Due Diligence Report - Fonterra

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Pre-condition 1: The Committee has concluded that this pre-conditionis able to be satisfied as of the date of this report on the following basis:(a) The Authorised Fund will be the Fund as described in theBlueprint and the Fund will meet the requirements ofthe definition of an Authorised Fund under the Form BConstitution. The Fund will be a unit trust established underthe Unit Trust Act 1960.iiiThe FSM rules which have been agreed with NZX (butwhich are awaiting approval from the FMA) and containdetailed requirements in relation to market conduct.The FSM will be a registered market and will be operated as aregistered exchange under the Securities Markets Act1988 which will require it to adopt and comply withcontinuous disclosure requirements.(b) The Fund will be established at or about the launch of TAF.(c) The Fund will have appropriate mechanisms, rulesand governance structures (which are summarised bymanagement in the Management Report and describedin detail in the Blueprint). The Committee’s advisors haveendorsed this view.(d) Terms sheets and other documents relating to the Fund havebeen reviewed by Mr. Oldfield and he has confirmed that heknows of no reason why the Fund cannot be established onthe terms presently contemplated at the date of this report.(e) Based on advice from Rothschild/Cameron, the Fund isreasonably likely to have sufficient number and dispersion ofFund units on issue so as to facilitate trading in those Fundunits. This view is endorsed by the Committee’s finance/markets advisors.(f) Rothschild/Cameron has advised that a Fund size of at least$500 million would provide a deep and liquid market.This view is also endorsed by the Committee’s finance/markets advisors.(g) The Committee’s advisors have confirmed that they arenot aware of any reason why this pre-condition has notbeen satisfied.Pre-condition 2: The Committee has concluded that thispre-condition is able to be satisfied as of the date of this reporton the following basis:(a) The market for trading Co-operative shares will be the FSMas described in the Blueprint and the FSM will meet therequirements of the definition of the FSM under the FormB Constitution. The FSM will be operated by NZX Limited(“NZX”).(b) The FSM will allow for trading of Co-operative shares in themanner set out in the Form B Constitution.iii The trading platform has been developed by NZX and isbased on the trading platform used by NZX for its own publicexchanges. The trading platform has been independentlyreviewed and confirmed by Fonterra’s capital markets advisor,Oliver Wyman.iv The share registry function for the FSM will, at the launchof TAF, include appropriate controls and functionality toenable trading activity and compliance with constitutionaland other limits and thresholds to be monitored.(d) Term sheets relating to the FSM have been reviewed byMr. Oldfield and he has confirmed that he knows of no reasonwhy the FSM cannot be established on the terms set out inthe term sheets.(e) Based on advice from its advisors and advice from Fonterra’scapital markets advisors, the Committee considers thatsufficient number and dispersion of Co-operative shares willbe on issue such that the FSM is reasonably likely to provide areliable and effective platform for the trading of Co-operativeshares. The Committee’s advisors have endorsed this view.(f) Liquidity in the FSM will be assisted by the RVP and by theability of farmer shareholders and the RVP to readily andwithout cost convert shares into units and vice-versa. TheRVP will be under obligations to buy and sell shares in theFSM within a defined maximum spread on a substantiallycontinuous basis. Fonterra has sought independent advicefrom Oliver Wyman, a leading international advisor in thisarea, on how to best structure the role of the RVP to enhanceliquidity in the FSM. This advice, which was reviewed andcommented on by the Committee’s financial/markets advisors,has provided the Committee with confidence that farmers willbe able to buy and sell shares in the FSM when they wish atprices that reflect a well informed and liquid market.(g) The Committee’s advisors have confirmed that they are notaware of any reason why this pre-condition has not been satisfied.(c) The FSM has appropriate mechanisms, rules and governancestructures (including as to liquidity, market conduct anddisclosure) which are summarised by management in theManagement Report and described in detail in the Blueprint.These mechanisms, rules and structures include:12
