BusinessDesk: Fonterra needs 75% farmer-shareholder support for TAF go-ahead

BusinessDesk: Fonterra needs 75% farmer-shareholder support for TAF go-ahead

Fonterra will require a 75% majority from its 10,500 farmer-shareholders to move ahead with its proposal to create non-voting, tradeable units allowing arms-length investment in New Zealand's largest business by non-farmers for the first time.

In a bid to garner farmer support, and to build a fund no larger than is regarded as necessary to give Fonterra a less volatile capital base, the latest proposals reduce the potential size of the fund, compared to earlier proposals, and include conservative operating parameters.

While Fonterra is targeting a NZ$500 million fund, its size will not be allowed to be larger than 25 percent of all Fonterra shares on issue, and day to day targets will be much lower, at an actual size of between 7 percent and 12 percent of issued shares, and a potential size of between 7 percent and 15 percent.

"It is critical for the board and management to ensure that the fund size remains within manageable limits well below this threshold," the due diligence report released today says.

The threshold for so-called "dry shares" will be lowered to 15 percent from 25 percent of those on issue, although there will be no restriction on dry shares being sold into the tradeable units fund created by TAF, since they can be traded between farmers already. No farmer will be able to sell any more than a third of their "wet shares", which are issued according to milk production volumes annually.

In a further measure to protect against aggregation by individual investors, no farmer be allowed to hold dry shares exceeding 5 percent of the total shares on issue, regardless of production levels.

The documents set out in detail the way breaches in the actual and potential fund size targets will trigger market disclosures and, where the breaches start reaching towards the 20 percent mark, the Shareholders Council will be consulted. Two council members will also be appointed to the Milk Price Panel, to give greater comfort over fears among some farmers that outside investors may try to force down the milk price paid to farmers in order to improve the TAF unit dividends.

In the event of an actual 18 percent or potential 20 percent breach, the board can suspend the sale of the economic rights in Fonterra shares into the fund, "unless there is a compelling reason otherwise, with that reason to be disclosed to shareholders."

The chairman of the farmers' watchdog body, the Fonterra Shareholders' Council, Ian Brown, was guarded in his expectations for the outcome of the June 25 votes.

"I wouldn't say there's a silent majority in support, but there is a silent majority of farmers who are waiting and watching carefully," said Brown ahead of a fortnight of intensive face to face meetings with farmers around the country.

Support from the 35-strong council for the proposals was "in the high 80s" (percent), but that unity was rocked by the resignation last week of the previous council chair, Simon Couper, who was not personally convinced that 100 percent farmer control was sufficiently enshrined.

Brown said the lower fund thresholds tightened up "the area of greatest risk" while giving the Fonterra board breathing room to manage the size of the fund in response to the cooperative's changing economic fortunes. The TAF proposal is intended to manage the risk of farmers seeking to withdraw capital in bad years, with explicit promises that it will not be used to raise fresh, non-farmer capital.

Voting packs for the crucial June 25 special meeting of Fonterra shareholders are arriving with farmers from today.

The first of two key resolutions for the meeting will require an ordinary 50 percent majority to allow the Trading Among Farmers proposal to be implemented, but Fonterra chairman Henry van der Heyden said the board would not go ahead with TAF unless there was a "clear majority" in support.

"If it's 50.1 percent, we won't be going ahead," he said, but declined to nominate an acceptable level above 50 percent.

The second resolution is the more demanding, as it contains six separate changes to Fonterra's Constitution, and requires a 75 percent shareholder majority.

While some shareholders would question the decision to have one rather than six separate votes on the constitutional changes, van der Heyden said there was a risk of "ending up with a camel" if some but not others of the elements were passed.

Still, the June 25 vote is not the last word on the TAF initiative, as two key pre-conditions will not have been fulfilled by then. Various waivers and exemptions are required from the NZX to prevent the exchange operator from being able to over-ride the Fonterra Constitution. These arrangements will require Financial Market Authority approval.

The other vital pre-condition is passage of the Dairy Industry Restructuring Act Amendment Bill, due for report back to Parliament from select committee early this month, but unlikely to pass before some time in July.

