Canadian co-operators want law change to prevent repeat of MEC demutualisation

‘Without any changes to the regulations, we should expect to see other co-ops suffer the same fate in the years ahead’

Eighteen months on from the shock sale and demutualisation of outdoor retailer Mountain Equipment Co-op, calls are being made for legal reform to save other co-ops from the same fate.

Steve Jones, a former member of the co-op who went on to join the SaveMEC campaign, is calling for a change in the law of British Columbia province, which he says contains a loophole which allows a co-op board to sell and demutualise the business without consulting members.

In a blog post, he highlights a “single line in the BC Cooperative Association Act which I believe is the crux of the issue.” This clause states that an “association must not dispose of the whole or substantially the whole of the undertaking of the association unless the disposition is authorised by a special resolution of the members.”

But, he adds, “there is a catch. If a large company, including a co-operative, experiences financial stress, they can make a petition to the court for protection under the federal Companies’ Creditors Arrangement Act (CCAA). The CCAA then takes priority over provincial regulations. By necessity, the CCAA gives the court significant power, including the ability to authorise a sale or disposition without shareholder approval.”

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“When it was announced that the co-op was being sold without members having a chance to put forward a recapitalisation plan, politicians across the country expressed their concern,” he writes. “I was optimistic that these same politicians would take steps in the aftermath to review the regulations that allowed this to happen. I have been communicating with the provincial government but unfortunately they remain unwilling to consider a review of the Co-operative Association Act.”

And he warns: “Without any changes to the regulations, we should expect to see other co-ops suffer the same fate in the years ahead.”

Mr Jones says he is not looking for the powers granted to the court under the CCAA to be reduced. Rather, he thinks “the only change that is needed is for members to be notified when the board engages in meaningful discussions related to the sale or disposition of the business. This would allow the members to participate on a level playing field to assemble a plan for the recapitalisation of the business.”

This would have helped the members of MEC, he says, claiming they were kept in the dark for three months about the business’s financial troubles and the negotiations with potential buyers. “By the time members were made aware of what was happening, it was too late to put together a bid to save their own co-op and it was sold out from under them.”

Members learned of the sale in September 2020; Mr Jones argues that had they been notified in June, when negotiations to sell the co-op began, “I am confident that … the member plan would have been the superior option and the co-op would still exist today.”

He adds: “An argument was made that the board could not have provided notice to members in June because it may have led to business disruptions … Suppliers may have refused to ship product without pre-payment if they knew the co-op was at the verge of failure.

Related: After LV= escapes demutualisation, what does it – and the mutual sector – do next?

“I believe the counter argument is simple. When that is the case, the co-op should petition for protection at the same time they provide notice that they are entering a sales process. Once under CCAA protection, the court is able to designate key suppliers and require them to continue to provide shipments to the business. Although this means the sales process will occur under the protection of the CCAA … it will allow members to prepare a plan on the same timeline as other bidders.”

He proposes a one-lined amendment to the act: “If an association enters into formal discussions related to a planned disposition of the whole or substantially the whole of the undertaking, it must provide notice to the membership within seven days.”

Mr Jones is urging co-operators to write to the BC minister of finance Selina Robinson, at [email protected], to lobby for a review of the law.

“Whether or not you agree with this specific proposed amendment, I think we can all agree that the failure of Mountain Equipment Co-op was a significant loss for the co-operative and outdoor recreation communities in Canada,” he says. “Such a loss should spur the question: Should we make changes to the regulation to prevent this from happening in the future?”

Co-op News has contacted MEC, and also Selina Robinson, for comment.