Purpose
The purpose section of the Act is amended to place after the purpose provision to “promote the efficient operation of dairy markets in New Zealand by regulating the activities of new co-op [(i.e. the name in the Act for Fonterra)] to ensure New Zealand markets for dairy goods and services are contestable” (Section 4(f) currently provides as follows: “promoting the setting of a base milk price that provides an incentive to new co-op to operate efficiently”) (Part 1, Clause 4, amending Section 4 of the Act by inserting new paragraph (fa)).
Trading among farmers
The Bill provides for the establishment of a market for trading by farmers in new co-op shares. An adjunct of the scheme is the establishment of a fund (the new co-op fund) holding new co-op shares and issuing securities that are also able to be traded on a registered market (Clause 8, inserting New Sections 109A-109L into the Act).
These provisions are, in more detail:
Order in Council
The Bill provides that this system is established by Order in Council and on the making of that Order in Council (made on the recommendation of the Minister if he or she is satisfied, on the basis of written confirmation by the chief executive, that certain preconditions have been met). Sections 77-85, 88-93 and 98-105 of the Act cease to apply. Those existing sections of the Act relate to Fonterra’s existing share issue and surrender obligations. These provisions are replaced by the new “Trading among Farmers” system in providing the entry and exit point for farmers in acquiring or disposing of new co-op shares (Part 1, Clause 8, inserting New Sections 109A; cf. New Sections 109B-109F).
Preconditions for making the Order in Council
The Bill provides that the preconditions for the Order in Council are that:
-
co-operative shares are listed on a registered market that provides for the shares to be traded by shareholding farmers;
-
there is established and maintained a fund (the new co-op fund) that satisfies the following requirements:
-
-
the securities issued in respect of the fund (the new co-op fund securities)—
-
-
-
are listed on a registered market; and
-
entitle the holders of those securities to receive distributions equal to the dividends they would receive if they were holders of co-operative shares;
-
-
the rules of the fund permit shareholding farmers to exchange co-operative shares for an equal number of new co-op fund securities, and vice versa; and
-
-
the manager of the fund has issued, or has entered into binding obligations to issue, new co-op fund securities for consideration of not less than $500 million; and
-
new co-op has given a notice to the chief executive requesting that the Order in Council be made (Part 1, Clause 8, inserting New Sections 109D and 109E).
Revocation of the Order in Council
The Bill provides for the circumstances in which the Order in Council may be revoked and the procedure for doing so by providing that new co-op must “without delay” (under pain of a maximum fine of $200,000 plus $10,000 for every day that the delay continues) give written notice to the chief executive if co-operative shares are no longer able to be traded on a registered market by shareholding farmers (other than in the case of a temporary halt in, or suspension of, trading in the shares) or new co-op fund securities have ceased to be listed on a registered market. The Minister must recommend the making of the revocation if he or she is satisfied, on the written confirmation of the chief executive, that the above is the case (Part 1, Clause 8, New Sections 109F and 109G).
Comment
It appears that the intention of this provision is to reproduce the current requirements relating to the issue of new co-op shares and the acceptance of their surrender of shares on equivalent terms.
Verification
The Bill makes provision for monitoring by empowering the chief executive to require verification by new co-op, co-operative that:
-
shares continue to be listed on a registered market that provides for the shares to be traded by shareholding farmers; and
-
that new co-op fund securities continue to be listed on a registered market.
The chief executive may give new co-op a notice “at any time” requiring verification of the above. New co-op must respond to the notice no later than five working days either verifying the matter in question or, if it is unable to verify it, stating that it is unable to do so. Contravention of this makes new co-op liable to a maximum fine of $200,000 and a fine of $10,000 for each day that the offence continues. The Bill also regulates the conduct of new co-op in relation to the functioning of the markets for trading in new co-op shares and in securities issued by the new co-op fund. (Part 1, Clause 8, inserting New Section 109H).
Default provision
The Bill provides that in the event that the market ceases to operate as required or is not established by 31 December 2013, an administrative mechanism for setting the share price is implemented “ensuring that the price of a co-operative share is set at a price that is within the range of the price for which the co-operative share would be traded in an open and unrestricted market between knowledgeable, willing parties who are at arm’s length”. This default provision applies first applies if there is a revocation of an Order in Council under New Section 109G (New Section 77B(a)) or the cut-off date of 31 December 2013 being reached without an Order in Council under New Section 109B having been made (New Section 77B(b)). (Part 1 Clause 7, inserting New Sections 77A and 77B into the Act).
Setting of base milk price
The Bill provides for the setting of a base milk price “that provides an incentive to new co-op to operate efficiently and that as far as possible preserves contestability in the market for the purchase of milk from farmers” (New Section 150A). The Bill specified certain assumptions and principles for the setting of the base milk price (New Sections 150B and 150C). The Bill also provides for the establishment of the Milk Price Panel (the panel) whose functions are: supervising the calculation of the base milk price; advising new co-op on the application of the milk price manual; and recommending the base milk price (New Section 150D). A milk price manual (the milk price manual), which must be maintained by new co-op, sets out how the base milk price is calculated (New Section 150F(1)) and the panel may make non-binding recommendations to new co-op in respect of the milk price manual (New Section 150D(4)). If a panel recommendation is not followed a public process must be followed in which new co-op's reasons for ignoring or departing from a recommendation or proceeding without a recommendation. A similar process applies where new co-op sets the base milk price not in accordance or in the absence of a panel recommendation (New Section 150G). The Bill also implements an detailed external oversight process of the base milk price manual by the Commerce Commission (New Section 150N). (Part 1, Clause 13, inserting New Part 5A, New Sections 150A-150U).
