Farmer Control Non-Negotiable
5 December 2007
Farmer Control Non-Negotiable
The Chairman of Fonterra Co-operative, Henry van der Heyden, says farmer shareholders will never lose control of the Co-operative unless, at some point in the future, a 75% majority vote of shareholding farmers decides to relax the control mechanisms that are being proposed.
“In reality that same possibility exists today,” says Mr van der Heyden. “A 75% majority vote of farmer shareholders can change most things in our Co-operative. But you don’t get 75% of farmer shareholders agreeing to a change unless there are good reasons.”
The Fonterra Board put out its preferred option on a new capital structure for consultation with shareholders last month.
Mr van der Heyden is urging shareholders to attend a round of farmer meetings this week to “clear the air” around control concerns. Fonterra is holding more than 100 meetings around the country this week as part of a consultation process with farmer shareholders.
Mr van der Heyden said the preferred option ensured control would remain in farmers’ hands and included built-in protections to achieve that outcome.
“No shareholder, other than the Co-operative, could hold more than 10% of Fonterra, a protection which would be backed by government legislation,” said Mr van der Heyden.
So the Farmer Co-operative does not have to have an enormous majority ownership to exercise control. In addition, new legislation would prevent groups of shareholders acting “jointly and in concert” to get around the 10% limits. This would be closely monitored and enforced and would include sanctions such as requiring the sell-down of shares.
The 10% shareholding cap could only be removed with the say so of a 75% majority vote of farmer shareholders and a change in government legislation.
“Turning to ownership, should a listing go ahead the Co-operative would begin with around a 65% shareholding,” said Mr van der Heyden.
“Reductions from that level can be decided upon by the Co-operative’s directors, but only up to a point. Any decision to go below 50.1% must be approved by shareholders with a 75% majority shareholder vote – and that could be 20 or 30 years away.”
The need for this vote would be written into the constitution of both organisations, he said.
Should the preferred option be adopted, the Fonterra Farmer Co-operative would still be 100% owned by farmers.
“The Co-operative would be a significant entity in its own right as it would receive revenue from growth in New Zealand milk supply and also from new conversions to dairy farming. The Co-operative would also receive dividends from its significant shareholding in the listed entity,” Mr van der Heyden said.
Prior to the Farmer Co-operative deciding to dilute its shareholding in Fonterra, there are a range of funding options available. In the first instance, if Fonterra identifies an investment opportunity it has the option of raising debt and it can also retain earnings. Beyond this it could make a call for new capital and at that point the Co-operative could respond by retaining dividends it receives from its investment in Fonterra, use capital from milk growth to invest in Fonterra, use higher earnings from Fonterra to fund debt or call on farmers for more equity.
Diluting the Co-operative shareholding in Fonterra would likely be the last option considered.
It is envisaged that it could take up to 15 years for the Co-operative’s shareholding in Fonterra to drop to around 58%, based on 1% milk growth a year, and moderate levels of capital expenditure. Dropping to 50.1% would likely take twice as long, more like 20 to 30 years, Mr van der Heyden said.
“These are important points that shareholders need to understand, so I am urging them to get out to meetings and, if they can’t, to go through the information provided to them. While this is just the beginning of the consultation process, it’s important farmers take the time now to get involved and that they stay involved so their views can be heard.”
A year ago Fonterra’s farmer shareholders identified and agreed on three issues which needed to be addressed with the Co-operative’s current capital structure. They are redemption risk, investment choice and capital to support the strategy for growth.
Fonterra’s farmer shareholders will vote next May on restructuring the company to two entities, and the introduction of a new, more transparent milk pricing mechanism. These two elements would then be road tested for around two years before farmers vote again to decide if the second entity is listed, introducing around 20% outside equity.
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