SML – Waivers from NZX Listing Rules 5.1.1 and 5.2.1

NZX Regulation Decision
Synlait Milk Limited (NS) (SML)
Application for waivers from NZX Listing Rules 5.1.1 and
5.2.1







15 November 2019

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Background
1. The information on which these decisions are based is set out in Appendix One to this
decision. These waivers will not apply if that information is not, or ceases to be, full and
accurate in all material respects.
2. The Rules to which these decisions relate are set out in Appendix Two.
3. Capitalised terms that are not defined in these decisions have the meanings given to them in
the Rules.
Waiver from Listing Rule 5.1.1
Decision
4. On the basis that the information provided by SML is complete and accurate in all material
respects, NZX Regulation (
NZXR
) grants SML a waiver from NZX Listing Rule (
Rule
) 5.1.1
to the extent that SML would otherwise be required to obtain shareholder approval for SML
Subsidiary to enter into the Variation.
Reasons
5. In coming to the decision to provide the waiver set out in paragraph 4 above, NZXR has
considered that:
a. the policy behind Rule 5.1.1 is to regulate those transactions which will significantly
change the nature of an Issuer’s business or which have a value that represents a
majority of the equity that investors hold in the Issuer and, as a result, are deemed to be
so significant to the Issuer, and therefore so likely to impact shareholders’ interests, that
shareholders should have an opportunity to consider the transaction and exercise their
right to vote before the transaction can take effect. The granting of this waiver will not
offend the policy behind Rule 5.1.1;
b. the Variation is entirely within the ordinary course of SML’s business, rather than being
a transaction that significantly changes the nature of the business. The Variation
confirms the current commercial relationship between SML and ATM and provides
certainty to that existing commercial relationship, rather than involving the immediate
expenditure of large amounts of shareholder funds;
c. the Variation provides a framework for orders with binding contracts only arising when a
member of the ATM group places or is deemed to place purchase orders. Therefore,
there is limited accuracy in the estimation of the value of the Variation over the term of
the Supply Agreement (as varied by the Variation);
d. the Variation has been negotiated on an arm’s length commercial basis. SML has
submitted that the Variation is within the competence and experience of the
management and the directors of the SML group;
e. there is precedent for the decision, including the waiver granted by NZXR to SML in
respect of SML’s entry into of the Supply Agreement initially in 2016 and the variation to
that agreement in 2018.

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Waiver from Listing Rule 5.2.1
Decision
6. Subject to the conditions set out in paragraph 7 below, and on the basis that the information
provided by SML

is complete and accurate in all material respects, NZXR grants SML a
waiver from Rule 5.2.1, to the extent that this Rule would otherwise require SML to obtain
shareholder approval for SML Subsidiary to enter into the Variation.
7. The waiver in paragraph 7 above is provided on the conditions that:
a. The Directors of SML certify that:
i. the terms of the Variation have been entered into, and negotiated, on an arm’s
length commercial basis;
ii. SML was not unduly influenced to enter into the Variation by ATM; and
iii. entry into the Variation is in the best interests of all of SML’s shareholders.
b. the waiver, its conditions and implications are disclosed in SML’s next annual report.
Reasons
8. In coming to the decision to provide the waiver set out in paragraph 7 above, NZXR has
considered that:
a. the purpose of Rule 5.2.1 is to ensure that shareholders have an opportunity to
consider, and vote on, material transactions where there is, or may be a perception of,
the potential for undue influence by a Related Party on an Issuer’s decision to enter into
a transaction or agree to its terms. The granting of this waiver will not offend the policy
behind Rule 5.2.1;
b. NZXR is satisfied that ATM will not receive favourable consideration due to the Related
Party relationship, and that the Related Party relationship has not unduly influenced the
decision to enter into, or the terms and conditions of, the Variation:
i. SML is already party to the Supply Agreement to which the Variation relates. SML
submits that it would enter into the Variation with ATM for commercial reasons,
irrespective of ATM’s shareholding;
ii. The Supply Agreement to which the Variation relates contemplated further
negotiation of the matters covered by the Variation; and
iii. entry into, and the terms of, the Variation have been negotiated on an arm’s length
commercial basis;
c. NZXR takes comfort that despite ATM’s increased shareholding, there is no ATM
influence at the Board level of SML;
d. the Variation is effectively a revision and extension of the Supply Agreement between
the parties, and is within the scope of SML’s ordinary course of business;
e. the condition at 7(a) above provides comfort that the Variation has been negotiated and
entered into on an arm’s length commercial basis, and is fair and reasonable to, and in
the best interests of SML and its non-shareholders; and

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f. there is precedent for the decision.
Confidentiality

9. SML has requested this decision be kept confidential until an announcement of the Variation
is released to the market.
10. In accordance with Rule 9.7.2, NZXR grants SML’s request.

