Fonterra will require a 75 percent 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 $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 reportback 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.