Why Co-ops can have corporate directors

Last April Dave Hollings of Co-operative and Mutual Solutions Limited asked me two questions. He's kindly given me permission to shares the Q & A's on here.

Both questions are about co-operative societies. Apparently they were raised by a co-operative consortium planning to operate across national boundaries. there's currently lots of interest in that model in the worker co-op sector. For example, both Altgen and uniteddiversity are working on developing the model.

Question 1 was answered in my last post. Here's question 2:

2. Whilst the Act says clearly there can be corporate members, can there be corporate directors as in Companies?

Yes:

A corporate body can be a member of a society - s32 CCBSA 2014.

A "person" can be a committee member - s 30(3) CCBSA 2014.

In any Act "unless the contrary intention appears", the word "'Person” includes a body of persons corporate or unincorporate" - s5 & sched 1 Interpretation Act 1978. Therefore the answer seems to be "yes".

Ian Snaith 2015

 

Need Co-op Shares Be in GB£?

 Last April Dave Hollings of Co-operative and Mutual Solutions Limited asked me two questions. He's kindly given me permission to shares the Q & A's on here.

Both questions are about co-operative societies. Apparently they were raised by a co-operative consortium planning to operate across national boundaries. there's currently lots of interest in that model in the worker co-op sector. For example, both Altgen and uniteddiversity are working on developing the model.

This post is on Question 1 the next one will be on Question 2.

Q 1 Does the minimum shareholding have to be in pounds or could it be in US dollars?

It would be interesting to designate share capital in US dollars (or any other currency) to see whether the FCA raise a problem on registering the rules but we can't be sure of the outcome until a court (or the FCA on rule registration) come down on one side or another. Anyone know of a society already registered with shares not in £GB?

Here's why: There is no direct law on societies as far as I know. However, the leading Company Law case, Scandinavian Banking Group PLC says that company shares can be in any currency or different classes in different currencies so long as a PLC has enough in sterling to meet the minimum of £50,000 that they are required to have issued - because that has to be in sterling.

By analogy, the argument against allowing non-sterling shares in a society is that the maximum holding in section 24 is expressed in sterling. However, that only applies to withdrawable shares so maybe non withdrawable shares could be designated in e.g. US Dollars. The problem with that is that sections 37 to 40 dealing with nominations of shares by members and other transfers on the member's death impose a limit stated in the Act in sterling. Maybe that means that all shares have to be designated in sterling so that those limits are clear.

On the other hand, the reason for the problem with the PLC £50,000 limit was that the EU Directive requires the limit to be set in national currencies and it has prioity over conflicting national law (pp 103-104 attached judgment). Society law is unaffected by any EU Directives in this area therefore that argument does not apply to them and maybe the courts would be willing to allow any currency to be used as they do for other purposes as is explained in the Scandinavian Banking Group case (attached). The rest of the judgment shows courts willing not to let the tail (e.g. amount required to requisition meeting) wag the dog of allowing shares in other currencies (p 104 paras B to E). That argument could be applied to sections 37-40 of the CCBSA 2014 in our context. That is in line with the courts' wish to be liberal when it comes to facilitating commerce.

Ian Snaith 2015

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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Collection of Information on Co-op and Bencom Law Reform 2013-2014

Yesterday the full text of the Bill to consolidate the law was published for consultation in draft form. Go here to see all the material for consultation.

To bring it all together I've done a dedicated Law Reform Page at www.iansnaith.com .

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This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

Mutuals' Redeemable Shares Bill 2013: The Detail

On Monday afternoon Lord Naseby introduced a private members' bill in the House of Lords which will, if passed, be very helpful to co-ops, friendly societies and mutual insurers. It removes some of the technical legal obstacles that limit their use of shares to raise capital. This Bill lays the essential legal foundations to make capital more easily available to co-operatives, friendly societies and mutual insurers.

The Bill is a vital part of the improved legal infrastructure being developed for mutuals over the next year or two. That includes the new Co-operatives and Community Benefit Societies Bill, increased limit on withdrawable share holdings in and regulations to apply the administration procedure to those societies (Budget 2013 at para 2.260), commencement of the Co-operative and Community Benefit Societies and Credit Unions Act 2010, and the publication of new FCA Guidance. For more information on those developments download the mp3 and listen to my Co-operatives Fortnight Lecture and follow the slides for it.

