As if a 75 per cent vote of shareholder support wasn't a tough enough ask, Fonterra leaders seeking to shake up the capital structure of New Zealand's biggest business have still to persuade the Minister of Agriculture their plan is a good idea.
The dairy farmer-owned co-operative, in a notice of next month's special shareholder meeting to vote on the capital restructure proposal, has included a letter from Damien O'Connor, which pours cold water on aspects of the package.
O'Connor and Cabinet need to approve a capital structure change as Fonterra is a creature of statute, created from an industry mega-merger to be a "national champion" under special legislation, the Dairy Restructuring Act (DIRA) in 2001.
In his letter, which Fonterra chairman Peter McBride released in the interests of transparency, O'Connor says the current proposals envisage a legislative change to remove key mechanisms that risk weakening performance incentives on Fonterra.
"Without alternative measures, I am not yet assured that these proposals would deliver the best long-term outcomes for farmers or the dairy sector as a whole," the letter reads.
"I am particularly concerned that the current proposals would create a higher risk of diverging shareholder interests inside the co-operative, between farmers with minimum shareholders for supply only, and those with larger shareholdings held for investment purposes.
"My concern is that this could result in competing shareholder priorities relating to Fonterra's future direction and strategy."
O'Connor says the proposals as they stand are not consistent with the Government's policy objectives and the purpose of DIRA.
He says he's prepared to consider "an alternative, more balanced proposal", and encouraged the Fonterra board to consider further how it might reshape its proposals "to find better balance".
However he ends with reaffirming "the importance the Government places on a mutually acceptable outcome to this process".
Fonterra's 10,000 farmer-shareholders are being called on to vote for the restructure proposal from today, in the lead-up to a special meeting following the December 9 annual meeting in Invercargill.
McBride told the Herald he reads the letter as supportive "in the context of achieving [an outcome] in the best interests of all New Zealand dairy farmers, not just Fonterra farmers".
He believes Fonterra's decision to go to a vote next month "is a bit of an issue" by putting time pressure on both sides - particularly on O'Connor, who is also New Zealand's Minister for Trade and who has had a full trade talks and overseas travel schedule in the midst of a pandemic.
"There is philosophical alignment and we are confident that a regulatory framework is there that will support a flexible structure for Fonterra. He [O'Connor] talks about resolving this in a timely fashion."
Asked what was the point of going to a shareholder vote now if the minister was seeking a "reshape" of the proposal, McBride said it would have been "irresponsible" to proceed any further without a shareholder mandate.
McBride noted the farmer-elected Fonterra Co-operative Council has voted 92 per cent to support the proposal.
"One of the council's biggest investigations [into the proposal] was around the share risk. Making that work available will be helpful."
In his letter to shareholders for the special meeting, McBride said the company is confident the changes will support the sustainable supply of New Zealand milk that Fonterra's long-term business strategy is based on.
"Our future relies on our ability to hold our own in an increasingly competitive environment, and one that is rapidly changing due to factors such as environmental pressures, new regulations and alternative land uses.
"We see total New Zealand milk supply as likely to decline, and flat at best. Our co-op's supply depends on the actions we take with our capital structure, performance, productivity and sustainability.
"If we do nothing, we are likely to see around 12-20 per cent decline by 2030 based on the milk supply scenarios we have modelled."
McBride said staying with the current capital structure, called Trading Among Farmers, was an option but Fonterra risked becoming a smaller and less efficient co-operative.
"If that is our collective decision, we would need to relook at how we implement the strategy based on even more conservative risk settings. Under Taf, we are unlikely to be in a position to achieve the same level of returns in terms of capital and dividends as we have outlined in our long-term strategy."