The largest shareholder in Westland Milk Products has decided to sit on the sidelines when the proposed sale of the company goes to the vote next month.
Southern Pastures said it wanted to give weight to dairy farmers who would be more affected by the sale.
The board of Westland decided earlier to support sale of the company to the Chinese firm Yili for $3.41 per share, or $588 million dollars in total.
But an actual sale needed approval from farmer-shareholders who supplied milk to the company.
Their vote is scheduled for 4 July.
Southern Pastures has nine farms and is Westland's largest shareholder, with a 5.54 percent stake.
But in a statement, its executive chairman, Prem Maan said the company would abstain from voting on the Yili offer.
"Our Westland-supplying farms are situated in Canterbury, and as such we are in the fortunate position of having options for who we supply," Mr Maan said.
"Many of our fellow shareholders in Westland aren't so well placed.
"So, we believe we have a moral obligation to leave the critical decision on whether the offer should be accepted or not to those Westland shareholders on the West Coast who have, and will have, no other supply options."
Prem Maan went on to say Southern Pastures felt that Yili had made a fair offer and his company would consider working with Yili if it was successful in its takeover.
But it would still be a pity if this sale went ahead.
"We will be sad to see the demise of the cooperative if that were to happen," he said.
"We are strongly committed to the co-operative model and, in fact, joined Westland and formed our joint venture, New Zealand Grass Fed Milk Products with it, because it was a farmer owned co-operative."
Southern Pastures is a large institutional farmer, owned mainly by European ethical pension funds.
Westland's second biggest shareholder is the state farmer Pamu, or Landcorp.
Its board will consider next week which way to vote on the Yili sale.
Meanwhile, controversy has broken out over large sale bonuses payable to management of the company.
This includes a sum of $680,000 dollars payable to the chief executive Toni Brendish.
A Westport dairy farmer who supplies his product to the company, John O'Connor, said it was wrong.
"They're very unfair on farmers who are struggling to pay the bills," he said.
"We feel we are being pushed into a corner to accept the sale."
Mr O'Connor sells 280,000kg of milk solids to the company annually, and he worried that the bonuses would encourage management to push for a sale.
"You know it's human nature creeping in, and it affects the objectivity of what they are saying and how they are acting," he said.
"We have been told it is standard practice and if it is not done the value of the company would be decreased because staff retention would be an issue, but we are very disappointed."
In response, the chairman of Westland Milk, Peter Morrison, said the payments related solely to company executives, not board members.
They were aimed to make sure key personnel were retained and to pay them more for the extra work that a sales process required.
Such payments also protected shareholder value - if key managers left during the sales process it would have undermined that very process.
Mr Morrison said payments like these were common practice.