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Demutualisation of co-operatives in Australia

In an article published on the australia.coop website in July 2003 titled Stopping Demutualisation, Co-operatives Victoria secretary David Griffiths put the following question: Should Government legislation be introduced to stop any further demutualisation in Australia?

Introduction

In his article, Griffiths uses the recent attempts by Warrnambool Cheese and Butter Factory (WCBF) and PIVOT to list on the Australian Stock Exchange to argue that legislative action is needed to stop the further 'demutualisation' of co-operatives in Australia.

This paper puts the case that:

  1. WCBF and PIVOT are not typical of most Australian co-operatives and are not good examples to illustrate how current laws make it possible but difficult for a co-operative to 'demutualise'.
  2. Recent reforms to Australian co-operatives law makes it unnecessary for the state to prohibit the 'demutualisation' of co-operatives, and
  3. It is inappropriate for the state to intervene on this matter, as it would be inconsistent with the co-operative principles.

Co-operative companies

Both WCBF and PIVOT are unlisted public companies registered under the federal Corporations Act, and are not subject to Australian co-operatives law. They were formed as 'co-operative companies' before Victoria's first co-operatives act in 1953.

Unlike co-operatives, companies do not have an in-built exit mechanism for non-user (inactive) shareholders. While originally co-operative in character, the inability of WCBF and PIVOT to remove inactive shareholders has led, over the years, to an increasing number of investor shareholders compared to user (active) shareholders. This has contributed to the pressure to list on the stock exchange.

The situation above also occurred in agricultural co-operatives until 1987 in NSW, and 1997/98 for most other states. New co-operatives legislation in those years introduced a compulsory exit mechanism called active membership, which removes non-users from membership.

Active membership, together with other reforms, has been effective in virtually stopping Australian co-operatives from becoming listed public companies.

Had WCBF and PIVOT been registered under co-operatives legislation instead of the Corporations Act, the proposals to list on the stock exchange may never have occurred.

WCBF and PIVOT are not mutuals

The argument that WCBF and PIVOT were about to 'demutualise' is a nonsense. Neither can be classified as mutuals, as both companies have user and investor shareholders.

A mutual is an organisation where there is a complete identity between the participants in the entity and its members, and where the entity's income is derived from members.

In Australia, mutuals come in many forms (trade unions, clubs, credit unions), and are incorporated under a variety of legislation, both state and federal.

A co-operative is just one of a number of legal entities available for people and businesses to form mutual organisations. Other entities include incorporated associations and companies limited by guarantee.

Housing co-operatives, for example, are mutuals - only tenants may be members, all tenants must be members, and income is derived from members. Similarly, credit unions are mutuals - only savers can be members, all savers must be members, and income is derived from services to members. Some buying co-operatives are also mutuals.

Not all Australian co-operatives are mutuals because they provide services to both members and non-members. For example, buying co-operatives which run retail outlets are not fully mutual as some customers may not be members. Similarly, some health services co-operatives are not fully mutual because they provide health services to both member and non member patients, and derive their income from government sources as well as members.

In contrast, agricultural marketing co-operatives and worker co-operatives are not mutuals at all, as they do not derive their income from members but from customers who are not members.

UK Co-operatives and Community Benefit Societies Bill

Griffiths refers to the UK Co-operatives and Community Benefit Societies Bill as an example of using government legislation to stop further demutualisations in Australia.

The Bill contains provisions enabling the UK Government to make regulations under which community benefit societies could be permanently prevented from any use of or dealing with their assets except for the benefit of the community, and also prohibit the conversion of the society to a company or the transfer of its assets to another body.

Although they are covered by the same legislation, co-operatives differ from community benefit societies. A co-operative conducts its business in the interests of its members, whereas, community benefit societies (bencoms) trade for the benefit of a wider community, rather than just their own members. Bencoms include housing associations and some social and sporting clubs.

Crucially, the UK parliament did not extend the provisions to apply to co-operatives, in recognition that they are self-help and democratic organisations. Click here to access the second reading speech of the Bill in the UK House of Commons.

Co-operative values and principles

Griffiths claims that the process of demutualising a co-operative and the demutualised outcome are inconsistent with co-operative values and principles. He fails, however, to substantiate his claim with examples of which values and/or principles prohibits the 'demutualisation' of a co-operative. This is because there is no such prohibition.

