Mutuals' Redeemable Shares Bill 2013: The Detail
The Bill is a vital part of the improved legal infrastructure being developed for mutuals over the next year or two. That includes the new Co-operatives and Community Benefit Societies Bill, increased limit on withdrawable share holdings in and regulations to apply the administration procedure to those societies (Budget 2013 at para 2.260), commencement of the Co-operative and Community Benefit Societies and Credit Unions Act 2010, and the publication of new FCA Guidance. For more information on those developments download the mp3 and listen to my Co-operatives Fortnight Lecture and follow the slides for it.
The Bill also complements the valuable work of the Co-operatives UK and Locality Community Shares Unit (funded by the UK Department for Communities and Local Government) which makes the use of IPS shares available as a concrete reality on the ground and promotes best practice and investor protection.
The Mutuals' Redeemable Shares Bill has been promoted by Mutuo and the information from them on it can be found here. The Co-op News has also given the new Bill considerable coverage.
To access a full copy of the Bill and follow its future progress go here.
This post explores the rationale and effect of the various clauses of the Bill as it stands at its First reading in the House of Lords. I must declare the interest that I took part in the initial drafting of this Bill on a paid basis for Mutuo through DWF LLP.
Why is the Mutuals Redeemable Shares Bill needed?
The Bill addresses a number of problems faced by different types of mutuals when it comes to using share capital to raise funds.
For friendly societies, it would for the first time permit societies registered as corporate bodies under the Friendly Societies Act 1992 to issue shares - see clauses 1(1) and 5.
For mutual insurers, it would allow those using either a company structure or a structure based on their own private Act of Parliament to issue shares - see clauses 1(1) & 5. Currently a company limited by guarantee, the structure used by some mutual insurance companies, may not have share capital if it was registered after 1980 - Companies Act 2006 s5
For industrial and provident societies, the problem is about the possibility of exit for holders of shares that are not defined as "withdrawable". Since January 2012 when the limit on holdings of nonwithdrawable society shares was removed, there has been interest in exploring the use of such shares. However, it is likely that the old Company Law "Rule in Trevor v Whitworth" would apply to such shares to prevent their purchase or redemption by the society itself (see the Hayes vs Snaith debate for the arguments on this). That means that people holding non-withdrawable shares in societies need to transfer them to other people to recover their investment. That severely limits the effect of the liberalisation of the holding limit.
How The Mutuals' Redeemable Shares Bill would Work
Like the previous private members' Acts used to improve the law for co-operative or mutuals in the UK in 2002, 2003, 2007 and 2010, this Bill, if it becomes law, will empower HM Treasury to change existing legislation by the use of secondary legislation to permit the use of redeemable shares.
That means that if the Bill becomes Law, its effects will still depend on the preparation of one or more Statutory Instruments, consultation on them, and a resolution of each House of Parliament to approve them under the affirmative resolution procedure - clause 1(3). That will all take time.
The Nature of Redeemable Shares
The Bill proposes that redeemable shares in an IPS may be transferable but not withdrawable - clause 1(2)(a). That leaves the society's rules or the terms of issue to decide on the details of the rights attached to the share, subject to other provisions of the Bill, as long as the share is not withdrawable. That will permit the use of redeemable shares without limit on the value held. For friendly societies and mutual insurers, that question is left to the regulations to be issued by HMT to permit such shares - clause 1(2)(b) & (c).
When will it be possible to redeem the shares? That will be found in the terms of issue of the shares and there is flexibility about those terms. It can be a date fixed there, a date worked out as the terms provide, or a date chosen either by the mutual or the holder of the share - clause 2(1).
After redemption, there will have to be at least one share left which is neither withdrawable nor redeemable - clause 2(4). This reflects the equivalent Companies Act provision on redeemable shares and ensures that there will always be at least one share in the mutual which has not been redeemed.
Other terms of redeemable shares, e.g. par value, number issued, minimum and maximum holding, and detailed provisions for redemption, can be left to the mutual's board as long as either the mutual's constitution or a members' resolution allows that, otherwise the mutual's constitution must itself set out those terms - clause 3(1) to (4).
The decision on whether to issue redeemable shares will have to be to be made by members - the mutual's constitution must allow it and may restrict the use of them - clause 2(3) & (4). That means the members will have to decide whether or not to allow their use and can define the limits within which they can be issued. This protects basic member control.
In addition, the Bill requires that redeemable shares:
- are held only by members
- entitle the member to only one vote regardless of how many shares they hold
- only give the holder a level of return allowed by the constitution of the mutual
- can be redeemed only at nominal (par) value with no other bonus or right to participate in surplus
- Clause 1(2)(d)
The Bill also prevents the use of redeemable shares for demutualisation. It limits the voting rights of anyone who gains membership only by holding a redeemable share as they cannot propose or vote on a resolution to convert the mutual into a company - clause 4. So even the one vote the member has cannot be used in that way. On the other hand, a user-member of the mutual who happens to hold a redeemable share will still be able to use their single vote on any demutualisation proposal.
The basis for the Rule in Trevor v Whitworth that prevents corporate bodies from buying back or redeeming their own shares is creditor protection. People who lend or give credit to companies and other corporate bodies, whose owner-members have limited liability for business debts, take the risk of business failure. However, if that happens and the business is wound up, there is a clear order of priority among the creditors for a share of the remaining assets. The rights of holders of shares are postponed and they get nothing until all the debts and costs of the insolvency process have been paid. If the company buys back its shares or redeems them and then is wound up the holders of shares may have jumped the queue. as a result the courts refused to allow companies to do that.
Over the years, parliament relaxed that rule and the current position is that, so long as certain procedural safeguards and rules about funding the redemption or buy back are observed, a buy back or redemption of shares is allowed. Those safeguards can be found in sections 658-737 of the Companies Act 2006.
Broadly, the redemption or purchase must be out of distributable profits or the proceeds of a new share issue. However, in the case of a private company, if sufficient funds are not available from those sources, shares may be redeemed out of capital, as long as the directors and auditors formally report on the solvency of the company, the redemption is approved by a special resolution and public notice is given of the redemption out of capital. It is then open to any shareholder who voted against the resolution or any creditor to apply to the court for the resolution to be cancelled.
Clause 3(5) of the Mutuals' Redeemable Shares Bill 2013 allows regulations to apply the same protections where redeemable shares are issued by mutuals.
A Vital Development
We must hope that this Bill succeeds in its passage through the two Houses of Parliament despite being a private members' bill.
It deals with a basic legal problem for co-operatives and bencoms and extends the ability of friendly societies and mutual insurers to raise capital. It also represents an important level of co-operation between those different but related mutual sectors. It's important that everyone rallies in support of it.
So write to your MP to support it.
© Ian Snaith 2013 This work is licensed under the
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