Legal News for UK Co-ops and Mutuals

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Interested in sharing information and knowledge around legal issues for co-ops and social enterprises in the co-oplawnews blog and thoughts on random issues in the "real" blog.

Friday, January 13, 2012

Thoughts on European Court 2011 Co-op Case

The Narrow Specifics

In terms of its strict legal effects, Joined Cases C-78/08 to C-80/08 Ministero dell’Economia e delle Finanze v Paint Graphos Sarl are very narrow. It deals with one particular aspect of the EU State Aids regime. The choice about whether to provide tax benefits or other assistance for co-operatives is one for national governments. The role of EU Law is only to deal with any potential distortion of competition that may be involved in such a national rule. This case provides guidance about how that EU regime should be applied if states do choose to provide such support for co-operatives on the basis of their business structure.

However, within that narrow scope the case does recognise particular features of those co-operatives which lock assets in to the society and prevent any distribution to members. Such co-operatives may be provided with tax concessions as far as the State Aid rules are concerned - as long as they are genuine.

It is less clear how far this would extend to other types of co-operative. The Italian tax provisions required that a certain proportion of transactions must be with members. Is this a necessary condition for the tax benefit to be justified or is it enough that the return on capital is limited so that it becomes more difficult to raise funds and impossible to make much use of the equity markets?

The answer appears to lie in the two sources consulted by the court in reaching its decision. They are the Commission Communication of 2004 and the Preamble to the SCE regulation. The wider implications of the case for the existence or development of a specifically European Co-operative Law hinge on the importance attached by the court to those two documents.

The Key Co-op Features defined in the case

In its judgment the ECJ listed a number of features of co-operatives which led it to see them as distinct from other economic operators due to low profit margins and limited access to capital markets (paragraphs 55 to 59):
  • The principle of the primacy of the individual as stated in recital 8 of the Preamble to the SCE Regulation
  • Distribution of assets on winding up to another co-operative pursuing “similar general interest purposes”
  • Management in interests other than those of outside investors
  • One member one vote
  • Reserves and assets commonly held and not distributable but dedicated to the common interest of members
  • Activities conducted for the mutual benefit of members as users, customers, or suppliers so that benefit goes to each member in accordance with his participation in co-op activities and transactions with it
  • Payment of limited interest on loan and share capital.
This suggests there are some co-operatives which meet the definition for registration in national co-operative law and fall within the ICA statement of Values and Principles but do not meet the conditions laid down in this judgment.

It is important to recognise the context of the judgment to decide how it might affect any state tax benefits or other assistance provided to co-operatives. Since the purpose of the State Aid rules is to prevent the distortion of competition in the EU, it is necessary to find some disadvantage or problem which justifies more favourable treatment for co-operatives which then has to be proportionate to the problems they face. The ECJ identified the obvious and central issue which is the difficulty in raising capital.

That mainly arises, as the court suggested, from the vesting of control in individuals equally and not according to capital contribution as in investor controlled companies. The principle that capital should enjoy a limited return rather than a right to the whole of any surplus on dissolution or by way of periodic distribution of profits is also crucial to the problems co-ops have in raising capital. Those features generally prevent the use of the capital markets and can justify some countervailing assistance without distorting competition.

However, it is less clear that it is necessary to prevent all distributions of assets or surplus to members on dissolution. Surely, a distribution to members in accordance with their transactions over a particular period (fixed by the rules) before the winding up would be sufficient? Such a provision would sever the link between the level of investment and the return to the member just as a patronage refund from a periodic surplus on trading does?

It seems that the court's inclusion of the “disinterested distribution” on winding up requirement comes from the Preamble to the SCE regulation and the Commission Communication rather than the logic of the argument about lack of access to capital markets.

In that sense, one can argue that state aids might be justifiable in EU Law for a wider range of co-ops as long as the ECJ relied on the logic of market disadvantage and did not slavishly follow the Commission Communication and the SCE Regulation Preamble which had their own contexts and purposes.

© Ian Snaith 2012 This work is licensed under the Creative Commons Attribution-NonCommercial-Noderivs 2.0 England and Wales Licence. To view a copy of this licence visit or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA

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