The co-operative principles describe co-operatives as autonomous organisations, which gives members the right to choose for themselves the best structure to meet their needs, including changing to a company or some other corporate body, merging with another co-operative or even winding up.

Industry support for status quo

Griffiths correctly stated that in order for a co-operative to transfer incorporation, a special resolution by way of a postal ballot is required to be passed by 75% of those members who vote. In addition, a disclosure statement, approved by the Registrar of Co-operatives, must be given to members in relation to a proposed resolution.

While the above provisions are 'imposed' by government through legislation, it was the co-operative sector that requested the stricter requirements for transfer of incorporation. Under previous co-operatives law, members could pass a special resolution for a such a transfer at a general meeting (not a postal ballot), with the same majority of 75% of members who vote, but without a disclosure statement.

The idea of a prohibition on the transfer of incorporation to a company was canvassed with and rejected by the Co-operatives Council of Australia and state co-operative federations in the 1990's during negotiations with government on the development of the Victorian Co-operatives Act. The author understands that neither the Council nor the state federations have changed their position on this issue.

Inter-generational equity

Griffiths refers to the issue of inter-generational equity as an important consideration to demutualisation. He questions whether contemporary members of a co-operative should be able to appropriate for themselves the assets created and built up by previous generations of members.

In Australia, co-operatives can be formed as either not-for-profit organisations (non distributing co-operatives) or commercial enterprises (distributing co-operatives).

Most mutual co-operatives are non distributing co-operatives, which are prohibited by legislation from distributing surplus funds to members from profits, reserves or upon winding up. Inter-generational equity, therefore, is not an issue for non distributing co-operatives as contemporary members cannot profit from previous generations.

In contrast, distributing co-operatives are formed by individuals and businesses to derive an economic benefit from either the purchase or sale of goods and services.

Agricultural co-operatives, for example, exist to improve the profitability of farm enterprises that are its members, with primary producers making the decision to invest in a co-operative as a more profitable alternative to making an investment within his or her own business.

The inter-generational equity issue developed for distributing co-operatives as a result of earlier co-operatives legislation not reflecting the co-operative principle of member economic participation. The principle requires that the economic results arising out of operations belong to the members who contributed to those results.

Until the 1990's, there was no mechanism in Australian co-operatives law for distributing co-operatives to equate members' shareholding with the asset value of the co-operative. This resulted in a number of older co-operatives accumulating reserves which could not be distributed to members who built the reserves, except upon winding up or conversion to a company with shares.

This weakness, together with some co-operatives having many inactive shareholders, created the environment where attempts were made in the 1980's and 90's, some successfully, to convert co-operatives into listed companies.

Recent changes to Australian co-operatives law has effectively negated one of the main reasons used to justify converting a co-operative to a listed company - unlocking the value of members' shares.

Distributing co-operatives now have the power, subject to member approval, to issue bonus shares from surplus funds or from the revaluation of a co-operative's assets. This allows members to share in the economic growth of the co-operative, built up by their patronage from when they first joined to when they cease membership.

By this means an active member upon ceasing membership will be in a position to agree that they have been treated fairly in accordance with the principle that the economic results of a co-operative are to be distributed in a manner that avoids one member gaining at the expense of others.

Conclusion

As demonstrated above, WCBF and PIVOT are not typical of most Australian co-operatives and therefore are not good examples to argue the case for legislative action to prohibit 'demutualisation' of all co-operatives.

The failure of Griffiths to give any examples of co-operatives having recently 'demutualised' highlights that WCBF and PIVOT are special cases borne from limitations imposed by the Corporations Act on co-operative type organisations, not of any failure to adhere to the co-operative principles.

Recent reforms to Australian co-operatives legislation initiated by the co-operative sector has virtually stopped co-operatives from becoming listed companies. This has occurred not through legislative prohibition, but through greater transparency and promoting the principles of democratic control and member economic participation.

Inter-generational equity should no longer be an issue if directors and members exercise the powers under co-operatives law to ensure that members are treated equitably in accordance with the principles.

But most importantly, it is not appropriate for the state to restrict the ability of co-operative members to exercise their democratic rights on how they should conduct their own business. To do so would be inconsistent with the co-operative principles.

Therefore, in response to Griffiths' question: Should Government legislation be introduced to stop any further demutualisation in Australia?, the answer must be no.

Tony Gill
26 July 2003

 
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