Co-operatives may need to raise capital, from time to time, to meet the needs of its business, to deliver value to members and carry out its purpose. There are a variety of ways to do so (see our previous article here), but below we focus on the issue of co-operative capital units (or CCUs).
CCUs are a form of “hybrid security” unique to co-operatives and are governed under the Co-operatives National Law and the Co-operatives Act. CCUs grant an interest in the capital, but not the share capital of the co-operative. Similar to having a “share” in property or a unit trust, CCUs are personal property which are capable of being transferred (or not) in accordance with the Rules of the co-operative. As CCUs do not carry with them most of the usual member entitlements, including importantly the right to vote at meetings, the issue of CCUs do not alter the “ownership” of the co-operative. We do note that CCU holders may vote on proposals which concern the rights of the CCU holders themselves. The issuing of CCUs must be pre-approved by the Registrar and the members (discussed below), and disclosure requirements apply.
The redemption of CCUs may only occur out of profits or proceeds from a fresh issue of shares or CCUs. However, you can structure CCUs to be non-redeemable and dividends paid out instead of interest and repayment of the face value of the CCU. If the co-operative is wound up, the natural order of priority is that CCU holders are ahead of shareholders and members.
If CCUs are issued to those who are not members of the co-operative, the disclosure regime under the Corporations Act 2001 (Cth) will apply. This regime imposes varying restrictions on the issue of CCUs, such as the need for a more detailed offer information statement or prospectus regarding the financial prospects of the co-operative (with certain exceptions such as for small scale offerings) and a prohibition on practices deemed to be market misconduct.
The issue of CCUs requires:
The terms of issue must include certain details such as the entitlement to interest, whether the CCUs will have different classes, repayment provisions, rights to dividends, and should also deal with the “dilution protocol”. The dilution protocol refers to the rights and restrictions on transfer of CCUs as well as further issue of CCUs, as the transfer or further issue may affect the liabilities of existing CCU holders.
The terms of issue of the CCUs will be commercial decisions for the co-operative to make. Careful consideration must be given as to how CCUs will be structured and issued as this will affect the level of investor interest in the proposal and member approval of the proposal.
The key advantage of using CCUs to raise capital is that it allows for external equity and additional investment while maintaining democratic member control – the issue of CCUs does not dilute the “ownership” of the co-operative. It also allows members to retain equity on repayment, subject to the terms of issue.
The key disadvantage is that CCUs do not attach voting rights in the same way that equity financing normally does, greater limits placed on the issuance of CCUs may reduce take up. The ability for the CCUs to be traded on a secondary market and ranking CCUs ahead of share capital in the event of liquidation of the co-operative may help provide certainty for the investor and increase CCU purchase.
CCUs will be different for each co-operative, as the terms of issue will need to suit the risk and rewards that apply to the co-operative’s business. Legal and financial assistance should be sought if you are contemplating a capital raise to ensure the structure is “right” for your co-operative. If you would like to explore issuing CCUs or require further advice, please don’t hesitate to contact our Business and Commercial Team at 02 6274 0999.
First published on 24 October 2023.