The motivation to buy shares in a co-operative is wholly different from the motivation to buy shares in a company. This is reflected in the differences between company law and co-operatives law, and in how these corporate forms are regulated when they seek to raise capital from the public.
The commonly accepted purpose of private enterprise is to maximise financial returns on risk capital. Shareholders are motivated by the revenues they receive in the form of dividends, and by the capital gains they may achieve through any increase in the value of the enterprise. Company law caters for this by allowing companies to use their profits to pay unrestricted dividends, by giving shareholders full rights over the surplus assets of the enterprise upon liquidation, and by allowing shareholders to sell or transfer their shares to a third party at a mutually acceptable price.
However investors in social enterprises such as co-operatives, are primarily motivated by the collective achievement of social objectives and social purpose. For social enterprises registered as co-operatives, this achievement of social purpose is for the mutual benefit of co-operative members or for the broader benefit to the community.
The different motivations for share acquisitions in a co-operative are recognized by regulatory limits on the financial return on share capital investment, the absence of capital gains, the subordination of share ownership to membership, asset locks and restrictions on takeovers.
The primary motivation for purchasing shares in a co-operative is to support the social purpose and objects of the enterprise. The purpose or objects of the enterprise may well provide a significant financial or economic benefit to members by providing a service that the member is either not able to acquire or can only acquire at great cost. The financial return on share capital is at best a secondary motivation, and any return on capital is better understood as compensation rather than a reward for risk taking.
The difference in investor motivation for co-operative shares also means that the financial disclosure regulations attaching to share capital offered by co-operatives are different to those required for public offers by companies.
Under the CNL , disclosure requirements focus upon the requirements of membership. Where membership includes a requirement to purchase shares, or to transact with the co-operative, the disclosure requirements will scale up or down depending upon the amount of investment or transactional commitment that is required as a condition of membership.
Return on investment
Unlike other types of business, it is not the object of a co-operative to maximise profits for shareholders. Instead, dividends payable on share capital are generally no more than is necessary to obtain and retain enough capital to run the business. This is consistent with the third co-operative principle of Member economic participation.
In respect of non-distributing co-operatives there is a prohibition on giving returns or distributions on surplus or share capital to members31. The whole of the non-distributing co-operative’s capital and revenue is to be devoted to achieving its purpose. This prohibition means that a non-distributing co-operative will satisfy the definition of ‘not for profit’ enterprise under tax legislation. However, it does not prevent the repurchase or repayment of member share capital at its fixed or par value.
It is not intended to explore circumstances where a capital gain may occur in this Handbook in any detail. The impact of regulation on capital gain and some instances are mentioned, however, the investor motivation for capital gain in a community investment context would not be relevant, other than as posing a risk for the enterprise to remain in community hands.
The scope for a shareholder in a co-operative to make a capital gain is either severely restricted or eliminated by a variety of mechanisms.
Section 76 CNL requires that shares be issued at a fixed amount that is specified in the rules of the co-operative. Shares cannot be offered at a discount.
Shares can only be offered to members and membership is determined by application to the co-operative. This requirement effectively prevents shares being offered on a securities exchange32.
For a distributing co-operative there is some, albeit modest, scope for capital gain. A distributing co-operative can issue shares at a premium, and the premium may be available to issue bonus shares that would recognize the contribution of original or earlier members33.
These limited opportunities for capital gains do not replicate the scope for gains that are possible for company shares.
The scope for capital gain by a member who chooses to transfer his or her share capital to another person who proposes to become a member is limited by the requirement for consent by the board of the co-operative and subject to any requirements under the rules of the co-operative. In theory, these transfers may have scope for a capital gain or a loss where the member transfers shares to another person who is either already or about to become a member and where the membership value proposition to the purchaser may be different from the par value of the shares.
There may be capital gains if the co-operative winds up or converts to a company.
In the case of a distributing co-operative, the distribution of any residual assets is governed by the same rules that apply in the dissolution of a company. In other words, they are pooled and distributed after payment of debts and claims on a pro rata basis against the number of shares held by the member. A capital gain may be achieved by shareholders of a distributing co-operative whose rules permitted the distribution of residual assets in the event of the co-operative being dissolved or wound up.
For non-distributing co-operatives, there is a prohibition on the distribution of residual assets to members under the statutory asset lock34. However, reserves set up by a co-operative, or statutory asset locks may be subject to distribution if the co-operative makes a structural change.
A non-distributing co-operative may convert to a distributing co-operative or a company and thereby avoid the statutory asset lock. Transfers of this nature are subject to approval by the Registrar35. It is likely that where there are assets that ought to be protected by an asset lock, other requirements will be imposed to protect those assets as part of the transfer process.
Distributing co-operatives may also convert to become a company. Such an event would enable members to access capital gain that would not otherwise be available under the co-operative legal structure. A conversion requires the co-operative to identify certain former members who had contributed capital to the co-operative and provide them either with a distribution or share allocation in the new entity to recognize the capital gain arising from the transfer36. The entitlement of former members in this event spreads the distribution across generations of members (although limited to former members over the previous 2 years) rather than confining it to the current membership. These requirements recognize the early economic contributions of former members, and tend to dissuade against conversion from a co-operative to a company.
A member of a taxi or transport co– operative who wishes to retire may sell his or her shares to a new member and because of other restrictions on the carrying on of a taxi or transport enterprise, the membership of the co– operative may represent an entry to a business that is otherwise restricted. In this way, the incoming member, or transferee of the shares may be willing to pay a premium to the outgoing member for the shares.