While business ventures invariably begin with a sense of goodwill between parties, disputes between business owners are unfortunately all too common. This rang true for the owners in the case of Campbell v Backoffice Investments Pty Ltd.
For a co-operative to flourish and grow over time, it requires capital to meet the needs of its business, to deliver value for its members and to carry out its purpose. Just like any other business, planning and consideration is needed to identify the amount of capital, and the most appropriate method of raising capital.
Broadly speaking, co-operatives can source funding through share issues, debentures, co-operative capital units (CCUs), or other external means (think bank loans and government grants like any other entity).
Only co-operatives who have shares on issue, are allowed to issue new tranches or classes of shares (i.e non-distributing co-operatives without share capital would need to change their structure to allow for the issue of shares). All shares in a co-operative have a fixed value, shares can only be issued to members, and there is a key restriction that prevents a member from holding more than 20% of the issued share capital. Hence, the issue of shares can be limiting.
Under the Co-operatives National Law and the Co-operatives Act (depending on your jurisdiction) there are also disclosure requirements associated with share issues that require pre-approval from the Registrar.
While there are some limitations, shares in a co-operative can be issued in different classes and have different rights attached to them. For example, a co-operative centred around producing fruit may issue shares to fund the construction of a warehouse, where the shares also give members the right to store produce in the warehouse for discounted rates, but also issue ordinary shares which merely entitle members to rebates on the amount of business transacted with the co-operative (regardless of where the produce is stored).
Of particular note is that shares in a co-operative are repayable upon a member’s exit, and the Board must plan for that eventuality. However, co-operatives have up to one year to repay members, and may substitute the payment with the issue of another security such as debentures or CCUs (effectively delaying the repayment time).
The amount of potential funding is limited by the member profile of the co-operative, and their willingness and financial ability to purchase shares. A co-operative may require a member to purchase new shares (through a compulsory share issue) but only after a resolution is passed by a special postal ballot of the members, but this may be a divisive option amongst members and members can choose to leave the co-operative in the two-week “opt-out” window after the resolution. There should always be caution in using a ‘compulsory’ approach to capital, and communication with members is key.
Another option for a co-operative is to issue debentures, which is essentially a promise to repay the money borrowed from the ‘debenture holder’ with interest. There is no need for debentures to be secured against the assets of the co-operative (although they can be) which might make for an attractive proposal from the Board’s perspective.
Debentures can be structured to present attractive investment opportunities without the limitation of shares, particularly because of the enlarged pool of potential investors, but the co-operative must have a plan to redeem the debentures at the end of their term.
Debentures can be issued to members and non-members, but care needs to be taken as the disclosure requirements for non-members are higher than for a ‘member only’ debenture issue. A debenture holder that is a member of the co-operative may request a disclosure statement containing information about the financial prospects of the co-operative before taking up debentures. For non-members the disclosure regime under the Corporations Act 2001 (Cth) will apply.
CCUs are a form of “hybrid security” which are unique to co-operatives in that they allow co-operatives to raise capital without compromising the rights and control of the co-operative by the members. CCUs do not carry a right to vote in the business of the co-operative. CCUs can be structured to act more like equity or a loan/debenture arrangement, so this gives a co-operative flexibility in how it wants to structure the rights attached to the CCU.
As with debentures, CCUs can be issued to members and non-members but again, care needs to be taken. The Registrar’s pre-approval to the issue of CCUs is required, as is a special resolution of the members. For members, the disclosure regime is contained within the Co-operatives National Law and the Co-operatives Act. If you are issuing CCUs to non-members, the Corporations Act 2001 (Cth) disclosure regime will apply.
Like all businesses, co-operatives can also borrow from financial institutions or seek grant funding or loans from the government. Similarly, they may also seek a loan arrangement voluntarily or compulsorily from its members, although the legislation imposes some restrictions on those loans and the loan process.
If you would like more detailed advice on the most suitable means of raising capital for your co-operative, please don’t hesitate to contact our Business and Commercial Team at 02 6274 0999.
First published on 21 July 2023.