Fonterra has outlined a complex process for returning $800 million of capital to its shareholders and unitholders in August – money that will be tax free in the hands of the recipients.
While the process looks complicated, farmers only have to attend a virtual special meeting and approve the scheme of arrangement.
Shareholdings in the big co-operative will stay the same, in aggregate and individually, avoiding both share compliance issues and any impact on voting rights.
In a letter to farmers, Fonterra’s managing director of co-operative affairs, Mike Cronin, said the payment process will happen in the background but he wanted to explain the mechanics of the scheme.
Fonterra will repurchase and cancel one in every six shares held by farmers.
It will pay $3 a share for each one repurchased, which is equivalent to paying 50c per share.
“At the same time, one share held by each shareholder, which is not bought by Fonterra, will be subdivided so that each shareholder will end up holding the same total number of shares as they held before the repurchase.
“The scheme also applies to shares held by the custodian of the Fonterra Shareholders’ Fund.
“The custodian will pass on the payment directly to unitholders and there will be no change to the number of units on issue.
“Fonterra has obtained a binding tax ruling from Inland Revenue that the amount paid to shareholders will treated as a return of capital and not as a dividend for income tax purposes.
“This means the capital return will generally not be taxable.”
Cronin said the virtual special meeting will be on July 12 and the notice of meeting and documents would be sent to shareholders on June 21.
He expected the High Court would make a final order by August 3.
A three-day trading halt on the NZX will take place August 8 to 10 to update the share register before the record date.
Payment to shareholders is planned to be within five days of the record date, by August 17.
Fonterra said the share compliance matter is to avoid a supplier with the minimum shareholding requirement falling into non-compliance when one in every six shares are repurchased and cancelled.
Therefore, the share subdivision to restore the original shareholding is necessary, it said.
Co-operative Council chair John Stevenson said the average $75,000 tax-free capital return to each Fonterra farmer in mid-August will be very welcome in on-farm inflationary times.
“I think the first call will be operating expenses, not large-ticket purchases,” he said.
Farmers will need to vote on July 12 and be reassured that their shareholding remains the same.
The return of capital comes from the sale of an offshore asset, Soprole in Chile, which was built up over several generations.
Stevenson expects the next review of Fonterra’s strategy to be presented in September and the first of regular reports on the shape of share ownership with the new flexibility to come out soon.
Medium-term projections of company performance, earnings and debt are now strategic requirements, he said.
