Fonterra Shareholders' Fund Prospectus and Investment Statement

In other respects, the Fonterra Unit will have
the same rights as all other Units issued by
the Manager. A more detailed description of
the Fonterra Unit is set out in Section 5 –
Trading Among Farmers in Detail.
Governance arrangements
relating to the Fund
All Shareholders in Fonterra have various
rights under the law and in the key
documents that give effect to Trading Among
Farmers. The governance arrangements
described below have been put in place to
give effect to those rights.
The Fonterra Farmer Custodian will be the
legal holder of the Shares in respect of which
Economic Rights are held for the Fund and
will have rights under the Constitution, as
well as at law.
The Fonterra Board is required to act in the
best interests of the Co-operative. The Courts
have established that this requires the
Fonterra Board to act in the best interests
of its Shareholders (which will include the
Fonterra Farmer Custodian).
Fonterra is required to consult with the
Chairman of the Board of the Manager
(representing the three directors who are
elected by Unit Holders) regarding the
appointment of Appointed Directors to the
Fonterra Board, who are the Co-operative’s
Independent Directors for the purposes of
the FSM Rules which govern the operation
of the Fonterra Shareholders’ Market. If a
majority of the three directors who are
elected by Unit Holders do not support the
proposed appointment, that fact must be
publicly disclosed.
The setting of the Farmgate Milk Price (which
forms the basis of the price that Fonterra
pays its Farmer Shareholders for milk
supplied in New Zealand) is governed by a
Farmgate Milk Price Manual which is
published and has been the subject of various
regulatory reviews. The Farmgate Milk Price
Manual is governed by a Milk Price Panel
which Fonterra has established for that
purpose, and which comprises a majority of
independent members. The setting of the
Farmgate Milk Price is overseen by the
competition law regulator in New Zealand,
the Commerce Commission.
The FSM Rules are enforceable by Shareholders.
They require the following key decisions to be
approved by a majority of not less than 75%
of the Fonterra Board, with such majority
including at least a majority of the
Independent Directors:
• a decision to pay an aggregate amount for
milk in excess of the amount calculated
under the Farmgate Milk Price Manual;
• a decision to amend or replace the
Farmgate Milk Price Manual;
• a decision to promote, or support,
an amendment to, or replacement of,
the Constitution that would have a
material adverse effect on the rights
attached to Shares which are held by the
Fonterra Farmer Custodian (in respect
of which Economic Rights are held for
the Fund); and
• a decision to appoint an Independent
Director where the appointment has
not been supported by a majority of the
directors of the Manager who are not
also Fonterra Directors.
Each of these decisions could normally be
taken by a simple majority resolution of the
Fonterra Board. The FSM Rules recognise that
these decisions of the Fonterra Board are
particularly important and, in the case of the
first three decisions, could have an impact on
the returns derived by all Shareholders,
including the Shares held by the Fonterra
Farmer Custodian (the Economic Rights of
which are held for the Fund). The FSM Rules
therefore require a higher than normal
majority for these resolutions, and require the
agreement of a majority of the Independent
Directors on the Fonterra Board.
Relationship between Fonterra
and the Fund
The relationship between Fonterra and the
Fund is governed by several key documents,
including the Trust Deed, the Authorised
Fund Contract, the Shareholding Deed, the
Custody Trust Deed and the Fonterra Farmer
Custodian Trust Deed.
Termination of the Authorised
Fund Contract
Trading Among Farmers is intended to be
stable and serve the interests of Farmer
Shareholders and Unit Holders over the long
term. However, Fonterra has the right to give
12 months’ notice to terminate the Authorised
Fund Contract without cause within the first
two years of the Launch Date. Fonterra could,
for example, decide to do this if it becomes
apparent that Trading Among Farmers is not
meeting its intended objectives.
If the Authorised Fund Contract terminates,
Fonterra could revert to a regime of issuing
Shares to, and redeeming Shares from, its
Farmer Shareholders. Should this arise, the
Fonterra Farmer Custodian could not seek to
have the Shares it holds redeemed, because it
is not a supplier of milk to Fonterra. However,
Fonterra may be able to establish and
implement a replacement fund as an
“Authorised Fund”, in which case Trading
Among Farmers could continue. In that case,
Fonterra would not be required to revert to
issuing and redeeming Shares.
If the Authorised Fund Contract was
terminated by Fonterra without cause within
the first two years, Fonterra would be required
to purchase the Economic Rights held for the
Fund (or the Shares those Economic Rights
relate to) or arrange an approved person to
purchase them. The price payable would be
the greater of:
• a 15% premium to the volume weighted
average price of Units and Shares over the
period of six months prior to the notice of
termination being given; or
• the Final Price, increased at a compounding
rate of 15% per year, less cash dividends
paid in those years.
The Authorised Fund Contract can also be
terminated by Fonterra or the Manager in
cases of material breach of the Authorised
Fund Contract or under other limited
circumstances. A detailed description of the
circumstances in which the Authorised Fund
Contract can be terminated is set out in
Section 5 – Trading Among Farmers in Detail.
The Fund will be wound up if all the Economic
Rights held for the Fund or all the Shares the
subject of the Fonterra Economic Rights Trust
are acquired by Fonterra or a person
nominated by Fonterra.
FONTERRA SHAREHOLDERS’ FUND PROSPECTUS AND INVESTMENT STATEMENT 13