The Bill currently contains elements which Fonterra has advised must change or TAF will be unable to proceed. At issue is the Bill's attempt to prevent Fonterra not to engage in any activity that could limit the ability of unitholders to liquidate the Fonterra Shareholders Fund.

The fund is timed for November launch, but chief financial officer Jonathan Mason said there would be a delay if equity market conditions were not favourable.

The due diligence report issued today says the initial fund unit price would be important to its success.

"A price materially below the current Fair Value Share Price of $4.52 may not be viewed favourably by farmers. Conversely, a higher unit price may put pressure on the cooperative's ability to attract new suppliers."

The price will only be determined during the fund launch process, the format of which has yet to be finally determined.

Van der Heyden said failure to implement TAF would see Fonterra adopt a more "softly, softly" business strategy, would give it less certainty about a permanent capital base, and would mean proposed entrenchment of 100 percent farmer ownership in the cooperative's constitution would not occur.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Damien O'Connor seems more in tune with concerns than the Chairman :
“Concerns have been expressed that this second vote would not require the 75% constitutional mandate, and I believe Fonterra have constructed this vote knowing there is increasing concern over what these changes might mean for the company.
I'm with Simon Couper on this one.

Are you sure, where did you get the 75%, have you managed to pin Henry down?:
Fonterra will require a 75% majority from its 10,500 farmer-shareholders
Releasing details of resolutions for the special meeting, Fonterra said although only 50 per cent approval was technically required to back Trading Among Farmers (TAF), anything short of an overwhelming majority would be insufficient.
"We are looking for a clear mandate," said van der Heyden. "If we get just over 50 per cent we will not be executing Trading Among Farmers."
Fonterra will seek a mandate from the co-operative's 10,500 dairy farmers when they vote on TAF on June 25. If the scheme attracts just 50.1 per cent support, it will not go through and farmers will be left with the status quo, van der Heyden told a news conference. "I want a mandate that will unify the co-operative around this proposed evolution in our capital structure," he said.

Meetings aren't till next two weeks HT.  On the radio Henry refused to be drawn how much over 50.2% (he used '50.1 or 50.2%) he would consider a 'clear mandate'. Surely an overwhelming majority would be a minimum of 80%?  Definitely something to ask at the meetings. ;-)

Henry's running the business acting as if he's a Murdoch - James that is.
Rabo could be asking invitation-wise what were we thinking.....
... anyone know their attitude to unwanted guests....
How will Henry go down in history, many would like to know, or are we seeing that now
This is no way to run a ballroom.

Trouble at mill...
We're starting to look like a flea on a mangy dogs rump!

Former dairy industry leader Morris Roberts is asking Fonterra leaders to put the brakes on Trading Among Farmers (TAF), saying it needs to be dealt with much more cautiously or it will "end up in tears".
The former chairman of Kiwi Dairies, a big co-operative rolled into the creation of Fonterra 11 years ago, said as someone who has spent more than 30 years as a director of dairy industry organisations, he was saddened to see Fonterra directors take their shareholders "down a most dangerous path".
He said Fonterra's reason for TAF – to end "capital washing in and out" of the company when farmers want to exit in hard times – was misleading. The only year this had happened was in 2008 after a widespread drought.
"Fonterra also announced a record payout of $7.90 that year and prudent directors would have retained $400m to $500m from such a windfall, but no, only $277m was retained, mainly to cover the San Lu [melamine scandal] problem.
"Many suppliers ... also took the high payout and share value and ran."
Roberts said the policy of the industry for more than 100 years had been to retain funds to strengthen equity.
A Fonterra director tried to shut down a respected former dairy industry leader before his claim that Trading Among Farmers (TAF) is taking farmer-shareholders "down a most dangerous path" was published today.
Morris Roberts, CBE, a chairman of Taranaki's former Kiwi Dairies company and a recipient of a Fonterra-Westpac lifetime achievement award, was visited yesterday by Fonterra director David MacLeod shortly after Fonterra was asked by the Waikato Times to respond to Roberts' criticisms of the controversial TAF scheme and its processes.

