Co-op Bank Now Demutualised but Name Debate Continues

On Friday, phase 1 of the deal to rescue and demutualise the Co-op Bank was finalised. It was supported at all necessary meetings of classes of creditor and shareholder and approved by the Court. Effective majority control of the Bank has now passed to investors with the issue of new ordinary shares and the cancellation of the Group's existing shares.

However, the question of the Bank's continued use of the word "Co-operative" in its name remains open. Back in early November when the basic effects of the deal were announced, I expressed my views and outlined the relevant legal provisions about its continued use of the word "Co-operative" in its name.

That led to Letters in the print edition of the Co-op News of 19.11.13 to 03.12.13 from my old mate, Iain Williamson, fellow Co-op news scribbler and secretary of the Co-operative Press, and Brian Taylor, long time co-op activist and employee, arguing that it's OK for the name to be used by a PLC 70% owned by investors.

Some readers of this blog may not subscribe to the paper edition of the Co-op News. So here's my reply to Iain and Brian, published in the print edition of 03.12.13 to 17.12.13:

"23rd November 2013

Dear Sir,

Co-op Bank, Co-op Group, The Name and the Brand

Please allow me to respond to the letters that appeared in the print version of the Co-op News of 19th November to 3rd December from Iain Williamson and Brian Taylor.

First, I heartily agree with Iain Williamson's comments on the Bank rescue and the current Group CEO. The leadership  shown by Mr Sutherland and the job that he and his colleagues have done in seeking to rescue what they can from the Bank disaster is excellent. They had a very poor hand in the negotiations and played it very well. We must all hope and pray that the recapitalisation plan is supported by the necessary majorities of each class of creditor and by the preference shareholders on 11th December when they meet.

I also agree with Brian Taylor's comments on the importance of the “Co-operative” brand and its value as an intangible asset, although I think he may have overstated the effect on the share price of a suitable name change for the Bank within a year or two of the recapitalisation.

However, the argument of Messrs Williamson and Jones that the Bank never was a co-operative is disingenuous. While the legal entity of the Bank has long been a PLC, the Co-op Group has always argued that the whole “family of businesses” is one Co-operative family. That was based on the Group’s status as a bona fide co-operative owned and controlled by its corporate and individual co-operative members and, crucially, its 100% ownership of the Bank PLC and the Co-operative Insurance Society.

That is a wholly different situation from  the retention of the name “Co-operative” by a Bank 70% owned by stock market investors. This new situation is a long way down a slippery slope. The recapitalisation deal actually permits the continued use of the name if the Group's stake reduces to 20% and the stake of the investors rises to 80%. The Group is already legally committed not to use the word “co-operative” or any similar word in conjunction with the word “bank” for many years.  That disposal of an aspect of the brand was presumably a necessary price for retaining a 30% stake in the Bank and getting the constitutional entrenchment of ethical values. That is certainly in the interests of all the stakeholders in both the Bank and the Group.

However, the Group is neither the whole UK Co-operative Movement nor the whole global Co-operative Movement. That wider interest requires that only organisations which conform with the ICA definition should be regarded as co-operatives. In many countries that is legally achieved by preventing the use of the name by any entity not registered under a specific Co-operative Law. In the UK we have the flexible and liberal approach of allowing co-operatives to use any business structure that they wish. However, the restriction on the use of the name “co-operative” by business structures other than I & P societies is the legal price paid for that. As I have noted elsewhere, the restriction only applies to new company registrations but there is power to prohibit the use of a misleading name at any time in a company’s life. That explains Paul Gosling’s observation on page 4 of the same issue of the News that a change of name ordered under those provisions is listed in the Prospectus as a risk factor for investors. That shows that the point is not merely “academic”. It is with a heavy heart that I re-emphasise this issue because it is obviously one that is irritating and worrying for the Bank and Group Executives and Boards.

