Author: Andy Cavanagh-Downs
An early and important decision for a community group is choosing which legal entity they intend to use for their renewable energy project. This decision is important as it has an impact on messaging, contracting, capital raising, and administration.
Types of legal structures available
Available legal structures include co-operatives, private companies, unlisted public companies limited by shares, unlisted public companies limited by guarantee and listed public companies.
On balance, we believe that most community groups are likely to choose between either a co-operative and an unlisted public company limited by shares. We have dismissed private companies (assume most community projects want to involve more than fifty shareholders), listed public companies (cost) and unlisted public companies limited by guarantee (unrealistic to access a guarantee for most projects). In almost all cases we believe the dismissed structures will not appropriate, efficient or realistic.
Differences between selected structures
In many ways there is little difference between a co-operative and an unlisted public company limited by shares. The main distinguishing feature for a co-operative is that voting rights are equal for each shareholder, regardless of the size of their holding. An investor with two shares in a co-operative has the same voting power and weight as one with two thousand shares. This differs from most public companies, where voting rights are weighted according to the size of shareholding. However, it should be noted that the constitution of an unlisted public company limited by shares can be drafted such that each shareholder has an equal voting right, regardless of the size of their holding, thus eliminating the difference.
Contracting
Generally speaking, most suppliers are more used to and comfortable with dealing with a public company, rather than a co-operative. There is no legal reason to restrict or stop suppliers from dealing with co-operatives, however they may need to review the legal set-up of the organisation in more detail to ensure they are comfortable with contract party risk. If suppliers always deal with companies, anything different to that may warrant further review or due diligence from their perspective. This could add cost and potentially limit the pool of available suppliers.
Messaging
The messaging and purpose of the organisation is important. Often community groups like the principle of democratic voting in a co-operative. It engenders a sense of working together, along with balancing objectives and desires. Even if the voting structure is mirrored in constitution of an unlisted public company limited by shares, the perception and feel of a co-operative is usually more friendly and trustworthy in a community.
Early stage funding
Community renewable energy projects, especially wind farms, need to attract early stage funding to establish the feasibility of a project. Early stage funding is risky because it hasn’t been established if a project is viable from resource, environmental and technical perspectives. Typically an early stage funder is the first person or entity to inject funds into a project. Up until that point a project is likely to have relied on volunteer effort. Entrepreneurs and people who understand the development process are suitable for funding this stage, although communities could access funding elsewhere should they have the opportunity. Providers of early stage funding generally like to exercise a degree of control, ensuring their risky investment achieves the outcome they desire. The democratic voting structure of co-operative may be unpalatable for an early stage investor, even when their ultimate objective is to cede control and facilitate ownership by the community. Co-operatives require a minimum number of shareholders, so having a sole investment from an early stage funder is not possible.
Most community groups don’t have the resources or capital to change the legal entity mid way through a project, it is almost always best to stick with the one entity throughout the process. If the community wishes to use a co-operative and an early stage funder wishes to retain control, one solution may be to release funding based on project outcomes. A tollgate process may balance the requirements of control and outcomes for the investor, while the community group could retain a co-operative structure.
Capital raising
Assuming a project is feasible, an important consideration is the capital raising process from the community. This requires a great deal of effort, communication and administration from the community group. It is important to build momentum and have potential investors follow through on their intention to fund the project. It is unlikely that the community group will have conducted a similar process before, so to some extent they will have to learn as they go through the process. A key objective for a community group should be to raise funds efficiently and within a targeted period of time.
For an unlisted public company limited by shares, it is likely that the maximum offer period is four months. During this time, a community group will have to raise sufficient funds to meet their minimum capital amount. Depending on the size and support for the project, this may be simple or very difficult.
Co-operatives may offer more flexibility in the duration of the offer period. The fund raising process is not subject to Corporations Act. The offer period may be held open for a longer period of time, provided that the offer document is updated if existing information becomes inaccurate or misleading. There may also be requirements to update the offer document if an annual report is published, as is the case in NSW. Provided that information in the offer document is accurate, a co-operative offer period may be longer than four months and thus providing some additional flexibility.
It should be noted that at the time of writing, co-operatives are not able to freely raise capital from interstate investors. While it is possible to accept interstate investment, there is an application and registration process that needs to be completed, adding pressures to management and potentially legal expense to the project. There are moves to harmonise state based legislation and automatically allow interstate investment, however at the time of writing this had not occurred.
Summary
Either a co-operative or an unlisted public company limited by shares may be appropriate for a community group. On balance, a co-operative structure may be slightly preferable as it has the advantages of more flexibility in the offer period, as well as being more likely to fit the values of a community project. Each group should weigh up the pros and cons of each structure, particularly when considering the objectives and requirements of early stage funders.
Please note that this document does not constitute legal advice and each group should seek professional assistance in relation to their particular circumstances.