Co-operatives and active membership

A defining feature of Australian co-operatives is the mandatory requirement for an express active membership requirement in its rules.

The historical reason for this requirement was to ensure that democratic control remained with those members who had dealings with the co-operative, particularly agricultural or producer co-operatives that relied on members to trade with the co-operative. Members who ceased trading with the co-operative but continued to hold shares were still able to vote and this meant that control could be had by members whose interests were divergent from the purpose of the co-operative.

Australian co-operatives benefit from legislative requirements for active membership because they contribute to the life and vibrancy of the co-operative and tend to engender greater membership engagement in the co-operative’s enterprise. This is in stark contrast to a company and its shareholders. The active membership requirement, however, presents the single most complex part of the rule approval and formation process of a co-operative.

The regulatory requirements for active membership rules are more rigorous for a distributing co-operative than for a non-distributing co-operative.

A distributing co-operative’s rules will require its members to contribute in some way to the achievement of the co-operative’s objectives. This requires the co-operative to identify its objectives or mission and additionally to specify what activities (referred to as ‘primary activities’) it will undertake to achieve those objectives.

The active membership rule will then require members to support one or more of the activities.

This may sound simple, however, the more broad the objectives, the more difficult it is to state what practical activities will be undertaken.

There are many ways members may be able to support the activities of a co-operative, the skill is in articulating this in a simple manner that requires a minimum of commitment. This does not prevent a member supporting the co-operative in more than one way or above the stated minimum. Those that do provide additional support can be rewarded through additional or cheaper access to the co-operative’s services.

A non-distributing co-operative is frequently the legal model of choice for public benefit or charitable pursuits.17 The rules for such a co-operative must contain a statement of its primary activities; however, it is sufficient that the active membership rule merely specify an annual subscription. That is not to say that they can only have such a rule. A non-distributing co-operative formed to carry on a child care centre may require members (parents) to do other activities to support the co-operative, such as providing volunteer time during the year or attending parental educational courses.

Non-distributing co-operatives that have a public benefit or charitable purpose will endeavour to recruit everyone in their community as members, blurring the boundary between member and community benefit. They have no ability to raise capital through shares, and they will often rely on public funding to pursue their objectives. They do have the power to raise finance through issuing debt securities that entitle investors to the payment of interest. However, the nature of their activities will often mean that they may not have the capacity to pay interest.18

This does not mean that non-distributing co-operatives may not be useful vehicles for community investment. A non-distributing co-operative may be the ideal vehicle to provide a much needed service within a community, and its restriction of distribution of surplus and assets can provide a firm degree of certainty that the community effort to build the enterprise will endure as a long term community asset through the operation of an asset lock.

For co-operatives to have the best chance of accessing capital through issuing shares or other securities, it is important that the active membership rule is not overly restrictive and does not limit the community or ‘crowd’ who may wish to contribute. Co-operatives are meant to be organisations with an open and voluntary membership. The more restrictive or onerous the active membership requirements – the fewer members who will be attracted to join and invest.

Remember, the active membership rule is in addition to whatever the co-operative sets as the minimum share investment required to become a member.

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