However, the wider interests of cooperatives cannot be ignored and BIS is the ultimate guardian of those interests in this situation as it is the only agency that can force a change. Surely consideration of a transition to another “ethical” name for the Bank within the next couple of years would be helpful to all the bank’s stakeholders - especially the investors who may well have rescued it from oblivion. Such an approach might also help to deal with any process by BIS that results from complaints about the use of the name and could help to  avoid an abrupt forced name change. I appreciate that any change will have be made some time after the recapitalisation plan has been carried out, as the unfettered use of the name by the Bank is the basis on which next month’s votes take place.

I hope that I am acting as a critical friend on this. As Daren Hale implies in his letter on the same page of the News as Brian Taylor’s, an absence of critical debate may have contributed to the development of these problems. We should all try to prevent any repetition of that by encouraging more robust, better informed and sympathetic debate as well as more thorough scrutiny by members and the press of management and boards.

Yours faithfully,

Ian Snaith"

Vince Cable has indicated that, if complaints are received, he will consider requiring that the name no longer be used. That possibility was highlighted in the Bank prospectus as a risk for investors. Surely it is time for the Bank to look at phasing out the use of the word "Co-operative" in the name to deal with that risk?

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Protect the "Co-operative" Name - contact BIS by 22.05.13

It is vital that everyone supports Co-operatives UK's campaign on the Government's proposal to remove the current protection for the use of the word “Co-operative” in the name of a company, LLP, sole trader, limited partnership, or unregistered general partnership. Do that by sending your opinion BY 22^nd May 2013 to catherine.crowsley@bis.gsi.gov.uk

It may be helpful to give some of the technical legal background to the proposal here and to explain its importance to UK co-operatives.

Co-operatives UK's excellent response  to the consultation provides practical evidence and coherent and convincing arguments against the change mooted by the government. I support that 100%. This short post elaborates the background and some of the arguments to complement the Co-operatives UK response.

Why Is Protection Needed?

In the UK legal system there is no requirement for co-operatives to use any particular business structure. Many co-ops use a society registered under the Industrial and Provident Societies Acts 1965 to 2003 (IPSA's) - soon to be renamed Co-operative or Community Benefit Societies Acts. But many co-ops use registered companies and limited liability partnerships because they find them more convenient. It is also possible for co-ops to use a limited partnership registered under the Limited Partnerships Act 1907 or an unregistered general partnership governed by the Partnership Act 1890 for a co-operative, although this is less common due to problems with liability in those cases. While a co-op cannot, by definition, be a sole trader, protection of the name against abuse by sole traders is important.

This freedom to choose any business structure arises from our liberal tradition of business law and has advantages. It allows flexibility and the development of new co-op businesses and initiatives without the constraint of one rigid legal straitjacket. On the other hand, as the whole concept of a co-operative is based on values and principles, some protection of their identity is needed.

The FCA Mutual Registrations team require that any society registered as a co-op under the IPSA's, meets the ICA definition. In the case of other business structures, protection against misuse of the name “co-operative” depends on the legislation now being reviewed by the Department for Business Innovation and Skills (BIS).

These protections are vital to ensure that the public are not misled into believing that they are dealing with a co-operative when they are not. They also prevent the co-operative idea from being tarnished by fraud and abuse.

How Does the Current Protection Work?

The regulation of words used in business names is governed by the Companies Act 2006 and regulations made under it. However, the protection extends to all business structures and not just to companies. How does this work?

Section 55  and Part 41  of the 2006 Act set the system up.

Section 55 requires permission from the Secretary of State (in practice Companies House) for the use of certain words in company or LLP names- See reg 2 of SI 2009/2615  for the application of this to LLP's.

Sections 1192 and 1194 require the same permission for any of those words to be used to carry on business in an unregistered or limited partnership or as a sole trader. They make it a criminal offence for anyone to do that in the UK.

Under The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2009 SI 2009/2615the word “co-operative” is protected from use in a company name, an LLP name, or to carry on business using any unregistered structure.

What Change is Proposed?

The current consultation by the Department for Business Innovation and Skills (BIS) questions whether any of the names on the list in those regulations should remain protected.

It does this by asking whether regulations are necessary at all and, if so, whether they can be “reduced, simplified or improved”.

