Fletcher Challenge Forests Letter To R.M. Dillon

Fletcher Challenge Forests Limited

2 August 2002

Mr R.M. Dillon VIA EMAIL & POST
Director/Advocacy
NZ Shareholders Association Inc

Dear Mr Dillon

Thank you for your fax of July 31.

Transfer of Effective Ownership

I must take issue with your comment that “a possible eventual result [of this transaction] could be the transfer of effective ownership of a major section of New Zealand forestry resource to the Chinese government’s investment arm.”

That is not correct unless you are looking forward to a hypothetical future day when SEAWI makes a successful offer under the Takeovers Code for a controlling interest in the Company. The Governance Deed that has been entered into is described on pages 22, 41 and 42 of the Explanatory Memorandum, and it ensures the Company’s independence.

SEAWI will not control the Company based on its 35% maximum permitted shareholding. They will have the right to fair Board representation, but the Company will remain independent and under the total control of its Board, which will have a majority of independent directors.

Independent directors will also be a majority on the Audit, Remuneration and Nomination Committees of the Board.

SEAWI will, of course, be free to bid for a controlling interest in the Company at a future date, after the agreed two year standstill period. Our shareholders would determine whether any bid was successful, or not, and it is they who will determine whether control ever passes.

I also note that the Governance Deed incorporates certain changes requested by the N.Z. Shareholders Association in discussions between Mr Sheppard and our Chairman, Sir Dryden Spring. Mr Sheppard expressed himself satisfied with those changes. Sir Dryden has asked me to record his disappointment that new issues are now being raised by Mr Sheppard in relation to governance.
Related Parties

This issue will be determined by the High Court on Friday, 9 August 2002 in the proceedings issued by Xylem Investments earlier this week. Fletcher Challenge Forests will obviously be bound by the decision of the Court in relation to this matter and it is not appropriate for us to comment further.

ADRs

The ADR programme is administered under the terms of a Deposit Agreement between the Company, Citibank, N.A. (the Depositary) and the holders of ADRs. By the terms of that agreement, where no voting instructions are received by the Depositary from an ADR holder, unless Fletcher Challenge Forests requests otherwise the Depositary is deemed to have been instructed by the relevant ADR holder to give a discretionary proxy to a person designated by the company to vote in respect of the shares underlying the relevant ADRs. Consistent with previous practice, Fletcher Challenge Forests intends to designate the Company Secretary to receive the discretionary proxy for the Special Meeting to be held on 13 August.

By virtue of the provisions of Listing Rule 9.3.1, on resolutions 2(a) to (d) no vote can be cast on any shares held by:

 any Related Party of Fletcher Challenge Forests who is a party to or beneficiary of the transactions that are the subject of the resolutions; or
 any Associated Person of such persons.
As described in the Notice of Meeting, Fletcher Challenge Forests believes that SEAWI, Rubicon, The National Bank of New Zealand and their Associated Persons are the Related Parties of the company prevented from voting on resolutions 2(a) to (d) by virtue of these provisions. Other parties which may be “related parties” of Fletcher Challenge Forests are not prevented by Listing Rule 9.3.1 from voting if they (or their Associated Persons) are not a party to or beneficiary of the transactions that are the subject of the resolutions.

The Company Secretary is not a party to or beneficiary of the relevant transactions and is not associated with any body that is. He is therefore not disqualified from voting under Listing Rule 9.3.1 either personally or as a proxy.

As the Company Secretary is not a person disqualified from voting by virtue of Listing Rule 9.3.1, the provisions of Listing Rule 9.3.3 and clause 4.9(a) of the constitution of the Company do not apply. Therefore, we decline your request for confirmation that the undirected proxy relating to the ADRs will not be voted. Fletcher Challenge Forests will separately record the votes cast pursuant to discretionary proxy, should any party seek to challenge this aspect of the Special Meeting. We understand that a ruling has been requested from the NZ Stock Exchange which may in part touch upon this issue.

Yours sincerely

Terry McFadgen
Chief Executive

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