PART TWO: FORMING A CO-OPERATIVE
What capital and finance can you get?
A co-operative needs capital to get established, and cash flow to keep it running until its income is sufficient to cover costs. The feasibility study should give you a good indication of how much you will need for premises, equipment, staff, products, licences, fees and other expenses.
Once you determine how much needs to be raised, and when, consider if the co-operative is to have share capital, how much the co-operative will charge its members for their shares, and how many members there are likely to be initially and within the first three years. There is likely to be a gap between capital raised from membership and the expected capital needs of the co-operative.
A co-operative group can be formed by co-operatives and/or other incorporated or registered bodies becoming the members, if the rules allow and the board of the co-operative group is of the opinion the body is designed to abide by co-operative principles.
Depending on the purpose of the co-operative, it may be wise to start small and finance the expansion from the profits of the mini-enterprise.
There are many ways to finance a co-operative; the sources of finance will depend on what type of co-operative you have, what the co-operative does, and whether the co-operative is likely to be able to repay the finance.
Be prepared; you will be unlikely to raise finance unless you can convince the sources of the finance that the co-operative will be viable and worthy of their funds.
Pre-registration contracts and acceptance of money for a proposed co-operative
If finance needs to be raised before the co-operative is registered, a person can enter into a pre-registration contract on behalf of, or for the benefit of, the proposed co-operative. The co-operative becomes bound by the contract if it is registered within a reasonable time and ratifies the contract or enters into a substitute contract. If it doesn’t, or fails to perform all or part of the contract, the person who entered into the contract may be liable to pay damages to the other parties of the contract. Details of all pre-registration contracts are required to be in the disclosure statement registered prior to the formation meeting.
The funds raised must be held in trust until the co-operative is registered. The money is refundable if the proposed co-operative is not registered within three months of accepting the money.
When shares are offered under a disclosure statement to people who are not shareholders in the co-operative, the person who offers the shares must hold all application money or other money paid on account of the shares in trust until the shares are issued or transferred or the money is returned to the applicants. If a disclosure statement states there needs to be a minimum number of applications for shares or a minimum amount raised, the shares cannot be issued or transferred until that condition is met. The money will be repaid if the condition is not satisfied within four months of the issue of the disclosure statement.
Shares in the co-operative
A share or other interest in a co-operative is personal property. It can only be issued to a member, is transferable (if permitted through the law or rules) and can be bequeathed in a will (if permitted in the rules).
A co-operative with share capital must state in its rules the minimum shareholding of members. The rules may state that members who use the co-operative more may be required to purchase additional shares.
Unless approved by the Registrar, one member cannot have a relevant interest in more than 20% of the nominal value of the issued share capital of the co-operative.
The fixed cost of a share (nominal value) must be stated in the rules. While shares cannot be issued at a discount, a distributing co-operative can issue shares at a premium to theirnominal value. For example, a co-operative may issue shares to foundation members for $1000 each nominal value. The foundation members have invested in the co-operative and have accepted the risk that the co-operative might not be successful. Later, when the co-operative is operating and making a profit, others might be keen to buy shares. As the risk has been reduced, the co-operative might issue the shares at $1,150 each i.e. nominal value plus a $150 premium.
The premium may be either cash or other valuable consideration. The co-operative transfers an amount equivalent to the value of the premiums to a share premium account, which can be used in a variety of ways, including to pay off preliminary expenses, pay dividends, and pay up the balance unpaid on previously issued shares.
A distributing co-operative may, by special resolution, passed by a special postal ballot, require members to buy additional shares. Payment for additional shares may be deducted from amounts payable to members for dealings with the co-operative. A registered disclosure statement must accompany the proposal, showing the number of shares to be issued and explaining how the raised funds are to be used, as well as a statement to advise that the member may choose to resign if they do not wish to participate.
If shares are issued partly paid, the co-operative has the flexibility to call on members for capital as it is needed, and may not need to issue additional shares. At least 10% of the share value needs to be paid up front; the rules should state a minimum timeframe between calls for the balance.
A distributing co-operative may approve by special resolution the issue of bonus shares to members if assets, not acquired for resale, have been sold at a profit or have been revalued at a higher value. The shares will be issued as fully paid-up shares with no payment required.
A co-operative may have more than one class of shares, as long as the shareholding and the rights of shareholders comply with co-operative principles.
Entry fees and regular subscriptions
The rules of a co-operative may require members to pay entry fees and regular subscriptions. The value of the regular subscription might be determined by the value of business the member does with the co-operative or the profits a co-operative earns through doing business with the member.
The co-operative must give the person applying to be a member written notice of the fees or subscriptions payable. The rules may stipulate that the entry fees and subscriptions will be repaid if the person is no longer a member.
