Author: Jenni Mattila
Increasingly, co-operatives (or 'co-ops') are the corporate structure of choice for providing a community-based infrastructure. This is mainly because the aims and purposes of a co-operative are in sharp contrast to a company's.
A company's main aim is to make profit from customers, and provide dividends to third-party shareholders. For a ‘selling co-operative’, the aim is to provide goods and services to its members at the best price, consistent with the requirements for long-term financial viability. In the case of a ‘buying co-operative’, the aim is to buy goods and services at the best price on its members' behalf for sale to third parties. Unlike companies, co-operatives do not have third-party profit takers.
Promoters' roles and responsibilities before incorporation
In this context, 'promoters' describes a group of people working together to incorporate a co-operative.
They usually form a preliminary board to complete the first stages, namely:
- to consider and develop the potential business
- to undertake feasibility studies, financial projections, market analysis and contact potential members
- to draft the business plan.
If promoters agree the potential project is viable, they may then agree to move onto the next stage, which typically involves:
- drafting the co-operative's rules, tailoring them specifically to the proposed business
- arranging draft of the co-operative's disclosure statement – the legal responsibility for the accuracy of the disclosure statement lies with the preliminary board
- lodging these draft rules and disclosure statement with the Registry of the Co-operatives in their home state for approval
- calling a formation meeting with the proposed members of the co-operative to approve and lodge the relevant documents with the Registry of Co-operatives for incorporation. This is once the approval for the rules and disclosure statement has been received.
A co-operative's rules are not simply 'pro-forma'
The Co-operatives Act is the primary source of legislation governing co-operatives. The core provisions of the Co-operatives Act are generally consistent between each state and territory equivalents. Co-operatives are founded on seven internationally recognised principles. These principles have also been included under the Co-operatives Act in each state and territory, and are the basis for the values by which co-operatives are run.
The co-operative principles are:
- voluntary and open membership
- democratic member control
- member economic participation
- autonomy and independence
- education, training and information
- co-operation among co-operatives
- concern for the community.
Unlike companies, co-operatives are better able to deal with issues of 'triple bottom line' accounting. This is where the board can take into account third-party environmental impacts and community obligations. Companies have limited powers to address external issues where they don't have a specific legal obligation or marketing imperative due to the company director’s obligations to shareholders.
Active membership
Members must be 'active members' within the meaning of the Co-operatives Act. This ensures the co-operative is controlled by people who have a direct interest in its business objectives.
To be an active member of the co-operative, members must either use or support the primary activity, or maintain a relationship or arrangement with the co-operative in connection with its primary activity. For example, an 'active member' requirement could be that the member's water or electricity supply comes from an irrigation co-operative or a renewable energy co-operative.
Accumulating and raising capital
Raising and retaining capital is fundamental to a co-operative's success and future viability. This can be achieved by:
- issuing shares to members
- retaining earnings within the co-operative from annual surpluses or profits
- raising capital contributions for a co-operative sinking fund for asset renewals
- establishing revolving funds and raising hybrid subordinated debt. Revolving funds can only be established if the co-operative has revolving fund rules and has issued a disclosure statement.
Setting realistic capital raising goals
The budget
Co-operatives must consider the likely requirements for start-up capital, and the promoter must draw up a budget over a minimum period, including projected income and expenditure. After incorporation, the board must track income and expenses against this budget. Budgeting not only acts as a key planning tool, but also serves as an appropriate benchmark for assessing and evaluating the co-operative's performance. Thus ‘warning signals’ will be apparent if the business is not running below budget, and rectification strategies may be needed to get the business back on track.
The business plan
A co-operative must develop a business plan before incorporation, and before drafting the disclosure statement. If key issues and risks associated with the particular projects are not adequately addressed and included in the decision making process as part of an effective business plan, the co-operative is susceptible to failure.
In addition, a co-operative's business plan must set out the mission statement, strategies, preparation for contingencies, include the budget and financial projections, as well as outline the marketing plan. The business plan determines whether the business is viable and forms the basis of the disclosure statement.
The future – asset maintenance and renewal
Co-operatives with assets and infrastructure should establish reserve funds for maintenance and renewals. In accordance with the rules of a typical ‘infrastructure co-operative’, contributions to reserves must be raised not only to maintain the assets on an annual basis, but also to cover the cost of replacing assets or covering abnormally high periodic maintenance costs. By focusing on asset maintenance and renewal costs over the life of the assets, the risk of failure is reduced.
The Registrar
The Registrar of Co-operatives in each state and territory plays a pivotal role in the administration of co-operatives, and has a direct role in their formation and capital-raising processes.
The draft rules and disclosure statement (including the application for shares) must be submitted by the promoters to the registrar at least 28 days before the formation meeting.
Subject to approval by the registrar, the draft rules and disclosure statement are presented at the formation meeting. The rules to the co-operative are approved by special resolution at the formation meeting by the proposed members that have signed the share application included in the disclosure statement.
After the formation meeting, all relevant documentation (including the application form, signed copy of the rules by the chairperson and secretary, and the list of foundation members) must be submitted to the registrar for registration within two months of the formation meeting.
There are different kinds of disclosure statements under the Co-operatives Act - covering different information that needs to be provided to members.
The difference between a disclosure statement and a Corporations Act prospectus
A disclosure statement under the co-operatives legislation and a prospectus under the Corporations Act (Cth) (“Corporations Act”) provide critical information to proposed shareholders, so they can make an informed decision on whether to invest. While the documents are similar in terms of disclosure, such as the rights attaching to shares, there are some key differences.
A Corporations Act prospectus must provide shareholders with all the information reasonably required to make an informed assessment of whether to invest in the share offer. A co-operative disclosure statement requires that specific information is given to members of the co-operative.
1. Exempt entity under the Corporations Act and interstate members
A co-operative is generally exempt from the fundraising provisions of the Corporations Act, unless it issues shares to people outside its home state, in which case the co-operative should seek legal advice before proceeding.
2. Duties of directors in making the disclosure statement and the obligations under the Trade Practices Act
In addition to the directors’ duties under the Co-operatives Act, co-operatives also have obligations under the Trade Practices Act 1974 (Cth) when issuing a disclosure statement. The co-operative's preliminary board of directors must ensure the disclosure statement does not include any false or misleading statements, and there must be no material omissions. Any statements made in the disclosure statement must be verified, reviewed and approved by the preliminary board that issues it. The board cannot contract out this responsibility.
3. Disclosure statement - projections
The information pertaining to projections and financial information is included as it would be in the business plan, to help proposed members or shareholders gauge financial feasibility - and thus any classification of the co-operative to act as a trading co-operative to issue shares, and in turn to return surpluses to its members.
A co-operative's purpose is to provide services to its members, not to provide dividends on share capital.
The formation meeting
The formation meeting is a pivotal component to forming a co-operative. It can only be held once the registrar has approved the proposed rules of the co-operative and the disclosure statement, and requires at least five prospective members at the meeting. At the formation meeting:
- the approved rules and the disclosure statement are approved by the proposed members/shareholders
- the board of directors is elected
- applications for membership are completed (they must be lodged with the registrar within two months of the formation meeting).
After the co-operative is incorporated, the board meets to approve applications for membership and issue shares.
Conclusion
Co-operatives play a significant role in Australian society and provide a suitable legal structure for community-owned infrastructure.
Important note
This article is for informative purposes only, and is not intended as legal advice. If you're looking into forming and incorporating a co-op, seek independent legal advice regarding any aspects of this article.