The Bill also complements the valuable work of the Co-operatives UK and Locality  Community Shares Unit (funded by the UK Department for Communities and Local Government) which makes the use of IPS shares available as a concrete reality on the ground and promotes best practice and investor protection.

The Mutuals' Redeemable Shares Bill has been promoted by Mutuo and the information from them on it can be found here. The Co-op News has also given the new Bill considerable coverage.

To access a full copy of the Bill and follow its future progress go here.

This post explores the rationale and effect of the various clauses of the Bill as it stands at its First reading in the House of Lords. I must declare the interest that I took part in the initial drafting of this Bill on a paid basis for Mutuo through DWF LLP.

Why is the Mutuals Redeemable Shares Bill needed?

The Bill addresses a number of problems faced by different types of mutuals when it comes to using share capital to raise funds.

For friendly societies, it would for the first time permit societies registered as corporate bodies under the Friendly Societies Act 1992 to issue shares - see clauses 1(1) and 5.

For mutual insurers, it would allow those using either a company structure or a structure based on their own private Act of Parliament to issue shares - see clauses 1(1) & 5. Currently a company limited by guarantee, the structure used by some mutual insurance companies, may not have share capital if it was registered after 1980 - Companies Act 2006 s5

For industrial and provident societies, the problem is about the possibility of exit for holders of shares that are not defined as "withdrawable". Since  January 2012 when the limit on holdings of nonwithdrawable society shares was removed, there has been interest in exploring the use of such shares. However, it is likely that the old Company Law "Rule in Trevor v Whitworth" would apply to such shares to prevent their purchase or redemption by the society itself (see the Hayes vs Snaith debate for the arguments on this). That means that people holding non-withdrawable shares in societies need to transfer them to other people to recover their investment. That severely limits the effect of the liberalisation of the holding limit.

How The Mutuals' Redeemable Shares Bill would Work

Like the previous private members' Acts used to improve the law for co-operative or mutuals in the UK in 2002, 2003, 2007 and 2010, this Bill, if it becomes law, will empower HM Treasury to change existing legislation by the use of secondary legislation to permit the use of redeemable shares.

That means that if the Bill becomes Law, its effects will still depend on the preparation of one or more Statutory Instruments, consultation on them, and a resolution of each House of Parliament to approve them under the affirmative resolution procedure - clause 1(3). That will all take time.

The Nature of Redeemable Shares

The Bill proposes that redeemable shares in an IPS may be transferable but not withdrawable - clause 1(2)(a). That leaves the society's rules or the terms of issue to decide on the details of the rights attached to the share, subject to other provisions of the Bill, as long as the share is not withdrawable. That will permit the use of redeemable shares without limit on the value held. For friendly societies and mutual insurers, that question is left to the regulations to be issued by HMT to permit such shares - clause 1(2)(b) & (c).

When will it be possible to redeem the shares? That will be found in the terms of issue of the shares and there is flexibility about those terms. It can be a date fixed there, a date worked out as the terms provide, or a date chosen either by the mutual or the holder of the share - clause 2(1).

After redemption, there will have to be at least one share left which is neither withdrawable nor redeemable - clause 2(4). This reflects the equivalent Companies Act provision on redeemable shares and ensures that there will always be at least one share in the mutual which has not been redeemed.

Other terms of redeemable shares, e.g. par value, number issued, minimum and maximum holding, and detailed provisions for redemption, can be left to the mutual's board as long as either the mutual's constitution or a members' resolution allows that, otherwise the mutual's constitution must itself set out those terms - clause 3(1) to (4).

Protecting Mutuality

The decision on whether to issue redeemable shares will have to be to be made by members - the mutual's constitution must allow it and may restrict the use of them - clause 2(3) & (4). That means the members will have to decide whether or not to allow their use and can define the limits within which they can be issued. This protects basic member control.

