Due Diligence Report - Fonterra

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