Friday 9th February 2018
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Farmer-owned cooperative Livestock Improvement Corp's board has released its suggested plan to merge its two share classes in a proposal the independent adviser described as relatively complicated but overall will deliver benefits.
LIC's two classes of shares - cooperative control shares and investment shares - are listed on the NZX Alternative Market (NZAX). Chair Murray King said the current structure means cooperative shareholders have greater voting rights but limited exposure to the financial benefits, while investment shareholders can reap financial gains but have limited ability to influence the cooperative's direction.
“This creates potentially serious conflicts between the two existing classes of shares," King said. "The board believes these conflicts will worsen over time and that now is the time to address these conflicts given they will otherwise lead to issues for the on-going management and governance of LIC.
"Share simplification is in the best interests of both classes of shareholders and LIC. While the impacts of moving to a single share structure differ for shareholders depending on their current investment mix, we believe that the overall benefits outweigh the negative effects."
LIC took its current form in 2002, following the passage of the Dairy Industry Restructuring Act into law. The company launched a roadshow in 2016 to discuss potential changes to the cooperative’s capital structure. In June last year, it said it expected to seek shareholder approval to move to a single class of shares when outlining its preferred option for a capital restructure early this year.
The proposal announced today would reclassify all cooperative control shares and investment shares into a single class of ordinary shares. Investment shares are worth more than cooperative control shares, meaning cooperative control shareholders will be issued new shares on a nil paid basis, meaning they owe $1 for each share and will be required to pay for them over time out of future dividends.
Eighteen percent of LIC's shares are cooperative control shares, held by 10,200 shareholders, with the remaining 82 percent investment shares held by 6,700 shareholders. The former are paid dividends based on Westpac New Zealand’s farm first mortgage interest rates, while the latter get ordinary dividends based on LIC’s financial performance, though no dividends were paid in the 2017 financial year.
Cooperative control shareholders must also hold shares to the value of 4 percent of expenditure on LIC’s qualifying products or services and cannot trade their shares. Investment shares can only be traded between cooperative control shareholders, and a shareholder can own a maximum of 5 percent of investment shares on issue and must sell within two years of no longer holding cooperative control shares.
The share class merger will be voted on by all shareholders, and will be put into effect if approved by at least 75 percent of each group. The company will undertake a roadshow between Feb. 26 and March 9, with voting to take place between March 6 and March 12, and a special meeting to be held in Hamilton on March 14. If implemented, trading in investment shares would be suspended on July 16, and trading in ordinary shares would open on July 23.
An independent appraisal report by Northington Partners says conflicts between the two groups of shareholders are exacerbated by the fact that the shareholders do not own the same proportions of the two share classes. About 36 percent of shareholders only hold cooperative control shares, while another 31 percent own a higher ratio of investment shares compared to the overall ratio of 18 percent cooperative control shares vs 82 percent investment shares.
Northington Partners said the board's proposed implementation process is relatively complicated and has different impacts for different groups of shareholders, largely dependent on the relative holding of cooperative control shares compared to investment shares. Still, it said that when considered across all shareholders, the benefits outweigh the potential negatives.
Current shareholders who are underweight in investment shares may see the proposal negatively, as those who currently only hold cooperative control shares likely do so only in order to meet the share standard required to access LIC's goods and services, while shareholders overweight in investment shares will give up some economic value through a reduced share of future profits but will get voting rights, Northington Partners said.
The board gave a relative value of $4 to each investment share, which Northington said was fair when considering its independent appraisal between $3.81 and $4.88 per share with a mid-point of $4.34.
Control of LIC will change significantly if the proposal goes through, Northington Partners said. Currently, farmers with just cooperative control shares have 40 percent of the total voting rights, which will drop to 7 percent, while voting rights from those overweight in investment shares will increase to 69 percent from 26 percent.
"In effect these shareholders are giving up their voting interests in exchange for a greater entitlement to the future profits of LIC," the report said.
Currently, LIC's share standard prescribes that a cooperative control shareholder must own 1 share for every $25 of qualifying expenditure. Under the proposal, that would be reset to one share for every $6.25 of qualifying expenditure, though some changes to reduce the immediate impact of the proposal have been included. Because the new shares issued to cooperative control shares under the proposal would be nil paid shares, all existing shareholders would meet the share standard straight after implementation, Northington said.
"LIC is essentially providing all shareholders interest free loans to increase their investment in order to meet the new share standard. Consequently, there will be no immediate need to share up or down to meet the new share standard."
Liquidity in the NZAX-listed shares is extremely low, but could improve modestly following the proposal, Northington said.
The NZAX-listed shares last traded at $2.25.
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