The outcome of last week’s special general meeting (SGM) of Kerry Co-op caused significant confusion for both shareholders and observers alike. But what actually happened last week and what does it mean for shareholders? The Irish Farmers Journal assesses the results and asks where to next for the board of Kerry Co-op.

What happened?

At the SGM meeting, shareholders in Kerry Co-op were asked to vote on two key resolutions.

The first item was a proposed change to the co-op’s rule book, which would allow Kerry Co-op to sell down its shareholding in Kerry Group plc below 10%. The co-op currently owns more than 13% of the shares in Kerry Group, which have a value of €2.5bn.

This proposed rule change needed a simple majority (>50%) and was passed comfortably, with 63% of shareholders voting in favour.

The second item on the agenda, which was by far the most contentious and caused all of the confusion in the aftermath of the meeting, was a resolution seeking to introduce an amendment to rule 68 of the co-op rulebook that would ring-fence 96.5% of the Kerry Group plc shares held by the co-op to be used for the sole purpose of a share redemption scheme. This was known as rule 68 (a).

In simple terms, rule 68 (a) would insert the share redemption scheme into the co-op rulebook and ring-fence almost all the co-op’s shares in Kerry Group plc to fund this scheme.

This resolution required a two-thirds majority to pass but was narrowly defeated by just 17 votes at the SGM

This amendment to rule 68 was fiercely opposed by the Shareholders Alliance group, which claimed the board of Kerry Co-op was seeking a mandate from shareholders to use co-op funds outside the ring-fenced amount to buy assets and return to being a trading co-op (ie to use the 3.5% of Kerry Group shares not ring-fenced to invest in new businesses).

This resolution required a two-thirds majority to pass but was narrowly defeated by just 17 votes at the SGM. The defeat of this resolution is significant as it is the first time in Kerry Co-op’s near 50-year history that a resolution put to members by the co-op’s board has been rejected by shareholders.

The aftermath

Despite the defeat of the second resolution, the board of Kerry Co-op is pushing ahead with the share redemption scheme as the co-op’s rulebook already states that the board of Kerry Co-op has the discretion to redeem or cancel shares in the co-op at any time.

In other words, the board of Kerry Co-op did not need shareholder approval to establish a share redemption scheme and the new scheme will go ahead regardless of last week’s vote. However, shareholders will rightly have serious questions around the actions of the board of Kerry Co-op over the past couple of months in how it communicated this vote to shareholders.

It also means there may be some ambiguity about the actual legality of the share redemption scheme following the SGM vote.

In a circular note and letter issued to shareholders in April, chair of Kerry Co-op Mundy Hayes informed members that the SGM would take place in June to consider two resolutions that would both need to be passed in order to introduce the share redemption scheme.

Resolutions 1 and 2 are inter-conditional and are required to implement the share redemption scheme

On multiple occasions in this letter, Mundy Hayes stated that the scheme would not go ahead unless both resolutions were passed.

“Resolutions 1 and 2 are inter-conditional and are required to implement the share redemption scheme. In the event that resolutions 1 and 2 are not approved by the required majority, the share redemption scheme will not operate and the initial redemption will not occur,” Hayes wrote in the letter.

If this is the case, then the legal footing of the share redemption scheme could possibly be open to legal challenge. Even today, it still states on Kerry Co-op’s official website that the share redemption scheme will not proceed unless the rule changes are made.

In all of the buildup to the SGM vote, shareholders in Kerry Co-op were led to believe the share redemption scheme could only go ahead once it had secured the required approval from a shareholder vote. At multiple information meetings in the lead up to the SGM, the board of Kerry Co-op repeatedly called on shareholders to vote in favour of the scheme.

Indeed, the first mention that the share redemption scheme did not need to pass a shareholder vote was during an interview Mundy Hayes gave to the Irish Farmers Journal a week before the vote.

In the interview, Hayes confirmed that the “cash for shares” scheme did not require shareholder approval and would take place irrespective of the result of the SGM vote. If this was the case, then it begs the question why did the board repeatedly communicate to shareholders that it was necessary for resolution 2 to pass for the scheme to go ahead?

On top of this, the wording of the resolution put to shareholders last week actually differed slightly from the original resolution that was first explained to shareholders in the circular note issued in April.

In the April circular, the proposed rule 68 (a) mentioned the share redemption scheme “approved by the society at its SGM in June 2019”. In the resolution put to shareholders last week, any mention of the term “approved by the society” was removed.

What happens next?

The defeat of the second resolution at last week’s SGM of Kerry Co-op means there could be some legal ambiguity hanging over the share redemption scheme, particularly considering Hayes’ letter to shareholders in April stating that both resolutions were inter-conditional and the scheme could not go ahead without shareholders approving both.

However, it is doubtful whether anyone would actually challenge the legality of the scheme considering most shareholders want the option to cash in their shares. The co-op is now processing the 1,475 applications it received for the scheme and almost €90m will be issued to those shareholders who applied by late July.

This review is likely to see the co-op board significantly reduced, and possibly even halved, from its current size of 33 members

Instead, the confusion created last week raises important issues for the board of Kerry Co-op. Given the amount of money at stake here (€2.5bn), shareholders in Kerry Co-op need to ask hard questions of their board members about the confusion in the lead up to last week’s SGM to ensure it is not repeated.

The Irish Farmers Journal understands an electoral review is ongoing in Kerry Co-op and will be completed by the end of June. This review is likely to see the co-op board significantly reduced, and possibly even halved, from its current size of 33 members.

If the electoral review recommends a downsizing of the co-op board then all directors in Kerry Co-op will have to resign their positions and elections will take place in October this year to elect a new board.

Ultimately, something needs to change at Kerry Co-op. The confusion created over the share redemption scheme raises concerns about the shortcomings at board level.

The relationship between Kerry Group and the co-op board has deteriorated significantly over recent years

Remember also that Kerry Co-op is still fighting a case against the Revenue Commissioners while it is imminently expecting an arbitration ruling over its row with Kerry Group over the milk price paid to farmers. The relationship between Kerry Group and the co-op board has deteriorated significantly over recent years, meaning farmer representation on the board of Kerry Group is suffering.

As such, the stakes couldn’t be higher for Kerry farmers. Addressing the issues at board level must become a priority.