FSF
13/06/2014 08:35
DISCPLIN
REL: 0835 HRS Fonterra Shareholders' Fund (NS)
DISCPLIN: FSF: Tribunal approval of settlement agreement between NZX & FCG
13 June 2014
ANNOUNCEMENT OF NZ MARKETS DISCIPLINARY TRIBUNAL
TRIBUNAL APPROVAL OF SETTLEMENT AGREEMENT BETWEEN NZX LIMITED AND FONTERRA
CO-OPERATIVE GROUP LIMITED IN RELATION TO FSM RULE 9.1.1
1. The NZ Markets Disciplinary Tribunal ("Tribunal") has approved a
settlement agreement between NZX Limited ("NZX") and Fonterra Co-operative
Group Limited ("Fonterra") dated 5 June 2014 ("Settlement Agreement") in
respect of FSM Rule ("Rule") 9.1.1.
Background
2. Fonterra is a multinational dairy co-operative owned by approximately
10,000 New Zealand dairy farmers.
3. The Fonterra Shareholders' Market ("FSM") was established as part of the
Trading Among Farmers scheme on 30 November 2012. It is a private market,
which enables Fonterra shareholders to trade co-operative shares (which are
quoted under the ticker code FCG) between themselves.
4. The Fonterra Shareholders' Fund ("FSF") is a separate unit trust
established to invest in the economic rights of shares in Fonterra. FSF has
units quoted on NZX's main board (under ticker code FSF) and ASX. They enable
persons who are not entitled to trade on the FSM to gain access to certain
benefits they would have received if they were entitled to own a share, and
thus to indirectly participate in the economic performance of Fonterra.
5. The FSF is designed to supplement liquidity in the FSM by enabling units
to be exchanged for FCG shares by participants in the FSM market. That system
is designed so that FSF units and FCG shares should trade at similar prices.
As a consequence, information about FCG shares is equally relevant to FSF
units.
6. Fonterra is subject to the FSM Rules. Rule 9.1.1 of the FSM Rules requires
that when Fonterra becomes aware of any Material Information concerning it,
it shall immediately release that information to NZX unless a reasonable
person would not expect the information to be disclosed, the information is
confidential and confidentiality is maintained, and one of five listed
provisos applies.
7. On Monday, 5 August 2013 Fonterra released an announcement to NZX
disclosing that three batches of WPC80 manufactured at its Hautapu plant
contained a strain of clostridium, which has the potential to cause botulism,
and that eight customers had been identified as having received affected
product. This followed Fonterra making a number of releases to NZX on this
issue, with the first being just after midnight on Friday 2 August. By
agreement with NZX, Fonterra replaced the releases it had made over the
weekend with one announcement on Monday, before trading began, providing the
latest information then available to Fonterra.
8. The previous week Fonterra had initiated a process to trace product after
receiving an email from AgResearch at approximately midday on Wednesday, 31
July 2013, that indicated one strongly positive result for botulinum toxin.
Fonterra was aware on that date that some affected product had been provided
to six customers, including a nutritional customer who uses the product to
produce infant nutritional products, but Fonterra was not aware on that date
and was actively seeking to discover whether any potentially affected product
had entered the consumer market or if it was still held by its customers.
9. Fonterra's trace back exercise of all affected product was completed on 18
August 2013, and on 28 August 2013 the Ministry of Primary Industries
announced that the bacteria found in the affected batches did not contain the
botulinum strain of clostridium and that the affected product posed no risk
to the public.
10. On Wednesday 31 July 2013, Fonterra lodged an announcement with NZX in
relation to its forecast cash payment for the 2013/14 season.
11. On Wednesday 31 July 2013, FSF units closed at $7.30. The unit price
decreased over the next two days to close on Thursday 1 August 2013 at $7.18,
and Friday 2 August 2013 at $7.12 (a decrease of 2.46% from close of market
on 31 July 2013).
12. The intra-day trading price for FSF units on Monday 5 August ranged
between $6.50 and $6.93, and closed at $6.86. The intra-day low price of FSF
units of $6.50 during trading on Monday 5 August 2013 represented a $0.62
decrease (8.70%) compared to the previous day's closing price of $7.12.
13. The price of FSF units decreased by $0.26 (3.65%) between close of market
on Friday 2 August and close of market on Monday 5 August 2013.
14. Similar market effects were observed in respect of FCG.
15. NZX Regulation ("NZXR") has investigated whether the announcement
released on 5 August 2013 (taking into account the first announcement was
made after the market had closed on Friday 2 August) was sufficiently timely
to meet the continuous disclosure obligations under the FSM Rules. NZXR has
completed an investigation of this matter including involving analysis of
information provided by Fonterra.
16. As a result of the investigation, NZXR considers that Fonterra breached
Rule 9.1.1 of the FSM Rules by failing to release Material Information to NZX
concerning the contamination of its WPC80 product with clostridium capable of
causing botulism, immediately after coming into possession of that
information by midday on 31 July 2013.
17. While Fonterra does not accept NZXR's view as recorded above, it
acknowledges that view and has agreed to make certain payments as outlined
below.
