Capital Raising – things are about to get Mutually friendly!
Co-operative and mutual enterprises account for approximately 8.3% of Australia’s GDP when including the member-owned super funds, and eight in ten Australians are a member of at least one co-operative or mutual business. Operating across the economy from health care to motoring services, in banking and finance and insurance services, social services to retailing, these businesses are a staple in the Australian economy.
Historically mutuals have had difficulties in raising capital without jeopardising their mutual status. Mutual enterprises are incorporated as public companies under the Corporations Act 2001 which must have a special constitution that imports the co-operative principles and provides for one member-one vote, democratic governance and a community driven ethic. The members of mutual enterprises are its customers.
In July 2017 the Report on Reforms for Cooperatives, Mutuals and Member-owned Firms (commonly known as the Hammond Report) was handed down. The report set out eleven recommendations which aimed to improve access to capital, remove uncertainties facing the mutual sector and reduce barriers to enable cooperative and mutual enterprises to grow.
On 4 October 2018 the Government released draft legislation for consultation to give effect to two of the eleven recommendations by:
- introducing a definition of a ‘mutual entity’ into a new section 51M of the Corporations Act 2001; and
- amending what the trigger event is which requires a company to disclose a proposed demutualisation in Schedule 4 of the Corporations Act 2001.
The amendments will address the lack of recognition and understanding of the mutual sector, make it easier to determine when an entity has or is intending to “demutualise”, and to allow mutual entities to raise capital without risk of demutualisation or the risks associated with a failure to adhere to the disclosure provisions (which are civil penalty provisions).
To date, mutual enterprises have been restricted in the ways they could raise capital to avoid triggering the demutualisation provisions. The Corporations Act 2001 currently provides that if there is a proposed constitutional change or share issue, which may vary or cancel a member’s rights in respect of shares, then the company must disclose ‘the proposed demutualisation’ (even if that may not be the intention of the company).
The proposed legislative amendments would make it clear that the disclosure provisions are only triggered if a constitutional change would result in a mutual entity no longer being a ‘mutual entity’. Provided the mutual entity retains its “one member-one vote” requirements, it remains a mutual entity.
While there are still restrictions on the process of capital raising, as Melina Morrison, chief executive of the Business Council of Co-operatives & Mutuals has said, “this will ensure there is genuine competition for member-owned business to compete with the big corporates and create real competition to benefit all Australians”.
If you have any questions about the proposed changes or mutual enterprises, please get in touch with our Business Team.