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Appendix One
1. Synlait Milk Limited (NS) (
SML
) is a Listed Issuer with ordinary shares Quoted on the NZX
Main Board.
2. A wholly-owned subsidiary of SML (
SML Subsidiary
), has entered into a variation (the
Variation
) to an existing Nutritional Powders Manufacturing and Supply Agreement with a
wholly-owned subsidiary (
ATM Subsidiary
) of The a2 Milk Company Limited (
ATM
) (the
Supply Agreement
).
3. ATM is a Listed Issuer with ordinary shares Quoted on the NZX Main Board. ATM has
applied to NZXR for a waiver from Rule 5.1.1 in relation to the Variation.
4. The Variation is intended to confirm the current business relationship between SML and
ATM and to change certain terms of the Supply Agreement. The Variation in itself does not
increase the volume of business between SML and ATM from current levels.
5. The key terms of the Variation can be summarised as:
a.
Term
: The term of the Supply Agreement is effectively extended by two years such that
it is terminable after July 2022 by either party giving at least three years’ notice to the
other party. From 1 August 2022 the Supply Agreement will continue on a rolling term
until either party gives three years’ notice of termination to the other party.
b.
Minimum Supply Volume
: SML Subsidiary continues to be contractually bound to
supply, under purchase orders, up to a prescribed infant and pregnancy formula
volume. The Variation increases the volume that was previously provided for in the
Supply Agreement.
c.
Exclusivity
: SML Subsidiary’s exclusive supply rights continue up to an increased
specified infant formula product volume in respect of infant formula already supply by
SML for sale by the ATM group in the markets of China, Australia and New Zealand.
d.
Sales Price and Discount
: The sales price for products continues to be not fixed in
the contract and varies based on a variety of factors. However, the discount applicable
to a portion of the price of product is increased in respect of product above a certain
volume ordered between 1 August 2020 and 31 July 2022.
6. On the basis that the Supply Agreement could remain on foot for longer than the minimum
term (approximately six years from the date of this waiver) and that the exact volume of
products to be purchased over the term of the Supply Agreement is uncertain, there is
potential for SML Subsidiary to sell product the value of which could be in excess of 50% of
the Average Market Capitalisation of SML.
7. Approximately 17.4% of the shares of SML are held by The a2 Milk Company (New
Zealand) Limited which is a wholly owned subsidiary of ATM. The a2 Milk Company (New
Zealand) Limited is therefore a Related Party of SML as:
a. ATM Subsidiary and The a2 Milk Company (New Zealand) Limited are Associated
Persons by virtue of being Related Bodies Corporate; and
b. The a2 Milk Company (New Zealand) Limited holds greater than 10% of SML shares
currently on issue.

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8. On the basis that Synlait Subsidiary and ATM Subsidiary are Related Parties and there is
potential for AML Subsidiary to sell product the value of which could be in excess of 10% of
the Average Market Capitalisation of SML, entry into the Variation constitutes entry into a
Material Transaction with a Related Party.
9. SML has applied for a waiver from Rules 5.1.1 and 5.2.1 to enter into the Variation which
may amount to a related series of transactions with a Related Party with a value of greater
than 50% of SML’s average market capitalisation. As at the date of this waiver, SML’s
market capitalisation is approximately $1.69 billion.

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Appendix Two
Rule 5.1 Disposal or Acquisition of Assets
5.1.1 An Issuer must not enter into any transaction, or a related series of transactions,
to acquire, sell, lease (whether as lessor or lessee), exchange, or otherwise
(except by way of charge) dispose of assets where the transaction or related
series of transactions:
(a) would significantly change, either directly or indirectly, the nature of the
Issuer‘s business, or
(b) involves a Gross Value above 50% of the Average Market Capitalisation
of the Issuer,
unless the transaction, or related series of transactions, is:
(c) approved by an Ordinary Resolution, or a special resolution if approval by
way of special resolution is required under section 129 of the Companies
Act 1993, or
(d) conditional upon such approval required by paragraph (c) above


Rule 5.2 Transactions with Related Parties
5.2.1 An Issuer must not enter into a Material Transaction if a Related Party is, or is
likely to become:
(a) a direct party to the Material Transaction, or
(b) a beneficiary of a guarantee or other transaction which is a Material
Transaction,
unless that Material Transaction is approved by an Ordinary Resolution (such
resolution being subject to the voting restrictions in Rule 6.3) or conditional on
such approval