DIRA amendment tabled:
National Party destroying cooperative industry for benefit of investment community, and a few priviledged farmers who had the proceeds from generations of cooperative development transfered to the balance sheet from demutialisation of the dairy board.
I'm grateful for platform provides, but don't understand how they can stand by and watch the crown jewel of export industry be destroyed for the benefit of financial industry, most likely domociled offshore. Capital has a home and it's not here, unless you count our benign climate and access to fresh water as capital. Good luck with the super university and innovation economy, where's the money coming from, QE3?

Thanks for the DIRA link. :-)

With respect mist42 your comments in relation to TAF and Fonterra in general,  are difficult to decipher. Fonterra is supposed to be a cooperative, it's sole purpose to maximise return on supplying shareholders product, no different to any business. Whether you want to differentiate between milk price and profit is a moot point, notwithstanding the importance of profit in regard to return on capital contributed. The other beauty of cooperatives is their principles and values are reinforcing of those communities in which their operations exist, now this is very different to most other type of business.
The government amendments are destructive, ill-founded and misguided. If supplying shareholders value the benefits of belonging to a cooperative, they will have to signal that in the TAF vote, then unite, stand up against the government and whatever other external self interest groups may be undermining cooperative structure, and reform our constitution to be more consistent with robust and stable principles and values. Instead of this government, why not leave something of value for the next generation?

Perhaps resolution 4 at the 25 June meeting might be our 'get out of jail' card?.....

Voting no for resolution 1, would be the get out of jail card if remaining or more realistically reforming the cooperative was considered most desirable.

Further commentary:
One can of Biopure's Infapure formula will retail for around 300 RMB ($62). To compare, a tin of Karicare formula was selling on The Warehouse's website for $21.50 yesterday
Page said Biopure would sell its formula only through its own retail stores and its own website in China, which gave the company maximum control over its supply chain.
However, there was always a risk of someone getting hold of used Infapure cans, filling them withfake product and reselling them, he said.
"We've heard there's a market [in China] for empty [formula] cans."
look back at corps:
A Chinese-controlled dairy company operating in New Zealand, Synlait Milk, is rejecting a claim it changed the expiry date on milk powder exported to Nigeria to extend its labelled shelf life from one year to two.

In business the co-operative model clearly does work
In business the co-operative model clearly does work. Italian co-operatives are some of the most successful businesses in Europe. The Desjardin Group, the financial co-operative in Quebec, is that region’s leading employer. In Switzerland, co-operatives are the largest private employer. In the UK, the co-operative sector has a turnover of £33.2 billion, with 12.8 million members. The co-operative model of organisation has already huge impact on employment and economic success not only of course in the Global North but also in the South too. In Africa, one in every thirteen people is involved in a co-operative enterprise, providing vital support whether in terms of marketing for farmers or finance, through co-operative credit unions, for families.
And importantly in a time of crisis co-operatives seem to be able to endure and survive for longer than other companies. A recent Canadian government study concluded that co-operative businesses tend to last approximately two times longer than other businesses in the private sector. This is because when companies serve members as opposed to profit, are democratically run and collaborative, this tends to pay off. Community as we see in the case of co-operative businesses – but also in the wider case of a co-operative economic system – clearly does matter.
Question: Who are the "investors" Henry and co have lined up that will buy the "dividend" streams.... As they wouldn't get this far without having a list of names.. - would they..

A recent Canadian government study concluded that co-operative businesses tend to last approximately two times longer than other businesses in the private sector.  The Canadian govt obviously didn't put any value in the study as it was the govt who dismantled the Canadian Wheat Board, despite farmers voting to keep it.  Sounds familiar........

New best friends - fact stranger than fiction:

Stephen Smith, the Australian defence minister, has adopted extraordinary measures to try to foil Chinese espionage during his first ministerial visit, leaving his phone and laptop in Hong Kong before travelling to Beijing.
Despite heading to China for a trust-building visit, Mr Smith and his staff reportedly swapped their phones, laptops and other electronic devices for fresh equipment in mainland China.