Co-operative capital units (CCUs)
CCUs can be issued to members or non-members of a co-operative, giving them an interest in the capital (not the share capital) of the co-operative. In this way, a co-operative can obtain finance from non-members while retaining member control of the co-operative, as required by co-operative principles. In some situations a board may issue CCUs to extinguish debts owing to past members.
The CCU holder has none of the rights or entitlements of a co-operative member, but they are entitled to receive notice of all meetings of the co-operative and all other documents in the same manner as the holder of a debenture of the co-operative.
CCUs may be either secured or unsecured and are transferable, subject to the terms of issue, the rules and the CNL.
The CNL states that terms of issue of CCUs must be approved by a special resolution of members and by the Registrar, and a disclosure statement approved by the Registrar must
be included with the offer, setting out the terms of the issue, the rights of holders of CCUs, the entitlement to interest, the terms of redemption, the limit of total CCU holdings held by persons who are not members of the co-operative and the manner of transferability.
The rules of a co-operative issuing CCUs may either give each holder of a CCU one vote per CCU held at a meeting of CCU holders, or vary the rights of CCU holders to the extent allowed by their terms of issue with the consent of 75% of CCU holders.
The redemption of CCUs is not a reduction in a co-operative’s share capital. CCUs can only be redeemed out of profits, the proceeds from a new issue of shares, or an approved issue of CCUs. Any premium payable on redemption can only be from profits or the share premium account.
If a co-operative redeems CCUs held by an active member, it can, if within the terms of issue of the CCUs, issue shares or pay up amounts unpaid on shares up to the nominal value of the CCUs held by the member rather than redeem the CCU for cash.
Loans
A co-operative may borrow from financial institutions, members or venture capitalists. This may be in the form of a loan, overdraft or line of credit, and interest rates and time to repay will vary widely. The repayment of the loan and interest needs to be factored into the costs of the cooperative for the term of the loan.
As credit unions, friendly societies, mutuals and some banks are also co-operatives, if your co-operative requires a loan, consider borrowing from a co-operative. They must still consider the risk before offering the loan, but are familiar with co-operative principles and care for their customer-members.
If a co-operative requires a secured loan, there will be a security charge over assets of the co-operative or person who took out the loan, giving the lender priority over unsecured
creditors, and the ability to take possession of the asset if they are concerned they may not be paid if the co-operative experiences financial difficulties. The lender or another interested party may register the charge over the asset with the Personal Property Securities Register (www.ppsr.gov.au).
A co-operative may require its members to provide secured or unsecured loans, depending upon the rules of the co-operative. The proposal must be approved by a special esolution of the co-operative, passed by a special postal ballot, and not allow the loan term to be longer than permitted under the CNL and CNR. The notice of the special resolution must be accompanied by a disclosure statement approved by the Registrar, explaining the purpose and value of the loan(s). The proposal for loans from members must be accompanied by the disclosure statement, clearly show the total amount of the loan and how the loan amount from each member is calculated, and a statement informing members that they may choose to resign if they do not wish to participate.
Debentures
A debenture is a promise to repay money borrowed from an investor. A co-operative can issue a debenture and commit to pay interest for a defined term and then repay the loan. A debenture is usually unsecured.
The CNL provides legislation on debentures of a co-operative issued to members and/or employees, as well as people who become inactive members who have their share capital converted to debt. Before issuing debentures to a person, the co-operative must inform the person in writing that the person is entitled to receive a disclosure statement and then provide the disclosure statement if requested. A disclosure statement, which must be approved by the Registrar, must contain “information that is reasonably necessary to enable a person to make an informed assessment of the financial prospects of the co-operative”. A co-operative may also issue debentures to people who are not members and employees if it meets the requirements of the relevant provisions in the Corporations Act 2001. In some situations, a board may issue debentures to extinguish debts owing to past members.
Grants
A co-operative may be eligible to apply for non-repayable government (local, state or federal) and non-government grants from community welfare and philanthropic organisations. Grants may assist with establishment expenses, including equipment and planning.
Surpluses
The Board of a co-operative may decide to keep all or some of a surplus it has in a year for the benefit of the co-operative. The Board may also decide to donate part of the surplus for a charitable purpose.
A distributing co-operative may use part of a surplus to support an activity approved by the cooperative.
The rules of the co-operative will limit the amount it will donate or use to support its activities to a proportion of the surplus.
A distributing co-operative may use part of its surplus or reserves to:
- provide members with a rebate in proportion to the value of business done by each member, or the profits earned by the co-operative on business done by each member
- issue bonus shares in proportion to the value of business done by each member, the profits earned by the co-operative on business done by each member or shares held by each
member - issue a limited dividend for shares held by members
- pay bonuses to employees.
Non-distributing co-operatives are only permitted to use a surplus for the benefit of the cooperative, or for charitable donations. They are not permitted to issue bonus shares or pay limited dividends.