In addition, the Bill requires that redeemable shares:

    
• are held only by members

    
• entitle the member to only one vote regardless of how many shares they hold

    
• only give the holder a level of return allowed by the constitution of the mutual

    
• can be redeemed only at nominal (par) value with no other bonus or right to participate in surplus

- Clause 1(2)(d)

The Bill also prevents the use of redeemable shares for demutualisation. It limits the voting rights of anyone who gains membership only by holding a redeemable share as they cannot propose or vote on a resolution to convert the mutual into a company - clause 4. So even the one vote the member has cannot be used in that way. On the other hand, a user-member of the mutual who happens to hold a redeemable share will still be able to use their single vote on any demutualisation proposal.

Protecting Creditors

The basis for the Rule in Trevor v Whitworth that  prevents corporate bodies from buying back or redeeming their own shares is creditor protection. People who lend or give credit to companies and other corporate bodies, whose owner-members have limited liability for business debts, take the risk of business failure. However, if that happens and the business is wound up, there is a clear order of priority among the creditors for a share of the remaining assets. The rights of holders of shares are postponed and they get nothing until all the debts and costs of the insolvency process have been paid. If the company buys back its shares or redeems them and then is wound up the holders of shares may have jumped the queue. as a result the courts refused to allow companies to do that.

Over the years, parliament relaxed that rule and the current position is that, so long as certain procedural safeguards and rules about funding the redemption or buy back are observed, a buy back or redemption of shares is allowed. Those safeguards can be found in sections 658-737 of the Companies Act 2006.

Broadly, the redemption or purchase must be out of distributable profits or the proceeds of a new share issue. However, in the case of a private company, if sufficient funds are not available from those sources, shares may be redeemed out of capital, as long as the directors and auditors formally report on the solvency of the company, the redemption is approved by a special resolution and public notice is given of the redemption out of capital. It is then open to any shareholder who voted against the resolution or any creditor to apply to the court for the resolution to be cancelled.

Clause 3(5) of the Mutuals' Redeemable Shares Bill 2013 allows regulations to apply the same protections where redeemable shares are issued by mutuals.

A Vital Development

We must hope that this Bill succeeds in its passage through the two Houses of Parliament despite being a private members' bill.

It deals with a basic legal problem for co-operatives and bencoms and extends the ability of friendly societies and mutual insurers to raise capital. It also represents an important level of co-operation between those different but related mutual sectors. It's important that everyone rallies in support of it.

So write to your MP to support it.

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Hear the 2013 Co-op Fortnight Lecture and Discussion

Here is a recording of the Co-op Fortnight Law Lecture and Discussion in mp3 form for you to download if you have an hour to spare or trouble sleeping.....If you look at the slides while listening, it may make more sense.
Thanks to the UK Society for Co-operative Studies, DWF LLP and Co-operatives UK for the support and to the audience for good questions and a vigorous discussion in the finest traditions of Co-op Debate.
© Ian Snaith 2013 This work is licensed under the
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International Co-operative Alliance UK and Blueprint

This link gives an up to date account of the relationship between the ICA's Blueprint Plan on legislation and this year's UK developments. Essentially, we have the consolidation which it is hoped will become law by late 2013 (see My Blog Entry of early 2012) and the 2013 Budget announcement of a plan to review the limit on holdings of withdrawable share capital in societies and to look at applying insolvency rescue procedures to societies - as recommended here. See Linda Barlow's Blog for an outline of the implications.

As usual with Budget announcements, the announcement was thin on detail:

"2.260 Co-operatives legislation – The Government will consult in summer 2013 on options for raising the limit on individual subscriptions for Withdrawable Share Capital in Industrial and Provident Societies (IPSs) and introducing insolvency procedures for IPSs and credit unions."

See Budget 2013 at page 94.

So now we await the consultations in the "Summer" .....and maybe a Draft Consolidation Bill earlier than that?

© Ian Snaith 2013 This work is licensed under the Creative Commons Attribution-NonCommercial-Noderivs 2.0 England and Wales Licence. To view a copy of this licence visit http://creativecommons.org/licenses/by-nc-nd/2.0/uk/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA