Co-operative shares are similar, but not the same as share capital in a company. In a company a member is any person who holds shares. Voting control of the company is generally proportional to the number of shares held. In a co-operative with share capital, members may be required to hold shares as part of their membership, but voting control is linked to membership and not to the number of shares held.
The reversal of this notion is the starting point for an understanding of co-operative share capital. Co-operatives are formed by and for members to serve their common need or goal. Whilst the right or obligation to take up shares may be part of the individual’s relationship with the co-operative, the right to hold or acquire shares only arises through the individual’s status as a member.
Some key characteristics of co-operative share capital are:
- Shares can only be issued to members. A co-operative cannot issue shares to a person, (or permit a transfer of existing shares to a person) unless that person also agrees to become a member including committing to any active membership obligation. Once the person is a member, then the co-operative may issue or offer any number of additional shares to the member, provided that the member does not hold more than 20% of the total issued share capital. Where the requirement for membership includes an obligation to acquire a minimum number of shares, these are generally referred to as ‘membership shares’. Any shares acquired by the member above the minimum amount may be referred to as additional shares. Additional shares may be issued to members with different rights to membership shares.
- Shares do not carry a vote. Only a member can vote and each member has only one vote, regardless of how many shares the member holds.
- Shares have a fixed or ‘par’ value. They do not represent a share in the underlying asset value of the co-operative and so their value does not fluctuate with the changing fortunes of the co-operative. They are not tradeable on a stock exchange although there is scope to transfer shares to another member and this may be done at a premium22 where the membership of the co-operative is limited. A co-operative’s constitution may provide additional distribution to members on capital at winding up if there is a surplus. This is not the same as the capacity of company shares to be sold with a capital gain. The fixed share value, lack of capital gain and the restriction of selling only to members, means that it is difficult or rare for a co-operative to be taken over by another entity.
- Shares may be repurchased or repaid by the co-operative. The ability to repay share capital is a feature of co-operatives that lends itself to issuing community shares, although obligations to repay share capital will also present challenges to co-operatives to manage their capital prudently.
- Shares may deliver a limited dividend. Member benefit in a co-operative is shaped by co-operative values and principles, which distinguishes it from the private interest of shareholders. Members benefit from the co-operative pursuing its objectives and delivering services to members. They benefit either because they can acquire these services at the best price or because the service would not be otherwise available. Dividends on shares are limited to an amount that is considered sufficient to encourage members to leave their capital with the co-operative and it is regulated by a formula that ties them to 10% above the rate of return on a 5 year bond. More commonly, members buy shares in order to receive the services offered by their co-operative”
- Shares may have different terms of issue. It is possible for co-operatives to issue different classes of shares that carry different rights. For example, membership shares, might have different rights to dividends, different priority and different rights to repayment from the rights that attach to additional shares. Some shares might be issued to fund a particular project and these shares might have entitlements to different services that exist because of the funded project.
A co- operative formed to run a football club might first offer membership shares that carry a right to attend football matches at a discounted price. If the co- operative then decides to fund the construction of a covered grandstand, it might fund this by issuing “Grandstand Shares” to members. The members who buy Grandstand Shares may have a right to a grandstand seat at a discounted price.
We all need capital
All enterprises need capital to start, to grow, and to be sustainable. Start-up capital is usually provided by the shareholding owners of the enterprise. Debt capital from lenders and the option to reinvest any surpluses from the business will come later when there is an established enterprise.
As well as providing the start-up funding, risk capital or shares invested by members allows the enterprise to ride the ups and downs of start-up and development, which are faced by all enterprises. It is the investment or stake that members are willing to risk to start or to grow the enterprise. The more innovative or ambitious the enterprise, then the more risk there is to the members’ investment stake. In the context of different share classes that a co-operative might issue, it is important to consider the rights that might attach to membership shares, to ensure that they perform a similar role to risk capital.
When the co-operative is at a different stage of development, it might then consider issuing additional shares (or debt) to fund the requirements of this period of development.
One of the main reasons why co-operatives can find it difficult to start, grow and compete with private enterprises is the restriction on issuing shares only to members. This is perceived as a capital barrier. To overcome this perceived barrier it is necessary to focus on acquiring members who bring capital with them.
There is a need to change the way we think when we plan how to raise capital for co-operatives. There is no limit to the number of members a co-operative may attract, other than the restrictions posed by the co-operative’s purpose and its active membership requirement. Members bring funding through capital or regular subscriptions. It becomes a question of planning to determine the type, amount and recurrence of funding.
If co-operatives can attract the ‘crowd’ as members, the capital input required from each member will be less. Along this same theme, the lower the capital required from an individual, the more likely it is that the individual member will be content to contribute and be content with the knowledge that the desired outcome is the provision of a needed service. The possibility of a return on the investment, whilst attractive, will not be a key motivation for the investment.
Pingala has a business model which combines rooftop solar with community financing to deliver much more than solar leasing on its own. The customers that Pingala targets are local organisations who would like to reverse or avoid a situation where they are suffering from being disconnected from the community in which they operate.
Their business model depends on their ability to engage and mobilise the community that surrounds each customer. It might be a community of geography but it could also be a community of interest in relation to an organisation. A school, for example, has residents in its local area, parents, students, and staff.
Co-operatives offer member capital
In the co-operative legal model, there is no room for a shareholder whose relationship with the co-operative is no more than the investment of capital for a dividend or capital gain23. The co-operative looks to the long term purpose of providing a service to its members in a sustainable way.
Not only are co-operative shares fundamentally different from company shares, as we have seen, they are not traditionally used as a means of finance in the same way that companies use or access share capital. Having said this, however, capital raised through the offer of membership shares is as real as capital raised through company share offers.
Companies that wish to start up or to expand may use a share issue to achieve a target amount of funding. For example a public company engaged in the transport industry may wish to expand its operations by acquiring another business. To do so it may need substantial capital and it may seek to raise share capital for that purpose through a public offer under a prospectus.
Co-operatives can only offer memberships with shares attached. However, co-operatives are able to continually attract new members who will be required to acquire shares in the co-operative. In other words, co-operatives must think in terms of offering memberships rather than simply offering shares. This does not mean that a co-operative cannot seek to offer memberships in a concentrated fundraising event similar to a public company share offer24. Many membership share offers by co-operatives are continuous in that they are made under the disclosure document initially lodged when the co-op was formed. The disclosure document is required to be updated so that any change in the co-operative’s circumstances as it develops is accurately reflected in the continuous offer. The uptake of membership offers will rise or fall with the amount of effort that the co-operative puts into their community engagement plan and the attractiveness of the offer as shown in the disclosure document.
Issues of membership shares by a co-operative are governed primarily by the CNL. There are no limitations on the number of offers that can be made nor the amount of share capital that can be raised under such offers. The disclosure requirements are set out in the CNL and, where the issue of membership shares is within the co-operative’s ‘home’ jurisdiction (State or Territory), there are no restrictions or requirements imposed by the federal Corporations Act25.
In offering memberships, as opposed to simply offering shares, the impact of an active membership requirement is crucial. Co-operatives are formed to satisfy the common needs of their members. Once a community identifies the service or need, then it will be clear what is required of the community to maintain the service.
Co-operatives in the UK do not have to specify an active membership requirement; however, registration requirements for co-operatives in the UK include a clear active connection between members and the co-operative through the requirements that only a “bona fide co-operative society” may be registered. To qualify as a bona fide co-operative society, and then to issue community shares, a co-operative must have a purposeful relationship with its members to meet their common economic, social or cultural needs or aspirations by accessing goods, services or employment. The UK regulator for co-operative societies determines this through an examination of the co-operative’s rules and its operations. An entity that exists merely for the financial returns on investment by members is not a bona fide co-operative society26.
UK requirements that a co-operative be a bona fide co-operative society are not dissimilar to active membership requirements for Australian co-operatives. This similarity makes it possible to translate the success of community shares in the UK to the Australian regulatory environment.