Fonterra seeking clear mandate on TAF

Voting packs on Trading Among Farmers (TAF) have gone out to Fonterra shareholders and the company has given an assurance it will require more than a simple majority in support of the move:

Fonterra’s Board will be looking for a clear mandate from the Co-operative’s 10,500 dairy farmers when they vote on Trading Among Farmers (TAF) on June 25, says Chairman Sir Henry van der Heyden.

While the TAF resolution at the special shareholder meeting is an ordinary resolution that requires a 50% plus majority to be passed, Sir Henry says the Board won’t be proceeding unless it has a much stronger mandate than that.

“I want a mandate that will unify the Co-operative around this proposed evolution in our capital structure,” he said. “This is the final vote in a long process. Shareholders have given us strong support in the earlier stages and that is what the Board is looking for this time.

“TAF offers a means of sustainably protecting 100% farmer control and ownership into the future and reducing risk to our Co-operative, so we’re looking for a mandate that enables the Board to continue to work towards protecting and strengthening Fonterra,” said Sir Henry.

“We have listened to our farmer shareholders and their key concerns rest on two fundamental points: Preserving 100% control and ownership and the integrity of the Farmgate Milk Price.

“Accordingly, we have proposed a range of resolutions for farmer shareholders to vote on that will tighten limits on the size of the Fonterra Shareholders’ Fund, which is fundamental to 100% farmer control and ownership, and preserve the integrity of the Farmgate Milk Price.

“These resolutions would require Constitutional change and would therefore involve a 75% vote.

“We propose to decrease the threshold on the size of the Fund from 25% to 20% of total shares, and decrease the number of Dry shares on issue from 25% to 15%,” said Sir Henry.

TAF is the company’s response to redemption risk – the very real threat of too many shareholders redeeming shares at high prices.

The other risk is suppliers choosing to leave the company, or being put off joining, as share prices rise when competitors don’t require the up-front expense of share purchases.

He said that robust modelling and much deliberation by the Board had informed the recommendation for a lower 20% threshold which struck the right balance between flexibility to manage seasonal milk fluctuations and controls to manage risk.

“While we intend to operate the Fund at a size of 7%-12% of total Fonterra shares on issue, we do need breathing room to take account of seasonal changes in milk volume,” he said.

“Milk production is driven by weather — for example this year we anticipated 3% milk growth but got 10%. Add 10% growth to our 7%-12% ideal Fund size and a 15% cap is too restrictive.”

He said that over time the Fund would be managed within the target size range, but the Constitutional limit needed to be higher to allow for seasonal shifts in milk production.

“It’s a combination of hard maths and good judgement that leads us to recommend 20%,” he said.

Sir Henry said another key resolution was to enshrine protections for setting the Farmgate Milk Price in the Co-operative’s Constitution so that future changes would require a 75%-plus majority.

“The proposal is that the Shareholders’ Council’s appointment to the Milk Price Panel be added to the constitution,” he said.

“This underpins the integrity of the Farmgate Milk Price going forward,” said Sir Henry. “Unlikely as it might be, were a future Board were to bow to pressure from investors in the Fund, this would become obvious and the Council’s constitutional ability to protect the process provides a further assurance for farmers.”

He said that Commerce Commission oversight of the Farmgate Milk Price formula — a process being worked through independently of TAF — provided a further safeguard in terms of transparency.

The farm gate price is the main reason farmers want to retain ownership of the company. If non-suppliers had control the pressure would be on to lower the price to provide higher dividends.

 

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