Lukewarm response from investors

They are disappointed that Fonterra rejected their recommendation that the fund be sold to unit holders at fair value. However, they've welcomed the proposal to cap the overall size of the fund at 10% of total Fonterra shares on issue rather than at the current size of around 6.7%.

In a letter to unit holders sent last week, fund chairman John Sherwin says capping the fund at 10% goes part way to addressing the size-related concerns.

"Subject to the Fonterra board's approval, the amended proposal provides the scope for the fund to be increased in size at a suitable time in the future to address the liquidity and other size-related considerations," he says.

"While it is disappointing that no progress has been made on the buyback recommendation, the subcommittee welcomes Fonterra's decision to modify it's recommendation around the capping of the fund."

Fonterra's farmer shareholders will vote on the new capital structure next month. Details will be released and mailed to farmers this week, then voting starts on November 19.

A special meeting will follow Fonterra's annual general meeting on December 9 for the vote. The proposal requires 75% support among voting shareholders to pass.

The proposal has already passed one hurdle - the requirement of a 50% yes vote by the Fonterra Co-operative Council (the old Shareholders Council).

Fonterra chairman Peter McBride says the council has already voted 92% in support of the recommended changes.

The co-operative has made several changes to the capital structure proposal put forward in September. The future of the fund has been a key issue.

McBride says the overall limit on the size of the fund has been reduced from 20% to 10% of total shares on issue, rather than having a total ban on any further shares being exchanged into units.

"This recognises that the fund size, which is currently around 6.7% of total shares on issue, could change from time to time subject to the overall limit," McBride claims. "Shares will still not be able to be exchanged into units on a day-to-day basis, and the board retains its current rights to regulate this process."

The fund, capped at $500m, has been a disappointment for investors who paid for units in return for dividends. Poor investment decisions by Fonterra and a lack of earnings have resulted in disappointing investment returns.

Key Changes to Capital Structure

• The introduction of thresholds to support the alignment of share ownership and milk supply, and reflect Fonterra's intention that the total number of shares on issue in the co-op is within +/- 15% of total milk supply, and that the proportion of shares held by ceased suppliers is less than 25% of the shares in the co-op.
• The way dry shares are allocated to associated shareholders (sharemilkers, contract milkers and farm lessors) has been simplified to make it easier for them to apply to hold dry shares.
• The overall limit on the size of the Fund has been reduced from 20% to 10% of total shares on issue, rather than having a total ban on any further shares being exchanged into units.