Raising capital in mutuals – legislating for change

By their very nature, co-operatives and all other types of mutuals are limited in how they can raise capital. Like all businesses, they can retain profits and can...

By their very nature, co-operatives and all other types of mutuals are limited in how they can raise capital. Like all businesses, they can retain profits and can borrow against future earnings, but they have no equity shareholders so do not have access to this type of prime capital.

Mutuals were not designed with capital investors in mind. They exist to serve their members who will be customers, employees or defined communities. Where members have contributed capital to their mutual enterprise, it is not in order to speculate for gain but is out of necessity in fuelling the business.

Large mutuals are thus created patiently, and over a long time – requiring sustained periods of business success to grow. The lack of external capital is sometimes cited as a strength in the process of building patient, risk averse mutual businesses, which can concentrate on the job in hand, rather than the short term needs of capital investors. However, it can also limit their flexibility in adapting to new market conditions, securing maximum investment in the business and their ability to grow through acquisition. 

These restrictions are well known and mean that the debate around capital in mutuals is not new. To date however, in the UK at least, mutuals have not made significant alterations to their basic capital framework, which was designed more than 150 years ago. The reason for this is that mutuals have been wary of introducing external capital into their business for fear that it could subvert the purpose of the firm and could lead ultimately to demutualisation in extreme cases. 

The challenge therefore is to amend the capital regime in mutuals to permit the injection of external capital, while safeguarding both the core purpose and mutual integrity of the business. We can point to existing examples of where this has been achieved in other countries such as Canada and the Netherlands.

Now, in the UK, the Mutuals’ Redeemable Shares Bill seeks to make the necessary legislative changes to permit mutuals to access additional capital, while safeguarding their mutual purpose and status. This legislation will facilitate growth in the mutual sector and increase competition with proprietary businesses.

New shares would be created which provide an option for institutions and individuals seeking to diversify their investment portfolio.

The shares will be fixed term shares, commonly not transferable but redeemable by the issuing mutual. Mutuals may in due course construct internal trading schemes for some types of shares to promote greater liquidity.

Redeemable Shares would entitle the holder to:

  • membership of the mutual
  • one vote as a member, however many shares were held
  • such level of interest as was payable under the rules
  • repayment of the capital at par at the end of the term, or sooner if the society was wound up

The Mutuals’ Redeemable Shares Bill would create a legal framework for these shares to be issued. The Bill will also provide powers to make regulations to deal with the detailed implementation of such schemes. Such powers would be exercised under the affirmative resolution procedure of both Houses of Parliament.

In summary, the Bill will:

  • Create an optional new and additional class of redeemable share through which specified mutuals can raise additional funds.
  • Provide consequential rights to specified mutual society members.
  • Restrict the voting rights of certain members who hold only redeemable shares, so that they cannot participate in any decisions to transfer, merge or dissolve the mutual.

Mutuo has produced this draft Bill with the assistance of leading co-operative and friendly society/mutual insurer lawyers, Ian Snaith of DWF LLP and John Gilbert of Hogan Lovells LLP.

On 22 July, Rt Hon Lord Naseby presented the Bill in the House of Lords as the first stage in its Parliamentary journey. Lord Naseby is a long standing supporter of mutuals in Parliament; Vice Chairman of the All Party Parliamentary Group for Mutuals; and a former Chairman of Tunbridge Wells Friendly Society.

As readers will appreciate, this is a complex undertaking, requiring skilled Parliamentary and legal expertise in order to build a cross-party consensus in support of this new law in both Houses of Parliament, with HM Treasury and with prudential Regulators.

Mutuo has assembled an experienced Bill team to take forward this work, and now need the support of all mutual business to help to steer the Bill to Royal Assent by helping to resource the Bill team and provide their expert input. 

A significant effort is required to give this Bill the best possible prospect of success, and this really requires the active assistance of those businesses that will ultimately benefit from it.

• Readers can immediately participate in this effort by logging onto the Mutuo website and joining the campaign to lobby for Parliamentary time to be allocated to this Bill. We hope that all readers and mutual businesses will feel able to support this exciting initiative, and wish to play an active part in charting the future of the mutual sector.

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