Pre-condition 3: The Committee has concluded that thispre-condition is able to be satisfied provided that certain criticalamendments to the DIRA Bill which were requested by Fonterrain its submission to the Primary Production Committee aremade to the DIRA Bill prior to enactment. The provisions of theDIRA Bill that management consider must be amended to enableimplementation of TAF, the concerns of Fonterra managementwith such provisions, and Fonterra’s proposed amendmentsto these provisions are described in detail in the ManagementReport. If these amendments are made to the DIRA Bill prior toenactment, the Committee are of the view that this pre-conditionwill be satisfied on an unqualified basis prior to the launch of TAF.The Committee believes that it will not be possible to implementTAF unless these amendments to the DIRA Bill are made. TheCommittee’s advisors have endorsed this view.Pre-condition 4: The Committee has concluded that thispre-condition is able to be satisfied (subject to the qualificationsoutlined below) as of the date of this report. The Committee notesthat certain waivers, approvals, consents and other confirmationfrom regulatory and other bodies which are required for theimplementation of TAF (which are described in detail in theManagement Report) have not yet been obtained. To the extentthat these waivers and approvals are necessary to enable thestructure of the FSM (including the RVP) and Fund to operateproperly, applications for these waivers and approvals will be filedwith the FMA and the Minister of Commerce. Other exemptionsand waivers relating to the structure of the offer of units in theFund and the offer documents have not yet been prepared or filedbecause in the view of Russell McVeagh, legal advisor to Fonterra,the structure of the offer documents and offering process has notyet been settled to the extent required to allow these exemptionsor waivers to be fully identified and applications made. Mr. Oldfieldconcurs with this view. In addition, OliverShaw have noted thatFonterra has obtained, or at this stage applied for, all appropriatetax rulings from the Inland Revenue Department addressing alltax issues relating to TAF for which a ruling would be appropriate.If the required waivers, approvals, consents, tax rulings and otherconfirmations identified required for the implementation of TAFare obtained, the Committee considers that pre-condition 4 will beable to be satisfied. The Committee and its advisors have no reasonto believe that such waivers, approvals, consents, tax rulings andother confirmations will not be obtained.8.2 100% Farmer Control and OwnershipThe Committee has also been requested to provide a view onwhether Fonterra will continue to be 100% controlled and ownedby its farmer supplier shareholders following the implementationof TAF. The Committee has concluded that implementation of TAFas described in the Blueprint will be consistent with the statementregarding 100% farmer control and ownership of the Co-operativecontained in Appendix 1. This view has been supported by opinionsfrom Alan Galbraith and Paul Oldfield on this issue, and theconclusions reached by management in the Management Report.8.3 Other Matters to be Addressedby the Committee under the Termsof ReferenceThe Terms of Reference require the Committee to report to theBoard in respect of a number of specific issues. Set out below is:i. A description of each issue;ii. The view of the Committee in respect of that issue; andiii. The grounds on which the Committee’s view is based.The Committee requested its advisors provide their views onwhether they consider that these requirements have been met inthe proposed structure of TAF. The Committee’s conclusions belowtake into account these views and the views of management oncertain of these objectives as detailed in the Management Report.8.4 Board ObjectivesThe Committee is required to report on whether the followingobjectives of the Board set out in the Terms of Reference areaddressed by the implementation of TAF. As of the date of this report:(a) Maintaining Fonterra as a sustainable co-operative with votingrights linked to milk supplied to Fonterra.The Committee has concluded that this objective has beenmet. Following the implementation of TAF as described in theBlueprint, voting rights in the Co-operative will remain tied tomilk supply. The Management Report highlighted certain areaswhere this fundamental concept has been enhanced and protectedin the Form B Constitution. The Committee considers that TAFwill enhance the sustainability of the Co-operative by providingpermanent share capital which will enable the Co-operative toeffectively execute its strategy.(b) Removing Fonterra’s obligation to redeem shares. This providespermanent share capital on which the business can operateand invest.13
Page 5: 3.2 Work PlanThe Committee adopted
Page 8: to further strengthen the integrity
Page 15 and 16: principles are subject to change fr
Page 17 and 18: 9 ConclusionThe Committee has seen
Page 19 and 20: Appendix 2 - Committee Termsof Refe
Page 21 and 22: 8 MeetingsThe Committee shall meet
Page 23: Qualifications and Professional Ass

Due Diligence Report - Fonterra

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