18. The Tribunal acknowledges that the matters which are addressed in this
announcement arose as a part of a significant and fast moving incident for
Fonterra. Further, the Inquiries put in place by Fonterra/its Board as a
result of these events examined and made recommendations in relation to a
wide range of matters, including Fonterra's overall governance and
communications. In this context, the Tribunal notes that it has been advised
that:
a. Fonterra has since instigated a new Food Integrity Quality Council,
chaired by the newly created position of Group Director Food Safety and
Quality (the latter reporting directly to the CEO). A key focus for the
Council is the possible impact of events and circumstances on Fonterra's
reputation. This has been factored expressly into the decision-making
functions and tools used by the Council.
b. Fonterra's CEO, each of his direct reports and senior executives have
signed variations to their employment contracts to record a commitment to the
highest standards of food safety and food quality, which includes an express
commitment to meeting all applicable Fonterra policies and regulatory
requirements. These include policies and standards in relation to disclosure
of material information and escalation of issues.
c. Fonterra has also established a permanent, multi-disciplinary group
Incident Management Team (IMT), whose role is to assess emerging issues for
their potential to develop into critical incidents, and in such scenarios,
address, among other matters, stakeholder engagement. One of the key
functions of the IMT is to ensure that information in relation to critical
incidents (including any incident that could result in a critical incident)
is escalated promptly to ensure that all regulatory and other requirements
are analysed and met appropriately. The IMT works seamlessly with Fonterra's
existing Disclosure Committee.
d. Fonterra has instigated detailed e-learning modules in relation to all of
its policies and standards, including its disclosure policy and standards.
Employees in Group Functions and the various Business Units are required to
study Fonterra's policies and standards in a structured manner online and to
complete a test at the end of each module. Compliance with this requirement
is monitored through the Office of the Chief Financial Officer.
Determination
19. The Tribunal considers issues in relation to continuous disclosure
provisions of the rules as a serious matter. The obligation to disclose
material information in a timely manner is a fundamental obligation placed on
Fonterra under the FSM Rules.
20. Timely disclosure of market sensitive information is essential to
maintaining the integrity of the market. Compliance with continuous
disclosure requirements ensures that the market is informed of relevant
information at all times. These provisions are designed to promote the
equality of information in the market so that all investors are able to make
informed investment decisions. It is a critical part of ensuring that NZX's
markets are efficient, transparent and fair.
21. In determining to approve the Settlement Agreement, the Tribunal
considered certain mitigating factors, including that:
a. Fonterra has co-operated fully with the NZXR inquiry.
b. Immediately after the issues arose, Fonterra voluntarily put in place two
separate and wide ranging Inquiries (the internal Operational Review and the
Independent Board Inquiry).
c. Fonterra has been willing to resolve this matter at a very early stage,
consistent with the principles of speed and certainty.
d. The issue appears to have arisen in part from a lack of internal
escalation by senior management at Fonterra and, as noted at paragraph 18
above, steps have since been taken by Fonterra to improve the escalation
process.
e. Fonterra has already suffered significant reputational consequences as a
result of the events that are the subject of this announcement.
22. In determining to approve the Settlement Agreement, the Tribunal
considered certain aggravating factors, including that:
a. Fonterra was aware of the expectations of the market and regulators to
ensure the timely disclosure of information.
b. Fonterra lodged an announcement with NZX following market close on Friday
2 August 2013, approximately two and a half days following Fonterra coming
into possession of what NZXR considers was Material Information.
c. The Tribunal considers that continuous disclosure obligations are amongst
the most fundamental obligations of a listed issuer, and are critical to the
fair and efficient operation of the FSM and Main Board markets.
d. As a large and prominent company, Fonterra has an obligation to uphold
high public standards and any breaches of continuous disclosure obligations
have the potential to affect a significant number of people.
23. NZX and Fonterra have reached a settlement and agreed that:
o Fonterra will pay the NZX Discipline Fund $150,000 (plus GST, if any) in
relation to the conduct in this case.
o This announcement by the Tribunal will be made.
o Fonterra will pay the costs of the Tribunal and will contribute to the
costs incurred by NZX in relation to this matter.
Approval
The Settlement Agreement is approved by the Tribunal pursuant to Rule 10 of
the NZ Markets Disciplinary Tribunal Rules ("NZMDT Rules"), and as such, the
Settlement Agreement is the determination of the Tribunal.
The Tribunal records that, while acknowledging that Fonterra does not agree
with NZXR's view that there has been a breach of the FSM Rules in this case,
it is nevertheless concerning and disappointing that a disclosure issue has
been required to be raised by NZXR with Fonterra and that Fonterra has not
accepted that a breach occurred. The Tribunal also records that Fonterra
could have managed its compliance with continuous disclosure obligations
better in this case. The Tribunal reinforces the need for organisations, and
particularly those of the size and standing of Fonterra, to devote proper
resources, time and training to their continuous disclosure obligations and
to foster a culture of openness and transparency in relation to continuous
disclosure issues.
The Tribunal
The Tribunal is a disciplinary body which is independent of NZX and its
subsidiaries. The Financial Markets Authority approves its members. Under the
NZMDT Rules, the Tribunal determines and imposes penalties for referrals made
to it by NZX in relation to the conduct of parties regulated by the market
rules.
Dated 13 June 2014
End CA:00251546 For:FSF Type:DISCPLIN Time:2014-06-13 08:35:05
