conventional monohull boat similar to a Volvo 70.   Selling the Event to the highest bidder would constitute monetary self-interest driving the decision.  Reforming the Event and reducing the costs of participants and of staging the Event to a level that matches New Zealand reality would restore respect for the Event and for TNZ in particular.  It would also happen to be consistent with the purpose of the Deed of Gift,  which was to establish a “friendly competition between foreign countries”.   

Jim Farmer

14 September 2020

Declaration of Interest: I was a member of the TNZ board from 2004 to 2013 when I resigned my position to avoid a conflict of interest in order to serve on the International Committee that was appointed to address safety issues that were highlighted by the death of British sailor Andrew (“Bart”) Simpson in a capsize of one of the huge multihull AC boats. 

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