Due Diligence Report - Fonterra

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The Committee has concluded that this objective has been met asof the date of this report. If TAF is implemented in accordance withthe requirements of the DIRA Bill, Fonterra will not be under anyobligation under DIRA to redeem Co-operative shares.(c) Ensuring Fonterra has sufficient permanent share capital to giveFonterra the funding needed to continue to have the ability todrive the highest sustainable returns to farmers.The Committee has concluded that this objective has been met.Under TAF, Fonterra will have a permanent share capital base sinceit will no longer be required under DIRA to redeem Co-operativeshares. This will improve Fonterra’s ability to drive the highestsustainable returns for its farmers.(d) Ensuring that the arrangements give farmers confidence thatthey will be able to buy and sell shares when they wish at pricesthat reflect a well informed and liquid market.The Committee has concluded that this objective has been met.Farmer shareholders will have access to the FSM through multiplemechanisms including the Fencepost trading site, a dedicated 0800number, or through use of a participating broker. It is proposedthat the FSM will be open for trading shares during business hourson every business day during the year. The Committee’s finance/markets advisors have advised that the FSM will likely provide areliable and effective platform for the trading of Co-operative shares.Fonterra has put in place an extensive TAF training plan targetedat farmers and rural professionals. The majority of this training willbe rolled out from August 2012 until the launch of TAF. To date, thefollowing training activities have taken place:i. Informal (pre-training) meetings with farmers on TAFhave been conducted by Fonterra Area Managers and/orspecialist TAF project team members;ii. CDs containing a TAF trading demo and simulationare being distributed to Fonterra Area Managers andCouncillors (system also to be available via Fencepost);iii. Trading demonstration sites have been operating at allField Days and other farmer meetings (e.g. the NetworkConference);iv. The May 2012 TAF Booklet was distributed to all farmersexplaining TAF and its structure and options to trade; andv. Fencepost material has been updated continuously,including FAQs.Future TAF training will include:i. TAF training on how to trade (approximately 100workshops are planned);ii. Quick-reference guide to be provided to every farmeras a ‘how to’ guide;iii. “Super-users” will be trained to train farmers and ruralprofessionals; andiv. Ongoing support from Fonterra Area Managers and TAFteam specialists will be provided at informal meetings,farmer meetings and Field Days.Consistent with our conclusion on pre-condition 2 relating to theFSM, TAF will provide a platform for the prices of Co-operativeshares to reflect a well informed and liquid market. The FSM will bea registered market and will be operated as a registered exchangeunder the Securities Markets Act 1988 which will require it to adoptand comply with continuous disclosure requirements. The FSMrules will require continuous disclosure of all material information.The RVP will enhance liquidity in the FSM. The RVP will be underobligations to buy and sell shares in the FSM within a definedmaximum spread on a substantially continuous basis. OliverWyman, a leading advisor in this area, has provided Fonterra withadvice on structuring the role of the RVP to enhance liquidity inthe FSM. This advice, which was reviewed and commented onby the Committee’s financial/markets advisors, has provided theCommittee with confidence that farmers will be able to buy andsell shares in the FSM when they wish at prices that reflect a wellinformed and liquid market.(e) Ensuring the arrangements produce a stable outcome in the sensethat they will meet the above objectives for the foreseeable future.The Committee has concluded that this objective has been met.The Committee is not aware of any reason why TAF would fail tomeet the objectives of TAF described above for the foreseeablefuture. The Committee considers that management has undertakenappropriate and robust scenario analysis to help ensure thatTAF can operate effectively in connection with a broad range ofpotential future circumstances and the Committee considersthat various TAF structures provide the Board with a means ofaddressing these circumstances.(f) Ensuring the Board can provide appropriate formal assurancesto the Shareholders’ Council that key issues raised by the Councilhave been addressed and that TAF is consistent with theco-operative principles endorsed by the Shareholders’ Council.The Committee has concluded that this objective has beenmet. The Committee is not aware of any key issue that has beenraised by the Council to date that has not been addressed bymanagement during the TAF implementation process to the extentthat such issue can be addressed at this stage in that process.The Committee considers that TAF is consistent with the currentco-operative principles of Fonterra for the reasons stated inparagraphs 1 – 5. below. In doing so, the Committee, however,notes that: (i) the Fonterra shareholders have already endorsedthe construct of TAF in the June 2010 vote; (ii) the co-operative14
