The new Fonterra Shareholders Fund will enshrine share ownership and voting rights with the shareholder, but allow them to free-up cash by selling the rights to dividend payments and changes in share price to investors.
The option is included as part of the third and final phase of a capital restructure package announced yesterday, which was built around allowing farmers to trade shares among themselves instead of the co-operative issuing or redeeming shares annually, as at present.
Fonterra chairman Sir Henry van der Heyden said the co-operative needed to change its capital structure to counter growing interest from foreign companies in New Zealand tying up future food supplies.
Sir Henry yesterday told a media conference the Fonterra board viewed food security as a serious threat which could see it lose suppliers and provoke a run on its capital base to a well-financed major competitor setting up business here.
Investors from Singapore, Russia and Japan already had stakes in the New Zealand dairy processing industry, and Sir Henry said interest was growing.
"The Fonterra board sees that as a real risk to Fonterra.
"We're not uncomfortable with competition - we're very supportive of competition - but it has got to be on a level playing field."
Sir Henry said, in any year, between 400 million and 1.1 billion shares were traded at the end of the season and, after a recent drought, Fonterra paid shareholders $700 million because low milk production meant they had surplus shares.
Shareholders have already partly addressed that issue by allowing farmers to hold up to 120% of required shares.
Sir Henry said under the system shareholders remaining with the co-operative carried the risk and burden for those leaving, when it should be the other way around.
Under the proposed changes, shareholders could buy or sell shares at any time of year, typically when they had spare cash or needed extra cash.
They could buy or sell the shares themselves from other farmers, or through an exchange, or Fonterra could do it for them through a Fonterra Shareholders Market.
Shareholders would be able to buy extra dry shares up to twice their annual milk production, two shares per kg of milk solids compared to 1.2 shares at present, but with a dry share cap of 20% of total shares on issue.
Only shares backed by milk production would have voting rights.
To ensure there were sufficient shares, financial institutions would be invited to become a registered volume provider, which would operate similarly to banks providing foreign exchange.
Chief executive Andrew Ferrier said providers would have controls on how to operate, with a tender system to ensure they maintained a narrow share price band, for stability.
The shareholders fund would enable shareholders to free up capital or retain shares by allowing them to sell the right to dividends and the gain or loss in share value.
He said other farmers, sharemilkers, institutions and the public could participate by buying units, but ownership of the shares and voting rights would remain with the shareholder.
Mr Ferrier would not be drawn on when the new structure would be in place should shareholders approve it, but said it would coincide with an appreciating share value.
The Fonterra Shareholders Council and Federated Farmers both support the concept of trading among farmers, saying it would ease pressure on Fonterra's balance sheet.
Both urged farmers to be involved in the consultation before a vote, likely in early July.
Open Country Dairy chairman Laurie Margrain was critical of the capital structure proposals, saying shareholders should be aware of what they would be giving up.
The company yesterday ran advertisements in major daily newspapers warning of a loss of share value and liquidity due to no guaranteed market, lower farmer equity from a low share price and warning it could reduce Fonterra's performance because of reduced threat of the company losing capital.
Mr Margrain said competing companies such as his only existed because farmers had a choice who they supplied milk to, and that relied on open-entry open-exit rules for co-operatives.
Main points
What Fonterra proposes for its shareholders:
- Shares to be bought and sold among shareholders or via a new entity, a Fonterra Shareholders Market.
- Shareholders can own shares up to twice their annual production.
- Buying or selling of shares can be done over three years.
- Registered Volume Provider will be appointed to ensure sufficient share volume and a stable price.
- Fonterra Shareholders Fund formed, allowing shareholders to forgo the right to dividends and gain or loss in share price in return for freeing up cash.
- Possible shareholder vote in late June or early July.
- 75% support needed for proposal to be implemented.
