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Agriculture Minister David Carter is urging Fonterra's farmer-shareholders to vote in the June 30 ballot on the giant cooperative's latest attempt at a capital restructure.
The Government wants a contestable market for farmers' milk and open entry and exit to the co-operative, which meant suppliers must be able to buy and sell Fonterra shares at a fair and reasonable price so they could freely supply the processor of their choice, or change land use, Mr Carter said.
In 2007 Fonterra argued its business strategy to aggressively pursue growth opportunities offshore required $3 billion to $5 billion over the following five years.
But its 10,500 farmer shareholders objected to the first capital restructure because they were worried that allowing outside investment in Fonterra could have eventually led to a loss of farmer control.
Now they are being asked to allow trading of shares between farmers, without them first having to be sold back to the co-operative, which would disconnect the co-operative from the "redemption risk" of having to find a lot of cash if many farmers decided to reduce milk supply or quit the co-operative.
Last November Prime Minister John Key called for Fonterra to have a capital structure which equipped it to take advantage of opportunities.
"Fonterra has a big impact on the New Zealand market, so its fortunes play a big part in the fortunes of our country," he said as shareholders voted 89 percent in favour of strengthening the share structure, and reducing the share price, and 91.2 percent in favour of constitutional change to allow the changes.
Voting is weighted according to a farmer's milkflows, with the larger suppliers having a bigger share of the voting power, and a 75 percent majority is needed to approve the changes.
Mr Carter said today the Government supported Fonterra's objective of changing its capital structure to make its capital base more sustainable and robust and to secure new capital for growth, but said the decision sat squarely with its shareholders.
"All New Zealanders have a vested interest in the success of our dairy industry because it is a significant contributor to the economy, accounting for almost 30 percent of the value of total merchandise exports," he said.
The farmer-based sharetrading will include the creation of a Fonterra shareholders' fund, through which farmers needing cash can free up some of their share capital without losing ownership of the shares.
The fund would kill two birds with one stone -- allowing farmers to control voting rights and ownership of the shares, but also give the public access to dairy dividends without having to own a farm.
Only 25 percent of the shares on issue will be available to provide dividends to the shareholders' fund, and directors will initially target a 20 percent threshold -- coincidentally the same proportion of extra shares farmers are allowed to own as "dry" shares not backed by milk supply.
Directors are also likely to stop an individual contracting more than a third of their shares to the fund.
Liquidity in the market will be promoted by registered "volume providers", who will only hold shares in trust and will be restricted in the percentage of shares they can hold.
Farmers' individual shareholdings will be limited to 200 percent of their milk production --- at a rate of one share for 1kg of milksolids -- an individual will not be allowed to hold a stake of more than 5 percent of the total shares on issue.