Carter Holt, Norske sue Fletcher

Fletcher Challenge Forests has copped a lawsuit from Carter Holt Harvey and Norske Skog on the eve of a historic shareholder vote to sell its forests.

"This could be real bad," said New Zealand Shareholders' Association chairman Bruce Sheppard.

Fletcher Forest shareholders file into the ASB Bank stand at Eden Park at 10am today to decide if the company should sell all but one of its forests to a consortium of Auckland property investors and North American pension funds.

The money would be returned to shareholders.

Proceedings filed in the High Court yesterday do not seek to stop the sale, but if they are successful, Fletcher will be forced to keep enough forests to supply 300,000 tonnes of pulp wood each year to Carter Holt and Norske Skog.

It wants to sell its forests, change its name, and focus on processing and distribution.

One option would be to turn Fletcher's Tarawera forest, which is not being sold to the consortium, into a pulp wood regime, but that could halve the forest's $165 million value.

The consortium has committed to fulfil the pulp supply contract for 25 years but the original contract was forever.

It is not known if failed bidder The Campbell Group was prepared to accept perpetual supply contracts or wanted similar arrangements.

The $560 million sale of all the forests but Tarawera goes unconditional today if shareholders approve with settlement due next Friday.

Fletcher said it understood the deal would not be affected by the legal action, and said it would "vigorously contest" the proceedings.

Carter Holt chief executive Peter Springford said his company had been trying to resolve the contractual issue for months.

A sale of the entire estate would leave Fletcher unable to fulfil its obligations.

Carter Holt is arguing Fletcher has to own forests to meet the contractual obligation.

"We have done everything possible to avoid going down this path.

"Notwithstanding our efforts, Fletchers have chosen to pursue the sale of their forest estate with a process and timetable that has not taken into account concerns regarding our contractual rights, which we are now being forced to assert through these proceedings.

"We are seeking a sensible commercial resolution to this situation with an agreement that gives Carter Holt Harvey Tasman the same security of log supply that the current contract with Fletcher Forests delivers," Springford said.

Fletcher shareholders will get 62.5c a share next month if the sale goes through and a total of $1.20 will be paid if the Tarawera forest right is sold for $165 million.

The Tarawera sale fell over when Kiwi failed to confirm finance.

Tarawera is a quality forest and Fletchers has expressed confidence that another buyer will be found.

Shareholders are expected to focus on the likelihood of getting the second capital return.

Fletcher's biggest shareholder is Rubicon with just under 19.9 per cent.

The Ohio Public Employees Retirement System has cut its stake to 4.4 per cent from 7.3 per cent.

The forest sale is widely expected to be approved as shareholders want to get their money out of the company.

The background

* Fletcher Forests has contracts to supply up to 300,000 cubic metres of pulp wood annually in perpetuity to Carter Holt Harvey and Norske Skog.

* Fletcher shareholders vote today on a deal to sell most of its forests to a consortium of New Zealand and US investors for $560 million.

* The buyers refused to take on the contracts in perpetuity, so the deal restricts the buyers' obligation to a maximum of 25 years.

* Carter Holt and Norske Skog want a ruling that gives them the same security of supply they had before the forest sale.