Thanks once again Henry_Tull for verifying sentiment with examples. And I agree with CO, it sounds disappointingly familiar, given the compelling wisdom
I would be interested to know peoples thoughts on the possible (likely) behaviour that TAF will engender within the shareholder base? Will it divide the shareholder base between those inclined to  trade shares, with those who want to manage cashflow through production? How does it reconcile with the purpose of belonging to a cooperative?
I attended two supplier meetings last week in which Henry vdH delivered the boards case for TAF. He was backed up by Mike Cronin one of the co-ops lawyers, who placated attendees on the functioning of the various complicated mechanisms comprising the shareholders fund, market maker and unit holder fund, by making soothing allusions to the robustness of free market rational in moderating the various bodies behaviours. I thought it was an interesting position from a well-paid lawyer, in light of the GFC and increasing awareness of the fallacy of such fundamentally flawed assumptions.

In general, lawyers make the case of those that pay them
Follow the money to understand the language and its intent (like real estate agents)
Our friends in the middle kingdom have a saying "oil mouth" for similar
When push comes to shove, they use a derivative of the Nuremberg Defense in that (it may or may not be true but) its what the client told me to say / or assumptions to use (so I'm Ok)....
Unfortunately few fonterra suppliers have several hundred thousand dollars to fund a robust legal review and publication, with advice - written specifically and directly applicable to suppliers.
We are yet to be convinced by seeing any numbers showing by how many $/kgMS we will be better off.
Without repeating in prior posts,
We have put links to Australian co-op folk just shaking their heads at what is proposed.
We have posted Nuffield work thinking thru international dairy co-ops and corps.
Here is a listed factory in Australia
see page 6 - the jv with FrieslandCampina - profit 2012 downgrade 20% to 30% (think through how TAF type unit holder will react to such news...)
page 17, shows a RaboBank comparison of global farm gate price. This work will be the first exhibit the outside TAF related investors use to show fonterra mgt that they are paying too higher a farmgate milk price.....

Wasn't the TAF about redemption risk :/   not about finding new capital
Depends on the day of the week, and what side of the bed you got out of. It has been evident for some time now that the reasons have been poorly explained and variable in nature.

That, in itself iconoclast is a policy's called " Don't scare the horses asses in charge of the cattle. "

Christov: Last week I asked both GBH and The-Angel if they would "investors be" in Fonterra's Dry shares, Wet Shares, Voting Shares, Non-voting shares. The idea being to test the waters in all this TAF jiggery-pokery and see if a serious investor would be tempted. GBH responded .. with a resounding thumbs-down .. your view?

Thumbs down for me also.....I question the honesty of Fonterra in disclosure with it's shareholders as they are now, that would be enough  reason for me not to be involved.
 Outside that there are "market forces" interested parties that will have, (at some not too distant point ), input that will skew any current charter policy, = factor X.
Fonterra argue as this is not a current reality , why consider it to be a stumbling block to the proposals on the table.
I believe the expansion ventures Fonterra are involved in ,currently and plans for further projects will require capital well beyond the means of the Co-operative as it is...a recipie for becoming disenfranchised ...? I think inevitabley. 

..... I wanted to give the idea a " down-trou. " , but Bernard would have me spanked & banned , so I just gave it the " thumbs down " ......
It's not a vote agin the dairy industry per se , I just don't trust Fonterrible .... really don't like them one little bit ....

Hey GBH , I been meaning to catch up with you today so you could ask Bernard to repeat his statement on John Tamahere's show yesterday about "How to crash the Property Market in N.Z." as I think he's dodging me today.
 He gave a good account of himself by all standards and had a lot of excellent points in regard to the boomer generation accepting lowered returns for their property obscession, although I don't think all of the possibilities regarding Land Tax have been thought right through.
 Now at one point Tamahere wanted to slit the wrists, and I thought ,as I smiled , Darth will be pleased.
 Ask him if Olly knows about his little plan to upset his bankroll.
 Maybe Bernard could get permission to reply the episode on the site here...?

.... I mist the JT show ....  my question is how to scupper the Aussie banks who've aided & abetted the NZ property bubble , and are happily milking the country more efficiently than Fonterrible is .......