CAPITAL STRUCTURE CONSULTATION 2021
Reducing the share standard would make it easier for new farmers to join our Co-op and give more flexibility to existing farmer owners who may want to free up capital or who are working through succession. In line with the Co-operative Principles, the financial benefits and obligations that arise from capital invested would still be allocated in proportion to shareholding. Control and voting rights would be based on share- backed supply in the same way as today. The caps on share ownership are intended to protect against significant levels of concentration of individual ownership within the farmer owner base. However, reducing the share standard would result in more shares that don’t need to be held by farmers to supply the Co-op – or “non-compulsory” shares. If exchangeability with the Fund remained in place as in our current structure, farmer owners could sell the economic rights of these non-compulsory shares into the Fund (i.e. exchange shares into units to sell those units), causing the Fund size to grow and exceed the thresholds that protect farmer ownership and control of the Co-op. Because of this, if we want to provide more capital flexibility, then we expect that we would need to take one of the following actions in order to protect farmer ownership and control: » Buy back and remove the Fund (No Fund); or » Stop the exchangeability of shares for units in the Fund and thereby cap the size of the Fund (Capped Fund). Both these options would be effective at protecting farmer ownership and control of the Co-op.
REDUCED SHARE STANDARD No Fund
REDUCED SHARE STANDARD Capped Fund
EXTERNAL INVESTORS
FARMERS
FARMERS
Tradeable shares 1:4 share standard
Units
Tradeable shares 1:4 share standard
FSF
No Fund » Removing the Fund would involve an offer by Fonterra to unit holders to buy back their units at a fixed price. The approval of at least 75% of unit holders entitled to vote and voting would be needed for the offer to be accepted. » The offer amount would need to be
Capped Fund » A Capped Fund would involve the Fund remaining part of Fonterra’s capital structure and listed on the NZX/ASX, but with one key change in that farmer owners would no longer be able to sell any further economic rights of shares into the Fund. Shares would be tradeable in the FSM only. » As at 31 March 2021, the Fund had 105 million units issued, which comprised 6.5% of total Fonterra shares. Capping the Fund would mean that it could get smaller, but it would not get bigger, other than in limited circumstances such as where a distribution reinvestment plan is offered. » Members of the public and other investors, including farmer owners, sharemilkers, retired farmers and non-farmer investors, could continue to trade units in the NZX/ASX with units continuing to receive distributions in line with our performance. Farmer owners would also still be able to exchange any units they hold for shares in the FSM. » This means that the size of the Fund as a proportion of our Co-op could not increase materially, but it could decrease if farmer owners exchange units they buy or hold into shares. Fonterra could also potentially buy it back in the future – partially or fully. » There could be an ongoing price difference between the traded price of shares in the FSM and the traded
acceptable to unit holders, fair to farmers and would need to make more sense to the Co-op than the Capped Fund alternative.
price of units in the Fund, for the reasons described in the key things to consider on page 12.
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