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Questions to consider on shareholder change

Around 150,000 Irish people hold shares in co-ops. Are some of these sitting on a potential pot of gold? Or was the original share investment to be deemed a charitable gift to support Irish farming?

Alongside the farming-based co-ops, we have fish co-ops, group water schemes and even some country markets with co-op shareholding.

Some shareholding has definitely evolved over the years into high-value potential. Others maybe less so, but all represent the hopes and plans of the original investors.

Last week we learned that ICOS, the umbrella body for Ireland's co-ops, appointed former staff member Seamus O'Donoghoe as its new CEO. He takes over at a challenging time.

Along with gearing up the dairy co-ops financially to handle a massive expansion in milk supplies, a review of the vexed issue of 'active' versus 'dry' co-op shareholdings is needed. Indeed, the two challenges are linked.

The so called 'dry shareholders' are those who hold co-op shares but no longer trade with their co-op. ICOS has urged co-ops to update their share registers so that power is retained by active shareholders.

A policy of buying back the shares of the dry shareholders, or of transferring from dry to active shareholders, was also encouraged. The ICOS line is that the co-op was established to provide a trading outlet for its members. Dry shareholders no longer contribute to this activity.

However, such amendments of co-op rules required a two thirds majority of the voting members at an EGM.

To be fair to the dairy co-ops, most of them have addressed this issue. Over the years, Dairygold Co-op, and its pre-Dairygold constituent co-ops, distributed much of its capital reserves as bonus shares to trading farmers.

Progressive Genetics, a co-op with which I had some dealings and which I regard as well run, was established in the mid-1990s. It issued bonus shares from its profits to a level whereby each euro originally invested in the co-op is now worth €2.20. Retiring farmers can cash in their shares.

Co-op livestock marts have been less active on this front but there are exceptions, such as Mayo Sligo Mart in Ballina and Connacht Gold Marts.

However, some will now argue that the power balance has tipped too far towards active shareholders and that dry ones are being unfairly treated.

In many instances, the effort and sacrifices made by the early co-op pioneers is now in 'the eaten bread that is quickly forgotten' category.

One observer of the scene said: "As farmer co-op shareholders grow older and retire from farming, they may become more of a commercial investor than co-operator but the younger crowd wants to air-brush them from the picture."

How do you value a co-op share? This is a contentious issue. The assets backing the £1 shares purchased 50 years ago are worth multiples of that today. However, when Kerry and Avonmore plcs went to the courts to realise the commercial value of their shareholding in the Irish Dairy Board Co-op, the court ruled that the shares were to be at original nominal value.

If another case was taken today on the share valuation issue, would the courts make the same ruling? Maybe so, maybe not.

In the history of the Irish co-op movement, the most profound decision by any co-op farmer board was to launch its company on the stock market. This move gave the company access to extra capital but now stock market rules prevail. For the farmers, the plc move put a market value on their co-op shares. However, any decision on the cashing of these shares still lies with the co-op and plc boards.

The dry shareholder issue has surfaced again as dairy co-ops contemplate new investment in facilities to process the post-quota milk expansion. Co-op boards, farm organisations and ICOS itself are all grappling with who is going to pay for the investment.

The IFA would accept limited issuing of shares for new milk suppliers but it does not want the creation of a trade in milk production rights that would amount to a new milk quota regime by the back door.

Instead, the IFA has commissioned Deloitte to come up with a business expansion type scheme (BES), where farmers, and others, could make tax incentivised investment in dairy plant.

The ICMSA commissioned the Keane Report on the issue. It insists that the investment is a matter for the processors and rejects any suggestion of a levy on the litre of milk.

Many of the scenarios involve loading the cost of processing the new milk supply on existing and past suppliers.

This threat has energised a group of Glanbia shareholders who are retiring as active milk suppliers.

They reckon that they are the victims of Glanbia's Co-op's restructured shareholder regime which, they claim, is biased against retiring farmers and not at all appropriate for a co-op with a plc entity.

The mainly Waterford-based farmers have seen their co-op balance sheet shorn of €24m by topping up milk prices in 2006 and again in 2009.

The Co-op debt was increased further by a €3m purchase of shares in One51 and even further by borrowing from an investment fund at 7.5pc interest. The exiting milk suppliers fear another raid on the Co-op balance sheet to fund expansion, yet they have no vote or say in such a move.

Meanwhile, the same shareholders see Glanbia Co-op's prime asset, its 54pc share of Glanbia plc, climbing close to €1bn.

In theory, this puts a value of almost €20 on each co-op share, but the only market they can access is an internal bid/offer arrangement where only active traders can buy. At the last transaction the co-op shares traded at about €2 each.

In contrast, the Kerry Co-op shareholders have benefited from a massive cash windfall from allowing the co-op investment in Kerry plc being reduced well below the 50pc benchmark. Each time the co-op shareholding hit €1bn, the co-op shares were cashed on the stock market.

Are Kerry milk suppliers any worse off than their Glanbia counterparts? Some would argue not. The big break from co-op control was made when the company first went plc. Whether the co-op shareholding is above or below the 50pc mark makes no difference.

Another possible weapon in the armoury of dry shareholders is that they are now sufficiently numerous that they could get together, call an EGM and decide to offer their co-op for sale.

Would that be an option for the disgruntled Glanbia group I wonder?

Indo Farming