Why Does it Matter?

In paragraph 39 of the consultation document the rationale for the protection is set out:

“39. All the words specified as “sensitive” and listed in Schedule 1 of SI 2009/2615 (see Annex A) were included to protect the public from being misled by a business’ name as to either its status or the nature of its businesses activities (e.g. charity, co-operative, Institute). However, as language evolves words, which may have been considered worthy of protection at the time, may no longer be considered such a risk”

In paragraph 52 certain names are suggested as being particularly in need of protection:

“52. Those which appear to be particularly important to protect include: Accredited, Bank, Charity, Institute, Insurance, Police and University. Misuse of these words poses a high risk to the general public.”

The internationally accepted ICA Statement of Co-operative Values and Identity  gives a clear focus for the meaning of the word “co-operative” and clear criteria against which to judge a business or person seeking to use the name.

The misuse of the word “co-operative” leads to similar risks to the misuse of the words listed in paragraph 52 (above) of the BIS document.

People may well wish to trade with a firm because it is a co-operative and because the name implies certain standards of behaviour and an ownership structure which protects and facilitates that. For legal structures other than industrial and provident societies, there is no other agency or government body that provides that assurance so the preservation of this protection is essential.

The use of the name is not restricted in the IPSA's because the flexibility to use a range of business structures for co-operatives is beneficial. In addition, to impose such a restriction, primary legislation would be required. Such a change would not amount to a consolidation so it could be achieved as part of the current Law Commission and HMT project.

If the regulations are to be removed or reduced radically, it is essential that protection is retained for the word “co-operative – and extension to the words “coop” and “co-op” is desirable.

Maybe the function could be removed from BIS to the FCA which carries out the same role for societies, or to Co-operatives UK as the custodian of co-operative values in the UK.  However, that would be unlikely to reduce red tape as a different government body would be involved in the process on the registration of a company or LLP and in prosecuting for violations by sole traders or unlimited and limited partnerships.

It makes sense for the function of approving the name to remain with the body involved in company and LLP registrations and for the prosecuting function to stay with the same body.

UK International Obligations

The International labour Organisation in its Recommendation 193 of 2002 makes clear the expectation that states who have signed up to the ILO Convention will promote co-operatives. That applies to the UK.

Paragraph 7(2) of the recommendation provides that:

"Cooperatives should be treated in accordance with national law and practice and on terms no less favourable than those accorded to other forms of enterprise and social organization."

To fail to protect the identity of co-operatives taking advantage of the flexible system of business structures in the UK would fail to meet that requirement.

Under paragraph 10 states are to adopt  legislation and regulations on cooperatives guided by the cooperative values and principles. The removal of the protection afforded by the UK Business Names rules would fail to do that.

Given that governments are also urged in paragraph 10 "to consult cooperative organizations in the formulation and revision of legislation, policies and regulations applicable to cooperatives", the submission of Co-operatives UK should carry particular weight.

As a member state of the European Union, the UK should also have regard to the European Commission's Communication of 23rd  23.02.2004 (COM(2004)18) on the Promotion of Co-operative Societies in Europe. In paragraph 3.2.4. the Commission emphasises the importance of  the co-operative definition, values and principles set out by the International Cooperative Alliance (ICA) in 1995, and refers to their endorsement by the UN and the ILO. It goes on the state:

"Consequently national legislators should be based on the co-operative definition, values and principles when drafting new laws governing co-operatives. In this context however Member States  are required also to be sufficiently flexible in order to enable co-operatives to compete effectively in their markets and on equal terms with other forms of enterprise."

That Communication has been endorsed and applied by the European Court of Justice.

This all shows that the removal of the protection of the word "co-operative" would be a violation of the principles expressed by the EU, the ILO and the UN. This adds weight to the campaign on this issue.

What To Do

You can help :

• Check out the Co-operatives UK draft response  and
• email your own to catherine.crowsley@bis.gsi.gov.uk 
• Write to your MP

BY 22^nd MAY 2013

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