principles are subject to change from time to time and may needto be updated to reflect the TAF structure; and (iii) the Fonterrashareholders have approved the issuance of dry shares tosupplier shareholders.(1) Shares in the Co-operative can only be held by supplyingshareholders. As discussed in connection with therequirement of 100% farmer control and ownership, theonly shareholders of the Co-operative can be farmers whosupply milk to Fonterra, those people who supplied milkto Fonterra but are selling down their shares over threeseasons, and the Fonterra Farmer Custodian, which will beultimately owned and controlled by farmers who supplymilk to Fonterra and hold Co-operative shares.(2) Fonterra supplying shareholders agree to the dual commitmentto supply milk and invest capital. Under TAF, our supplyingshareholders will continue to be required to supply milkand provide capital to the Co-operative.(3) Supplying shareholders will be issued and must hold Co-operativeshares in proportion to their total milksolids supplied. TheFonterra “share standard” requires a supplying shareholderto hold one Co-operative share for each kilogram of milksolids obtainable from milk supplied to the Co-operative.However, the Form B Constitution introduces the conceptof a three season rolling average for calculation of thelevel of supply and, following the introduction of TAF,the share standard will be able to be satisfied by suppliershareholders holding Co-operative shares and vouchersthat retain the voting rights of shares that have beentransferred to the Custodian so that economic rights canbe held for the Fund. The Form B Constitution will providethat supplying shareholders may hold Co-operative sharesequal to up to 200% of the required share standard (butsubject to the aggregate constitutional thresholds). TheCommittee does not consider that these changes areinconsistent with the underlying principle since anyadditional shares held in excess of the share standard donot entitle the supplying shareholder to any additionalvoting rights or milk price entitlement.(4) Control of Fonterra is exercised by its supplying shareholders whohave voting rights in proportion to their total milksolids supplied.As discussed in connection with the requirement of 100%farmer control and ownership, farmers who supply milk toFonterra and who hold Co-operative shares and vouchersare the only people who can vote on Co-operative matterson the basis of and in proportion to their production andappoint and remove Fonterra Directors.(5) Financial benefits and obligations that arise from cornerstoneactivities are allocated to supplying shareholders in proportionto their total milksolids supplied. Under TAF, the financialbenefits and obligations from the Co-operative’s businesswill continue to be allocated to supplying shareholdersin proportion to their total milksolids supplied to theCo-operative. A particular supplier may elect to acquireadditional Co-operative shares up to 200% of the sharestandard, however, this entitlement to purchase additionalshares (and therefore increase the financial benefitsallocated to the shareholder) will still be calculated withreference to the amount of milksolids supplied to theCo-operative by the relevant supplier. The Committee doesnot consider that these changes are inconsistent with theunderlying principle.8.5 Other IssuesThe Committee is required to report on the following issues tothe extent relevant at this point in time in the process of theimplementation of TAF:(a) The TAF Project is being properly and reasonably managed inthe context of the Board’s timetable and objectives.The Committee has concluded that to date this objective has beenmet. The Committee considers that management is appropriatelymanaging all aspects of the TAF implementation process whichhave been required to be undertaken to date.(b) Appropriate expert advice has been taken on key aspects of theTAF Project and that key areas for advice have not been omitted.The Committee has concluded that this objective has been met inthe TAF implementation process to date. The Management Reportand the Committee advisor reports indicate that suitable andappropriate levels of advice have been obtained. Additional advicewill still be required during the offering process and in connectionwith the preparation and verification of the offer documents.(c) Management and advisors have:i. Considered all material risks in connection with the TAFProject (including any new risks that have been identifiedby management and advisors since their prior reports inconnection with Capital Structure Stage 3 were deliveredto the Board) and have developed and provided a full riskanalysis and appropriate risk mitigation plans;ii. Undertaken appropriate scenario planning and stress testingin connection with the key areas of the TAF Project includingthe rules, structure and processes underlying the FonterraShareholders’ Market and the Fonterra Shareholders’ Fund.The Committee has concluded that this objective has been met.The Committee has put in place a robust and comprehensive duediligence process, and its advisors have confirmed that they havehad sufficient access to management and management’s ownadvisors to discuss issues identified. Material issues identifiedby the Committee’s advisors are summarised in Section 5 ofthis report, including the status of each issue. The Committee15
Page 5: 3.2 Work PlanThe Committee adopted
Page 8: to further strengthen the integrity
Page 13: Pre-condition 3: The Committee has
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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